Agricultural prices

Prices of corn belt food staples are registered more promptly and more delicately on the Chicago Board of Trade than anywhere else in the world. The farmer visitor in Chicago, who has a few minutes to spare, finds it very interesting to look down from the Chicago Board of Trade galleries on the corn pit. For several minutes, the pit may be the dullest thing imaginable, and suddenly news will “break.” Perhaps it is the month of August, and it has begun to rain in Nebraska. As a result, certain operators are anxious to dispose of the corn for which they had contracted. Perhaps it is 9:30 on another August morning, and the temperature, even this early in the day, is 85 degrees, and the prospects are for hot winds sweeping Kansas and southwestern Iowa. Men who have sold corn “short” a few days before, on the strength of local rains, are now thoroly scared, and rush into the pit to buy back before the price runs up more than three or four cents.

The farmers sitting in the gallery, watching the speculators buy and sell “paper” corn, by shaking their fists and nodding their heads, feel that the Board of Trade is a gambling institution. So firm is this conviction that several of our largest farmers’ organizations have gone on record as being opposed to the speculative system as a method for registering prices of farm products.

So far as the business world is concerned, the system of buying and selling future contracts employed by the Board of Trade is in the nature of risk insurance. A feed concern may have sold to farmers twenty carloads of their feed at a price based on $1.20 corn. They have not bought this corn as yet, and do not have room to store it. They therefore buy a contract for future delivery at $1.20, in order to protect themselves against corn going up in the meantime. This feed concern is in the manufacturing game; it can not afford to take a risk, and for that reason buys a future on the Board of Trade. When this feed concern accepts the actual corn, it sells the contract. It may make or lose money on the purchase and sale of the contract, but in either event the net result is that the actual corn cost $1.20 per bushel plus the commission charge of a fraction of a cent per bushel.

The speculator takes the risk, and the spirit in which he approaches the game is often the gambling spirit, pure and simple. But, like all shrewd gamblers, he takes his risks as shrewdly as possible, and after a time becomes expert in judging the probable effects of weather, political news, transportation difficulties, etc., on corn prices. And these factors are more real than some of our agitators would have us believe.

But while speculators perform a real service to society, there is nothing angelic about them. They are concerned with a profit, not with service. The professional speculator is generally either “long” or “short” of the market; that is, he has corn bought or sold for future delivery. The man who has December corn bought for future delivery at $1.20 per bushel is hoping with all his energy that the corn crop is short and price will therefore advance, that transportation difficulties will materialize, that an unusual demand will spring up from Europe for foodstuffs, that something will happen to send up the price. He is favorable to the promulgation of any kind of news which will help him to sell his corn at a profit. While the Board of Trade has regulations against the dissemination of false news, nevertheless these men at times seem to be able to color the crop news very effectively. Situations develop where most of the professional speculators are on one side of the market, and where they are apparently able to use propaganda to force prices very rapidly either up or down, at the expense of the amateur speculators.

The products most traded in on the Board of Trade are wheat, corn and oats, and to a lesser extent the cured hog products, rib sides, lard, and mess pork. The smallest units traded in are 5,000 bushels of grain and 50,000 pounds of provisions. In the case of the grains, the contracts most commonly traded in are contracts for delivery in December, May, July and September. In the case of the pork products, the contracts most traded in are contracts for delivery in January, May, July and September. Before the war, trading in December corn customarily opened in the month of May. The price of December corn as quoted in May was necessarily based on the supposition that the ensuing crop would be a normal crop, neither greater nor less than the average. If there was cold, wet weather in May or June, the price advanced. If the weather was warm and rather dry, the price declined slightly. However, as a general proposition, before the war, the price held practically steady during the months of May and June. During July and August, however, corn values on the Chicago market oscillated back and forth with rainfall and drouth, registering the changes in marvelously delicate fashion. Customarily, before the war, it took an average rainfall, in the seven great corn states, of about one and a quarter inches during ten days, to hold the price of December corn futures practically stationary. A rainfall of as much as one and three-quarters inches in a ten-day period during July and August would ordinarily depress the price by several cents a bushel, whereas a ten-day period with no rainfall at all would customarily advance the price by eight or nine cents a bushel or even more if the temperature was high.

