Agricultural prices

The ratio method of price determination was first publicly recognized in the United States by the Food Administration, in November of 1917. A commission of seven swine men had been appointed by the Food Administration to determine the cost of producing hogs, and in submitting their report the commission adopted practically without change the ratio method of price determination as advocated in Wallaces’ Farmer during the summer and fall of 1917. The commission, composed of expert swine men from all over the United States, after a careful technical survey of the situation and consideration of the figures submitted by the author, came to the conclusion that the ratio method actually expressed cost of production more simply and accurately than any other method.

In its simplest form, the hog producer of fifty years ago grasped the ratio idea. Without any statistical investigation, the swine growers of those days came to the conclusion that they could make money when they sold their hogs for a value per hundredweight of more than the value of ten bushels of corn. For a generation or two, hog men looked on a ratio of ten bushels of corn to one hundred pounds of hog flesh as about right, altho they felt that such a ratio might not cover risk.

From an exact statistical standpoint, take the ten-year period extending from 1907 to 1916, inclusive. During that time No. 2 Chicago corn averaged 66.3 cents a bushel, whereas hogs averaged $7.53 per hundredweight. The ratio for that particular ten-year period was 11.4 bushels of Chicago No. 2 corn to equal in value one hundred pounds of Chicago hog flesh. How uniform is this ratio between corn and hogs from decade to decade may be judged from the following table, which gives the ratios as they have prevailed year by year for the past sixty years, and the average by decades. The second column shows the number of bushels of corn required each year to equal in value one hundred pounds of live hog:

To refine the method to meet market conditions, we need to know the ratio between corn and hogs at different seasons of the year. There are seasonal periods of over-supply and scarcity of both corn and hogs. In November, for instance, the 1907–1916 price of corn was 67.2 cents and the price of hogs $7.23, or a ratio of 10.6 bushels to one hundred pounds of hog flesh, while in March of the ten-year period the average price of corn was 61.7 cents and the price of hogs $7.66, or a ratio of 12.4 bushels of corn for one hundred pounds of hog flesh. In like manner, there is a fairly normal ratio for each month of the year and for each week of the year. All this is on the assumption that hogs are simply condensed corn. It does not take into account the fact that hogs have been made out of corn at varying values during a period of about a year preceding time of marketing. Obviously, then, we must have a composite corn value. In matters of this sort, statisticians know that it is absolutely impossible to weight matters so as to represent actual conditions, but at the same time they know that absolute accuracy is not at all essential, that in fact a difference in weighting will ordinarily make very little difference in results.

While the author personally recommended to the commission appointed by the Food Administration to investigate cost of producing hogs, a slightly different weighting, yet nevertheless we will use here the weighting recommended by that committee. The committee assumed that the corn going into the making of a hog was distributed over twelve months; that during the first month 2 per cent of this corn went into the hog or its dam; the second month, 2 per cent; third month, 2 per cent; fourth month, 3 per cent; fifth month, 4 per cent; sixth month, 6 per cent; seventh month, 5 per cent; eighth month, 9 per cent; ninth month, 15 per cent; tenth month, 20 per cent; eleventh month, 17 per cent, and twelfth month, 15 per cent. Securing composite corn values by this kind of weighting, we find that as an average of the ten-year period, 1907–1916, the January ratio was 11 bushels; February, 11.6 bushels; March, 12.4 bushels; April, 12.7 bushels; May, 12.3 bushels; June, 12.1 bushels; July, 12 bushels; August, 11.8 bushels; September, 11.8 bushels; October, 11.3 bushels; November, 10.6 bushels, and December, 10.4 bushels.

For sake of example, determine cost of producing hogs for the Chicago market for the month of April, 1918. Corn values month by month, beginning April, 1917, were as follows: 144.9 cents, 163.9 cents, 170.7 cents, 200 cents, 197.2 cents, 208.6 cents, 199.2 cents, 201 cents, 173.2 cents, 180.6 cents, 174.5 cents, and 172.3 cents. Weighting these on the basis indicated, we get a composite value of corn of 182.5 cents.