Anyone who studies these things is surprised at the accuracy with which the market price before the war actually reflected crop conditions as they changed from day to day. Since the war, it has been more difficult to measure the price-making forces. Political conditions in Europe even during the months of July and August often have had as much influence as the weather in determining the price of corn.

The Board of Trade has to do with both cash grain and future trading. So far as prices are concerned, the cash market is supposed to be less sensitive than the market for futures. The business of the future market is to register changing conditions as promptly and accurately as possible. Occasionally, however, artificial situations develop. For instance, in a year of a very good corn crop, a large number of speculators may have sold December corn “short” at around $1.20 a bushel. At the time of the sale, they may have had every reason to believe that they could eventually buy the actual grain for less than this price when the month of December finally arrived. Then gradually transportation difficulties began to grow and bad weather came on, and altho there might be an enormous crop in the country, there would be very little corn in Chicago. Then certain other speculators might go to work buying large quantities of December corn futures, knowing that other men were “short” a long line of December corn at $1.20. These speculators might not actually want the corn, but nevertheless, by playing the technique of the market, might be able to create a “squeeze” and force the price of corn up to $1.50 a bushel before permitting the “shorts” to settle. And this might happen in spite of the fact that by January 2d there might be enough actual corn coming into Chicago to enable cash corn to be sold as low as $1.20.

The object of this book is neither to praise nor condemn the speculative system as a method for registering prices of farm products. We are pointing out the strong points in the present system. Idealistic social workers, representatives of organized labor, and many farmers, would like to do away with the speculative system of registering prices. They would like to substitute therefor price-fixing legislation. These people, as a rule, are densely ignorant of the legitimate price-making forces, and it is impossible that they should be able to shape a price-registering machinery superior to that which we now have.^[2]

One reason for the writing of this book is the belief that organized farmers and organized labor, working in conjunction with certain idealists, will make an effort to modify our present price-registering system. We are heartily in sympathy with such an effort, for the speculative system is far from perfect. But it is such a delicate system of registering prices that we believe that even the most virulent opponents should allow the system to run unchecked for a good many years yet, in order that they may study its functions more carefully. Here is a great field of research for the economists, who for some unknown reason have failed to study Board of Trade prices during the past fifty years as closely as they should.

Improvement on our present system can be made only after a thoroly scientific and dispassionate study of its strength and weakness.

Three forces are prominent in making agricultural prices—cost of production, supply and demand, and strategic considerations. Farmers and laborers believe that cost of production should be the chief consideration. Business men preach “supply and demand” as the great price-making force, and in addition use strategic propaganda when it is to their advantage to do so.

Cost of production in the long run is on the average practically identical with both the supply-and-demand price and the actual price. It is in the very nature of things that those producers who can not on the average get cost of production will go out of business. In the case of the hog business, it takes about three years for the average man to get in and out. Ten years, which is fully three times the “in and out” cycle, is “long run” in the hog business. A ten-year average of actual hog prices should therefore be approximately equal to a ten-year average of the cost-of-production price of hogs. As a matter of fact, we find that the cost of production, as shown by the corn-hog ratio, is practically the same from one decade to the next. Decade after decade, the corn-hog ratio has remained constant at eleven to twelve bushels of Chicago corn per hundred pounds of Chicago hog ever since the Civil war. Farm management investigations indicate that for the average farmer this ratio represents approximately cost of production. As a matter of fact, this ratio is “cost of production” in the very truest sense of the term. This ratio represents the reward necessary to keep enough farmers producing hogs to satisfy the consuming demand, year in and year out. Stated thus baldly and simply, we see how the cost of producing a hundred pounds of hog weight must in the long run average the same as the “actual” price and also the “supply and demand” price. And yet hogs may sell for a year or so for the value of fifteen bushels of corn, as they did in 1866 and 1910, or they may sell for a year or so for the value of nine bushels of corn, as they did in 1908 and 1917. At any given time, the cost-of-production price is likely to be decidedly lower or higher than the actual price or the supply-and-demand price. It is only on the average that cost of production becomes identical with the actual price.

Supply-and-demand price departs from the cost-of-production price at any given time because of such things as unusual weather, accidents, etc. Dry weather in July and August may cut the corn crop short, and as a result temporarily increase the number of hogs marketed. Under such conditions, the packer buyers make no attempt to pay for the hogs the increased price which the higher price of corn would warrant, but instead buy as cheaply as they can, quoting in defense, “supply and demand.”