The historical ratio for the month of April is 12.7 bushels of such composite corn. Multiply 182.5 cents by 12.7, and we secure $23.18 as the cost of producing hogs for the Chicago market in April of 1918, under the ten-year ratio method. The actual price was $17.45, or a loss of $5.73 per hundredweight. The chart which is published herewith illustrates graphically results secured in the same manner for every month during the ten-year period beginning 1907.

Ordinarily, Chicago No. 2 corn measures very accurately the changes in corn value on the farm, the corn out of which hogs are actually made. During part of the winter of 1917–1918, Chicago No. 2 corn ceased to be quite such an accurate measure as usual, for the reason that the quality of the crop was so poor that only a small amount of corn graded No. 2, and for the further reason that there were severe transportation difficulties.

Some people have urged not using Chicago No. 2 corn values, but corn values on farms as reported to the United States Department of Agriculture, monthly, by crop reporters. This price is no doubt compiled with considerable accuracy, but is open to objection for the reason that it does not represent a uniform grade. In soft corn years, a bushel of corn as valued by crop reporters on farms is poor stuff. In such years, there is always a wider spread between the farm value of corn and the Chicago No. 2 value than in years when the quality is good. It might do fairly well to take farm values of corn and farm values of hogs if definite grades could be established. If they can not be, it is probably best to take Chicago values of No. 2 corn and heavy hogs as a basis, making allowance occasionally when exceptional conditions arise in the way of artificial prices temporarily created by transportation difficulties, and remembering always that the true point at issue is to apply a ratio between certain grades of actual feed on the one hand and a certain grade of hogs on the other. This is a technical matter which really can not be decided by lawyers or business men, however competent such men may be to run a food administration or a department of agriculture, or by farmers, however competent such men may be to feed hogs. It is a matter which must be handled by men who understand markets and who have had sufficient economic training so that they understand a little something of the making of index numbers, and who have had sufficient touch with agricultural conditions so that they understand a little something of the technique of feeding hogs.

Soon after the report of the commission on cost of producing hogs, the Food Administration announced among other things that it would do its best to pay hog producers, for a hundred pounds of hog flesh, the equivalent of thirteen bushels of the corn which went into these hogs, the ratio system to apply to hogs farrowed in the spring of 1918. It was expected that there would be an urgent need for hog products during 1919, and it has generally been regarded that this announcement of the Food Administration was wise. The thirteen-bushel ratio was 13 per cent over the historic ratio, and encouraged the transforming of a larger amount of corn into hogs than usual.

When it came to putting the thirteen-bushel ratio into effect, in the fall and winter of 1918–1919, the Food Administration did all in its power to squirm out of living up to its guarantee. First, the effort was made, in the month of September, 1918, to make it appear that the thirteen-bushel ratio was based on a ratio between farm corn prices and Chicago hog prices, in spite of the fact that the pamphlets originally issued by the Food Administration to farmers of the corn belt in November of 1917 explained the ratio on a basis of Chicago corn prices and Chicago hog prices. By using farm corn prices, the Food Administration secured a figure of about $2.50 per hundredweight lower than if the thirteen-bushel ratio had been applied literally as described in the original pamphlets. The Food Administration, however, claimed that it could not live up to its original guarantee, because the export prices of pork would not justify it. In this respect, it is interesting to note that in August of 1918, just before the Food Administration took up this matter of carrying out its thirteen-bushel guarantee, Great Britain reduced its maximum price on American bacon by about $12 per hundredweight. It is also interesting to note that the British Food Administration was making money on its handling of pork products, altho it was losing money on its wheat. Those American producers who were most familiar with the situation believed that there was a concerted effort by the American and British food administrations to buy the large American hog crop, which had been secured by the thirteen-bushel guarantee, as cheaply as possible, avoiding its guarantee with such chicanery and deceit as an experienced business man knows how to use in case of emergency.

The committee of some fifteen men, supposedly representing the American hog producers, which met with the United States Food Administration in this matter, were not well educated along statistical or economic lines, and they went down to defeat in September, 1918, scarcely realizing just what the Food Administration had done to them. Only two members of this committee had served on the original commission, and it was impossible for them to give the other members a full comprehension of what the ratio meant. When the facts became known, widespread indignation among the farmers of the corn belt compelled the Food Administration to abandon the hypocritical pretense of living up to the thirteen-bushel ratio and come out flatly for a $17.50 minimum, which was really a ratio of 10.8 bushels. The Food Administration was able to thus repudiate in part its definite obligation to hog producers, because there were no thoroly organized farmers with leaders trained to think in terms of statistics and economics.

The author does not care to create a prejudice against the Food Administration. It probably did its work as efficiently as any branch of the government during the war. The sole purpose is to point out to agricultural students the extreme disadvantage under which farmers labor in bargaining with other classes of society. It is hoped that as farmers learn to follow the example of keen business men and employ trained experts to look after their interests, and as farm leaders become better trained in statistics, economics and business principles, this disadvantage will disappear.

What makes hour-by-hour and day-by-day prices under laissez faire conditions is not cost of production, but that brute force which we call “supply and demand.” In its blind groping, this force necessarily approximates cost of production as an average of any long period of time. But it never specifically recognizes cost of production as a factor which should be considered. It approximates cost of production because it has to, not because it wants to.

An illustration of the strategy of the hog market is a case in point. Imagine a Monday hog market in early March, at which season of the year prices are generally rising. Suppose that instead of the accustomed 40,000 Monday hog run, 60,000 have been received. Suppose that, owing to car shortage or some other reason, eastern shippers are out of the market. There is a larger supply than usual and a smaller demand, and prices decline 15 or 20 cents a hundredweight, perhaps very much more. “Supply and demand,” say the packers and practical economists, with unction. But at that very time every one may know that the potential supply in the country is very small, and the potential demand is very great. At that very time this wider situation may be taken fully into account by the packers in the prices which they are charging for their products to the retailers. The hog market may have broken 15 to 20 cents, but the lard, ham and bacon markets may have held steady or even advanced.

The packers, in the prices which they pay for live hogs and the prices which they charge for hog products, are governed chiefly by strategic considerations. Day by day they change their prices to meet the surface indications of changing supply and demand conditions. They may sometimes exercise such poor strategy that they will be compelled to manufacture hog products at a loss for a time. The prime consideration is to buy as cheaply as possible and to sell as high as possible and yet meet the competition, which is rather more active than many farmers have supposed.

Now it is obvious that a ratio system of hog prices is not compatible with the system employed by the packers, or by any typical business man, for that matter. Big business enjoys a speculative profit which comes with fluctuating prices. But a daily fluctuating price is not consistent with the idea of a just price or a cost-ofproduction price. If the packing business were a monopoly under government control, stabilized prices under the ratio system might be paid with some degree of satisfaction, provided we assume that the governmental authorities have a real insight into market conditions and a thoro understanding of the ratio system of price judgment as related to supply and demand. Under the present regime, however, it is difficult to see much prospect of hog prices ever being stabilized, for the reason that under a laissez faire system business profits result from fluctuating prices, those businesses profiting most which are best organized and most long-lived, and are able to take strategic positions over long periods of time.

What would happen if cost of production were to be paid in the hog market day by day, year in and year out? By cost of production is meant the 11.5-bushel ratio, modified seasonally. Packers can think of many objections. For instance, they can conceive of periods of a year or two at a time when the 11.5-bushel ratio would necessitate paying the farmers more for their hogs than they could get for the meat. Equally, they can see how it might be that for periods of a year or two at a time, they would be able to get out of the consumers a price equivalent to considerably more than the 11.5-bushel ratio. Admittedly, these objections are sound under present conditions; supply-and-demand price is the only price adapted to the laissez faire situation.

If farmers as a class are to secure cost of production for their hogs month after month and year after year, they must organize into powerful associations to do business co-operatively. They must control the supply of hogs with an iron hand and an intelligent head. They must be willing to play fair with the consumers and not charge more for their hogs than the ratio of the past sixty years. In fact, it is conceivable that they might be able to sell their hogs at slightly less than the 11.5-bushel ratio of the past sixty years. If the organization was really powerful enough to enforce the cost-of-production ratio over any period of time, the market risk, which has been a very serious factor in the past, would disappear. This risk has been such a factor that it is quite possible that farmers would be willing to produce enough hogs to satisfy the market at an eleven-bushel ratio if the risk no longer existed. The author estimates that as an average of the past sixty years the consuming public has been paying at least 50 cents per hundredweight more than necessary for its hog products. This extra 50 cents has been in the nature of risk insurance.