A business panic may come on, as in October of 1907, and as a result the demand for meats of all kinds may shrink. Corn prices, the cost of producing hogs, may stay up, as was the case in 1907–1908, but hog prices nevertheless are reduced. A study of the hog market for many years past reveals the fact that the immediate price-making force is “supply and demand,” and that “cost of production” has no influence whatever on prices except in the long swings.

The supply-and-demand theory of prices is well understood by nearly every one. Supposedly, actual prices at any given moment represent an equilibrium of supply and demand. The next day larger supplies come in, and the demand remains unchanged; naturally the price declines to a point where supply and demand are again equal. There is a presumption in the minds of many people that supply and demand interact with almost mathematical accuracy to determine prices. In the long run, possibly this is true. The day-by-day price, however, is as much a matter of psychology as mathematics.

This brings us to a consideration of those more intangible price forces which may be grouped together under the head of strategy. In January and in August of 1919, we had excellent examples of the use of strategy as a price-making force. In both months, certain powerful interests worked in conjunction with the newspapers to modify public psychology in the interests of lower prices. Day after day, the lower price bombardment was directed against the farmers by the daily press and the politicians. Prices declined in spite of the fact that the supply was greatly curtailed and the potential demand was as great as ever. In the corn market, receipts were exceedingly light at Chicago during both price raids. Hog receipts in August of 1919, when prices dropped $5 per hundredweight, were the smallest of the year. But government officials constantly talked about the vast army supply of bacon. As a matter of fact, the quantity of pork products put on the market by the government was not enough to account for much of a drop in hog prices. But the publicity which went with the government announcements, combined with determined pressure on the speculative markets in this country and abroad, sufficed to lower prices tremendously in defiance of any mathematical expression of supply and demand.

There is a strategy to the timing of a determined price drive. All farmers know that such a drive may be expected in the fall of the year. A drive in the fall is partly normal as a result of the increased supply at that time, but oftentimes strategic. In the fall of 1865, following the Civil war, there was a determined price drive, roughly corresponding to the price drive initiated in August of 1919. In both cases, strategic factors were apparently paramount. Certainly, no mathematical formulation of the law of supply and demand could account for the price changes which took place in 1865 and 1919.

Farmers have discovered since 1914 that such disturbances as foot-and-mouth disease, interrupted railroad service, and falling foreign exchange may influence prices without changing either potential supply or potential demand. They have suspected the “interests” of manipulating foreign exchange in the fall of the year to make lower price for farm products. They have known that ocean freights have generally advanced in the fall of the year, to the detriment of farm product prices in the United States, and they have suspected that part of this advance in ocean freight rates was due to England trying to get a large return on her shipping and at the same time buy her food more cheaply.

The two charts presented herewith indicate the normal seasonal trends, during the decade preceding the war, of exports from the United States as related to British exchange, and to ocean freights from New York to Liverpool. It will be noted that United States prices must necessarily be weakened in the fall of the year by weak British exchange and high ocean freights.

The speculative price as set from day to day is sometimes a result of technical situations altogether apart from supply and demand. Ordinarily, the speculative price as represented by “futures” and the cash price move in sympathy, but occasionally a scared “short” finds the market oversold and bids up prices unduly in an effort to cover, or a tired “long” finds the market overbought and sends prices down unduly in an effort to sell. And occasionally there is manipulation—interests working together to make the price temporarily higher or lower than a normal working of supply and demand would justify. Sometimes the cash markets, following the lead of the speculative markets, may get out of line with ultimate supply-and-demand conditions for several months at a time.

Prices of corn, hogs, etc., are determined chiefly by supply and demand, together with the occasional influence of strategic manipulation. The system as operated by the packers and Board of Trade speculators really reflected conditions before the war with remarkable accuracy. During the war, so many extraordinary conditions were at work that it was impossible to measure supply-and-demand conditions at all accurately, and it is impossible to say how efficiently the speculators did their work.

But speculators and packers, in so far as they set prices, are concerned solely in making a profit for themselves. If, by manipulating the market, they can make a bigger profit than by trying to express supply-and-demand conditions with mathematical exactitude, then they may be expected to manipulate. The violence with which hog prices swing above and below cost of production would suggest that the packers are consciously endeavoring to send prices too low for a year or two, in order later to send them too high. They go into the low-price period with a small amount of high-priced products on hand, and come out into the higher level with a large quantity of low-price products. It would seem that by laying in a stock of hog products at the low point, they hope to profit later by an advance in price.