It is conceivable that both farmer producers and city consumers might organize to carry this risk between them, the city consumer co-operative organizations agreeing in advance to take a certain number of pounds of hog products, and the farmer producing organizations agreeing to furnish such a quantity of hog products on the basis of a corn-hog ratio representing cost of production.

A ratio between corn and cattle does not represent cost of production nearly as accurately as a ratio between corn and hogs. However, such a ratio, when worked out and applied over a long period of years, reveals the interesting historical fact that the swings in cattle prices above and below the ratio line are periods of about seven years each way.

A more accurate method is to take into account the fact that fat cattle as produced in the corn belt and marketed at Chicago are commonly made out of feeders which were bought a few months previously, taken to the farm, and finished chiefly on corn, together with a little in the way of pasture, hay, silage and concentrated feeds, such as cottonseed meal and oil meal.

As an average of the ten-year period, 1906–1915, ordinary 1,000-pound feeders on Chicago, in October, cost $51.20. As an average of the ten-year period, these same 1,000-pound feeders, as ordinary, well-finished fat steers weighing 1,300 pounds each, sold the following April for $98.35. During this ten-year period it seemed to take $47.15 to cover the cost of feed, risk, labor, etc., of bringing a 1,000-pound feeder to 1,300-pound fat condition. Ordinarily, it is substantially accurate to measure these things in terms of corn only. During the ten-year period under consideration, the weighted price of corn was 61.5 cents. Dividing $47.15 by 61.5 cents equals 76.7 bushels. As an average of the ten-year period it has required the value of 76.7 bushels of weighted corn to make a 1,000-pound feeder, bought in October, moderately fat for the Chicago market the following April. The corn is weighted on the theory that the steers consume 8 per cent of it the month after they are bought, 15 per cent the second month, 20 per cent the third month, 20 per cent the fourth, 20 per cent the fifth, and 17 per cent the last month. Applying the ten-year ratio to the specific month of April, 1918, we find that a 1,000-pound feeder in October, 1917, cost $84, and the value of 76.7 bushels of composite corn was $139.40, making a total cost of the finished 1,300-pound steer, $223.40. The actual selling price in the month of April, 1918, was $199.55, or a loss of about $23.85 per steer. Applying the same method month by month, we get the chart as herewith published. It expresses profits and losses with a fair degree of accuracy to the ordinary cattleman who buys feeders at the central market and feeds them for five to seven months, largely on corn. During the winter of 1917–1918, the chart was not quite so accurate as usual, for the reason that the other expenses did not mount at this time as rapidly as corn. While heavy losses were incurred by cattle feeders, they were not so great as indicated in the chart.

The profits and losses of the big cattlemen of the far-western and southwestern states are not to be measured by such a chart. Their chief expenses are labor and the cost of pasture. Weather conditions affect them directly, whereas weather conditions in the corn belt affect cattle profits indirectly, thru the price of corn. During 1917 and 1918, the western cattle men, with the exception possibly of those in certain sections of the southwest, which suffered from unprecedented drouth in 1917, made unusually good profits. As a class, their profits were probably not as large as the profits of the grain-growing farmers of the middle-west, but were far larger than the profits of the cattle feeders of the middle-west.

The Chicago packers buy hogs as cheaply as they can and sell the pork as high as they can. Nevertheless, for months at a time they may sell pork products at a loss. Over any long period of time there is a fairly constant ratio between the value of one hundred pounds of live hog flesh and one hundred pounds of lard, ribs or other standard hog products. To simplify matters, and for purposes of illustration, we will consider that standard hog product, dry salt ribs, which makes up about 35 per cent of the live hog.

As an average of the ten years from 1886 to 1895, dry salt ribs (low-grade bacon) sold for the value of 136 pounds of live hog. During the ten-year period from 1896 to 1905, ribs sold for the value of 137 pounds of live hog. During the ten-year period from 1906 to 1915, they sold for the value of 135 pounds of live hog. But while this ratio is quite constant over any long period of time, it varies considerably according to the season of the year. As an average of the ten-year period of 1907–1916, the ratio was 136 pounds in January, 132 pounds in February, 127 pounds in March, 126 pounds in April, 133 pounds in May, 137 pounds in June, 137 pounds in July, 137 pounds in August, 135 pounds in September, 136 pounds in October, 140 pounds in November, and 139 pounds in December. In April of 1918, hogs averaged about $17.45 per hundredweight. Using the standard ratio for the month of April, of 126 pounds of live hog for one hundred pounds of ribs, we would get as the hog price of ribs $21.97. The actual price was about $23.21, or the packers got for the dry salt ribs in the month of April, 1918, about $1.24 more than the customary ratio. The chart tells the story, extending from 1905 to 1919. The black area above the line might be called packers’ profits and the black area below the line packers’ losses on the manufacture of ribs. As a matter of fact, the packers’ profits in the latter part of 1917 and early in 1918 were probably larger than indicated. This method assumes that the packers’ manufacturing charges rise and fall in the same ratio as hog prices rise and fall. In the rough way, over any long period of time, this is approximately true, but it was probably not true in late 1917. Hog prices at that time were over 200 per cent of the ten-year period, whereas packers’ manufacturing costs were probably not in excess of 170 per cent of the ten-year period.

It is conceivable that as the packing business becomes even more centralized and further improvements in the use of by-products are discovered, it may be possible for packers to sell short-ribs, as an average of a ten-year period, for a price no more than the cost to them of 133 pounds of hog flesh. Under conditions as they prevail at present, however, the 135-pound ratio is approximately correct.

The ratio method of determining profits and losses in the manufacture of various packers’ products is not put forward as an aid in any method of packing house accounting. It is, however, put forward as a method by which the consumer and the farmer can discover in a rough way when the packers are absorbing more than their customary share.

A similar chart worked out for lard gives much the same results, altho at times the profit and loss of the two products do not always coincide exactly. For instance, in 1914, lard sold for far less than its normal ratio during the entire year, whereas ribs sold for slightly more than their normal ratio. In 1919, lard sold far above its normal ratio and ribs were below. Similar ratios might be worked out for all the various hog meats, and also for cattle and the various cuts of beef. What examination we have made of some of these ratios indicates that the packers, in their buying of live stock and selling of products, regard each product as a law unto itself. If there is a large amount of stored lard on the market, on account of the shutting off of the German demand, lard prices may be reduced, even tho hog prices are such as to warrant lard selling at a dollar or two more per hundredweight. On the other hand, if the Allies at the same time are in the market for ribs, the prices will be advanced, even tho ribs may be made from hogs at a dollar or two less per hundredweight. The problem of the packers is to buy as cheaply as possible and sell as high as possible, in the knowledge that too wide a spread will invite competition. In the case of hog products, a loss may be withstood on a rapidly rising market, because the manufacturing loss will be compensated for by the speculative profit. This was illustrated during a considerable part of the year 1917, when most hog products sold at considerably less than their normal ratio, but when the packers actually made splendid profits, owing to the continual advance of prices and speculative gain on products on hand.

In normal times we regard charts based on principles as stated in this chapter as approximately accurate in measuring packers’ profits and losses in the manufacture of given products.

It is conceivable that the normal lard ratios may go lower in the near future. Corn oil, cocoanut oil, cottonseed oil and other tropical vegetable fats are being used as lard substitutes, and as a result lard may sell decidedly below its normal pre-war ratio to hogs. However, in this case the bacon hog will gain in popularity and the supply of lard will be curtailed to a point which will justify a ratio almost as great as existed before the war.

Just what price farmers should get for their milk has been a peculiarly vexing question. Before the war, farmers selling milk to city dealers were in an unusually weak bargaining position. When their position became intolerable, they organized into powerful bargaining associations, many of which were said to be illegal under strict interpretation of the law.

One of the earliest formed and most powerful of these producers’ associations has been the Chicago Milk Producers’ Association, numbering 16,000 members and controlling most of the milk that is shipped into Chicago or manufactured in the district immediately around Chicago. During the years immediately preceding the entry of the United States into the great war, this association bargained directly with the Chicago milk dealers as to what prices the farmer members of the association could get for their milk. They held a successful strike in April of 1916, and thereafter the Chicago milk dealers seemed to regard the association with considerable respect. The city press and the city politicians, however, felt that the farmers were too high-handed in their disregard of certain laws, and forthwith began agitation which finally resulted in indictments against the leaders in the Producers’ Association.