It is typical of supply and demand, as it makes prices of standard farm products, that a small crop sells for more than a large crop. A twenty per cent decrease in the supply raises the price more than twenty per cent, possibly thirty per cent, or even fifty per cent. Old Gregory King, in the latter part of the Seventeenth century, recognized this principle when he stated:

“We take it a defect in the harvest may raise the price of corn [wheat] in the following proportions:

Modern statistical study indicates that this statement of King’s is somewhat exaggerated, but undeniably the tendency exists among standard agricultural products for small crops to bring in a greater return than large crops. In other words, the demand for farm products is inelastic. The ultimate consumer wants just so much of staple foods, no more, no less. If farmers raise more than so much, they must accept a considerable reduction in price; if they raise less, they can command an advance out of all proportion to the shortage. The law of demand for staple farm products being inelastic, small crops bring in a greater return than large crops.^[3]

The classical economists, the people of laissez faire persuasion, accept this condition as natural, as inevitable, and therefore desirable. But is it desirable? The sharp price rise which comes as a shortage becomes apparent benefits those lucky producers who have supplies on hand, and especially those keen speculators who first saw the oncoming shortage and bought in anticipation. This sharp price rise may overstimulate production. The high hog prices in 1909–1910 stimulated the production of too many hogs, and when this increased production reached market, the price was $6.50 instead of the expected $8 to $10. And the low prices of 1911–1912 in turn begat the high prices of 1913–1914.

The question comes, Would it not be to the public interest if, in price making, more emphasis could be placed on cost of production and less on the short-time working of the law of supply and demand? Prices should rise with a short crop, but not to such an extent as to make a short crop more profitable than a normal crop. If a moderate rise in prices will not sufficiently curtail demand, then the public should be educated to the fact that there has been a drouth, and that unless they curtail their demand, there will not be enough to go around. Of course, under our present laissez faire attitude, every speculative business man would take such a pronouncement as a “bull” statement, and the demand would immediately increase instead of decrease. There is danger that any attempt to make cost of production the guiding factor in price determination will amount to close government supervision of storage, speculation and similar market phenomena. The disadvantages of government supervision are apparent to all who watched the Food Administration at work during the war. The Food Administration performed a hard job remarkably well, but farmers found that the officials were ignorant of agriculture, and that, moreover, agricultural interests could not expect a square deal except in so far as they were organized to compel a square deal, or except as the emergency itself compelled a square deal to insure continued production.

If farmers are to continue under the present laissez faire system with supply and demand, together with strategic manipulations, as the price-making force, they must necessarily learn to play the game themselves. They will find it necessary to practice sabotage in the same scientific, businesslike way as labor and capital. They will reduce the size of their crops at strategic moments, because they know that small crops ordinarily bring in a greater return than large crops. Of course, if farmers should practice sabotage in the same heartless, efficient way as labor and capital, our society will be imperiled. The burden of the sabotage practiced by labor and capital has been borne chiefly by the farmer. When farmers also practice sabotage, labor and capital will be forced to come to an agreement with farmers on production and price matters.

Is there not a possibility that capital, laborers and farmers, by placing themselves in equally powerful bargaining positions, may come to see the futility of sabotage as a price-sustaining force? Once farmers are able to meet the other classes of society on equal terms, all three classes ought to unite on production as the source of profit, rather than on clever bargaining. This involves close-knit organizations of both farmers and laborers under the leadership of men well educated in general economics, in strategic bargaining, and in production. There must be men studying the system as a whole, men who perceive the legitimate physical difficulties which our society faces. The labor leaders must come to see that there is a point beyond which labor can not go in raising wages and reducing hours. Farm leaders must come to see that there is a point beyond which farmers can not go in reducing acreage and raising prices. Business leaders must come to see that the common people will not stand for curtailment of production to two-thirds factory capacity in order to secure abnormal profits, when by running the factories to full capacity the business will give normal profits. The best brains of all classes must unite in overcoming legitimate physical handicaps, not in figuring out ways in which a specific class may benefit at the expense of other classes. In the meantime, farmers must learn to use sagacious sabotage as effectively as labor and capital. Otherwise they will continue to be at the mercy of capital and labor.