In the fall of 1917, the milk producers adopted as their guide in arriving at milk prices what has been called Pearson’s formula. According to this formula, the cost of producing a hundred pounds of milk in the Chicago milk district is equal to the cost of 44 pounds of grain, plus 188 pounds of silage, plus 50 pounds of hay, plus 39 pounds of bedding, plus 2.42 man hours of labor. To the valuation thus secured, certain differentials were to be applied to each month of the year, the widest differential being 120.3 per cent, in December, and the narrowest 70.6 per cent, in June. This formula was devised by Professor F. A. Pearson, of the Dairy Economics Division of the University of Illinois, after several years of actual cost-accounting work in the Chicago milk district. It really represents actual cost of production on a large number of farms in certain specific years. Using Pearson’s formula as a guide, the Chicago milk producers asked the dealers $3.71 per hundredweight for their milk in November, 1917. The dealers refused, and a strike was declared. The Food Administration intervened in an unofficial way and induced the producers to agree to a price of $3.22 per hundredweight, pending an investigation by the federal government as to a price which should cover cost of production and a reasonable profit.

The Food Administration appointed as a committee to determine cost of producing milk plus a reasonable profit, six people of essentially city interests and three people of essentially agricultural interests. This committee took testimony during the months of December and January, and in their report took as a guiding principle in determining the cost of producing milk the ratio method. Early in December, the author was asked to present to the commission a profit and loss chart on milk produced in the Chicago district since January, 1907, the profits and losses being based on ratios between milk prices per hundredweight on the one hand, and a composite of corn, oats, bran, cottonseed meal, gluten feed, hay, and labor prices on the other hand. These latter ingredients were weighted roughly as in the Pearson formula, but corn was given greater emphasis. Incidentally, it is interesting to note as corroborative both of the ratio method and the cost-of-production method as employed by Professor Pearson, that the two methods give very similar results. Of course, it is conceivable that if Professor Pearson had made his cost-accounting investigation in a year either of extremely good pasture or extremely poor pasture, the two methods would not agree. But taking as he did fairly average years, the results check very closely.

While the Chicago Milk Commission adopted the principle of the ratio method, it did so with certain modifications. To illustrate the method as adopted by the Chicago Milk Commission, we quote from the report as follows:

“The commission has therefore selected as a base, representing cost of production and a fair profit, the average sale price per one hundred (100) pounds over the years 1908 to 1915, inclusive. The result of course does not represent present value, due to the large advance in cost of feed and labor since that time. The quantity of feed and labor per one hundred (100) pounds of milk, however, is the same in both periods. Considering the eight-year period as a base and distributing feed and labor on a basis of 100 per cent total, the commission developed the following ratio: Nineteen per cent home-grown grains, 19 per cent mill-feeds (wheat, bran, wheat middlings, hominy, cottonseed meal, oil meal, gluten feed, dry salt), 35 per cent hay (including silage valued at the ratio of three tons of silage to one ton of hay), 27 per cent labor.

“It was agreed by the commission that variations in the prices of those four units represent with sufficient accuracy, when applied according to the above ratio, the increase or decrease in the cost of production of milk. The only criticism made to this base or this plan was by a minority of the members of the commission, that the price to the producer during the eight-year period referred to was not satisfactory to them.

“From the monthly price reports issued by the Department of Agriculture, the farm prices of home-grown grains and hay are obtainable, and from a reliable trade journal published in Milwaukee the wholesale prices of mill-feeds are obtainable. The average over the eight-year period from these records is as follows: Corn, $1.107 per hundred pounds; mill-feeds, $1.306 per hundred pounds; hay, 55.7 cents per hundred pounds.

“It appears fair to the industry that it is entitled to the same proportionate increase in the price of its product as has occurred in the elements which make up the product. From the records of the Department for November, 1917, the beginning of the period under consideration, the following prices prevailed, obtained from the same sources: Corn, $3.089 per hundred pounds; mill-feeds, $2.3655 per hundred pounds; hay, 78 cents per hundred pounds.

“The commission has considered from the evidence and such information as was obtainable that the price of labor in November represents 50 per cent advance over the average for the eight-year period. Using the proportion of feed and labor and prices over the eight-year period, and comparing with November prices from the same source of information and on the same products, we find the following ratio of increase:

“The average price of milk per one hundred (100) pounds for the month of November, from 1908 to 1915, inclusive, was $1.768. Applying the new index ratio of 1.77, the November, 1917, price would be, therefore, $3.13. In the same manner, the price for any month may be determined by taking the average price over the eight-year period for that month and multiplying it by the index figure, 1.77. It will be noted that by the use of this method the ratio of the costs of feed and labor between the average of the eight-year period and the November, 1917, period, is used rather than the actual prices of the commodities.

“The average monthly prices of milk per hundred pounds over the eight-year period were as follows: November, $1.768; December, $1.812; January, $1.781; February, $1.737; March, $1.60; April, $1.406; May, $1.15; June, $1.017. Applying this index, 1.77 November price, to these figures: November, $3.13; December, $3.20; January, $3.15; February, $3.07; March, $2.83; April, $2.49; May, $2.04; June, $1.80.”

This report was signed only by the city members of the commission. The agriculturally-minded members and the Chicago milk producers knew that the prices secured by the ratio method as advocated by the commission were not high enough to cover cost of production. The fault was in the method of application. Hay and labor between them were made to represent, according to the commission, 62 per cent of the total cost of producing milk, which is altogether too high a weighting. This bad weighting was made worse because of the fact that thoroly up-to-date figures on hay and labor were not available, and the figures which were taken were far lower than those existing at the time when the report was actually published. The converting of silage into terms of hay instead of into terms of corn is a matter open to grave question in view of the fact that silage production costs are almost identical with corn production costs, and the alternative market for silage is the corn market and not the hay market. Several other mistakes were made which might have been avoided if the method had been applied by a thoroly impartial body well versed in the technique of dairying as well as the weighting of agricultural index numbers. The unjust prices secured by the commission should not be blamed on the ratio method, but on the way in which it was applied. The finest scales are not dependable in the hands of an ignorant or a dishonest man.

We present herewith a historical milk chart indicating profits and losses from January, 1908.

A full description of the derivation of the Pearson formula is to be found in Bulletin No. 216 of the Illinois Experiment Station.

There are two methods of determining the cost of producing crops—the cost-accounting method and the ratio method. The common method is the cost-accounting system, as employed by farm management investigators. For example, it has been found that the average farmer in the corn belt puts about twenty hours of man labor and fifty hours of horse labor on the average acre of corn. This divides up roughly into three hours of man labor and twelve hours of horse labor for plowing, three hours of man labor and twelve hours of horse labor for disking and harrowing, three-fourths of an hour of man labor and one and one-half hours of horse labor for planting, six hours of man labor and twelve hours of horse labor for cultivating, six hours of man labor and twelve hours of horse labor for husking, two hours of man labor and five hours of horse labor for manuring and miscellaneous. In addition to the man and horse labor charges are machinery expense, seed, manure or fertilizer, insurance and depreciation on the general overhead charges, and the rent of land. With man labor at 35 cents an hour, horse labor at 18 cents an hour, land rent at $12 an acre, and machinery and miscellaneous expenses at $4 an acre, the total cost of producing an acre of corn in 1919 was about $32. On extra good land, the rent was as high as $18 or $20 an acre, and the cost of an acre was increased accordingly. However, on extra good land the yield was decidedly above the average. The average acre yield in Iowa in 1919 was forty bushels, or the cost of producing a bushel of corn was roughly 80 cents on the farm in the month of December. The 1919 crop was decidedly above the average; with an average crop it would have cost the Iowa farmer right around 90 cents a bushel in such a year as 1919.

The ratio method when applied to corn corroborates the farm management investigational method. The ratio method is based on the supposition that the cost of producing corn varies with the cost of man labor, horse labor and machinery. For the sake of convenience, it is taken that the cost of horse labor varies with the price of corn, oats and hay, and that the price of agricultural machinery varies with that part of Dun’s index known as metals. Roughly, it is figured that of the cost of producing corn in Iowa, 35 per cent is represented by land charge, 20 per cent by man labor, 15 per cent by corn (used either as seed or fed to horses), 10 per cent by hay fed to horses, 5 per cent by oats fed to horses, 10 per cent by Dun’s metals, and 5 per cent by Dun’s miscellaneous. Dun’s metals are given a lag of two years, and Dun’s miscellaneous of one year, owing to the fact that machinery and the miscellaneous overhead expenses entering into the cost of corn production become felt rather slowly.

Applying the ratio method, we will take as our base the ten-year period from 1897 to 1906. During this period Iowa land averaged about $50 an acre; harvest labor, without board, $2 a day; corn, 29.4 cents a bushel; hay, $5.47 a ton; oats, 23 cents a bushel; Dun’s metals, about $14, and Dun’s miscellaneous, about $15. The average acre of Iowa corn during this ten-year period was worth on a December 1st farm basis $10.

Now, in 1919, Iowa land was worth about $192 an acre, or 384 per cent of the basic ten-year period; man labor, without board, at harvest time was around $5.20 a day, or approximately 260 per cent of this ten-year basic period. In like manner, corn was 410 per cent; oats, 280 per cent; hay, 330 per cent; Dun’s metals, 230 per cent, and Dun’s miscellaneous, 230 per cent. If land is allowed a weighting of 35 per cent; man labor, 20 per cent; corn, 15 per cent; hay, 10 per cent; oats, 5 per cent; Dun’s metals, 10 per cent, and Dun’s miscellaneous, 5 per cent, we arrive at 329 per cent as the cost of producing an acre of corn in 1919, as compared with 100 per cent for the basic ten-year period. In the basic ten-year period, an acre of corn actually sold for $10. In 1919, in order to come as near breaking even as in the basic ten-year period, an acre of corn should sell for $32.90. The ratio method gives almost identically the same results as the farm management method. Both indicate that it cost the average Iowa farmer in 1919 about 80 cents to produce a bushel of corn on a basis of December 1st farm values.^[4]

The ratio method may be applied to other crops by using a somewhat different weighting of the production factors. In the case of oats in Iowa, for instance, land may be given a weighting of about 35 per cent; man labor, 15 per cent; corn, 10 per cent; hay, 10 per cent; oats, 15 per cent; Dun’s metals, 10 per cent, and Dun’s miscellaneous, 5 per cent. This would indicate that oats in Iowa in 1919 cost about 324 per cent as much as in the basic ten years. In the basic ten-year period, the average acre of oats in Iowa sold for $8. We may therefore conclude that the cost of producing oats in 1919 was 324 per cent of $8, or $25.92. With an average yield of thirty-three bushels per acre, the cost per bushel was about 78 cents on a December 1st farm basis.

Manifestly, the weak point in the ratio method of determining cost of producing crops is the character of the basic period. Did the crops actually sell during the basic ten-year period for cost of production? Manifestly, in some years they sold for less, and in some years they sold for more. As an average of the entire ten-year period, they must have sold for at least cost of production, or farmers would gradually have reduced their acreage of the particular crop under consideration, or else gone out of business entirely. As a matter of fact, in the ten-year period under consideration, 1897–1906, land values were constantly advancing. It would seem, on the whole that this particular ten-year period is a fair one to use, and that as an average of these ten years crops sold for approximately cost of production, no more, no less.

It is always conceivable that over long periods of time there might have occurred changes in supply or demand conditions that would make the basic ten-year period altogether false for the purpose of comparison. For example, in the case of oats, it is conceivable that tractors, trucks and automobiles might so displace horses as to make the city demand for oats decidedly less than during the ten-year period extending from 1897 to 1906. The oats acreage might therefore be considerably decreased, and oats be produced in large quantities only in those sections especially adapted to growing oats. It is conceivable, therefore, that the ratio method may possibly give the cost of oats production at rather too high a figure, a figure impossible of realization, one year with another. In the case of standard crops, however, there is remarkably little change in either supply conditions or demand conditions. Methods of producing corn are pretty well standardized. The market for corn is almost equally stable. It is believed that the ratio method of determining cost of corn production will be approximately accurate for the next fifty years.