What is the best means of overcoming the food shortage resulting from drouth? Laissez faire economists and business men say: Let high prices curtail demand and stimulate production. But this remedy is “locking the stable after the horse is stolen.” Is it practical to build government warehouses to store wheat in years when the acre yield is more than fifteen bushels, and from which wheat may be drawn in years when the yield is less than thirteen bushels?

No scheme of this sort can be definitely laid out in advance. But statistical science will soon reach a point where it should be possible to meet our physical handicaps in the way of drouth, floods and accident, in the spirit of doing what is best for society, instead of utilizing the crisis for individual or class profit.

If we are to continue our present complex society, we must educate our children very thoroly in social mathematics. Our problems are not only problems of the spirit, but also of exact measurement. What is the fair price for bacon? This involves the cost-of-production idea. Is bacon relatively lower or higher than hogs? Are hogs relatively lower or higher than corn? Is there a normal supply in the country? If bacon were lower in price, would the future supply be imperiled? Would an injustice be done to farmers? If bacon were higher in price, would an undue profit accrue to the packers, or would the farmers be stimulated to produce too many hogs a year from now?

Possibly it will be wise for the government to provide funds to finance a Price Publicity Committee, to be made up of economists appointed by our state universities and agricultural colleges. The duty of this commission would be to make public week by week the relevant price facts. They would point out which products are relatively high and which are relatively low, and issue index numbers of various kinds, in an endeavor to educate the public to fundamental price facts. The object of such a Price Publicity Committee will be to furnish such constant publicity that it will be difficult for any product to sell for any length of time either above or below cost of production. And in saying this we define cost-of-production price as that price which is necessary in the long run to keep enough producers in the business to satisfy the demand. It is believed that adequate publicity will favor the prevailing of the long run cost-of-production price as opposed to the short run supply-and-demand price.

Men in whom the laborers of the country have faith should have an intimate, statistical knowledge of the supply and demand forces as they make prices and as they make for the prosperity of laborers and society as a whole. Men in whom farmers have faith should have an intimate, statistical knowledge of labor and business problems in order that they may know approximately when labor and business are charging fair prices for their services. Business men already have a fair statistical knowledge of farming and labor conditions, but they need an even more intimate knowledge, as well as a change of heart. They must learn to operate their businesses from the standpoint of greatest service and a fair profit, not from the standpoint of greatest profit. Those businesses which do not learn this may expect to be taken over either by the government, organized labor, or organized farmers, if not in one way, then in another.

Both farmers and city consumers have expressed much dissatisfaction in recent years with the methods of price determination as used by the boards of trade and packing houses. The representatives of the boards of trade and packing houses have answered these complaints with the simple formula, “supply and demand.”

During the war, many people announced that prices in the United States were no longer the result of supply and demand. For a period of two and a half years, wheat prices were held at approximately $2.20 a bushel, in spite of the fact that both supply and demand conditions were varying constantly during this period, and in spite of the fact that under supply-and-demand conditions as they ordinarily work, prices might have been expected to have gone as high as $4 and as low as $1.50, at different times during this period of two and one-half years. Social workers and others of idealistic temperament who have always been pained with the rather heartless way in which the law of supply and demand has worked, were much pleased with the stabilized wheat price, and referred to it as an instance of the repeal of the law of supply and demand.

Of course, the law of supply and demand never has been repealed, and never will be repealed. Instead of trying to repeal it, we should try to secure the best type of price-fixing machinery thru which this law may work. Man has not repealed the law of gravitation, but has devised such machines as automobiles, airplanes, etc., thru which he accomplishes his purposes notwithstanding.

Our city friends who favor government attempts to repeal the law of supply and demand and to fix uniform and relatively cheap prices should direct their efforts toward the search for a new price-fixing machinery. For arbitrary interference with this law invariably brings penalties in the form of conditions which often are more severe than the condition which it was hoped to improve.

What we should strive for rather is a better understanding of the law of supply and demand, in the hope that we may be able to modify the severity of its operation and thus avoid periods of feast and famine, with their unreasonably low prices and unreasonably high prices.

Thousands of men in the corn belt, especially the leaders of the organized farmers, should be familiar with the normal, mathematical working of the law of supply and demand. They should know not only when prices are lower than warranted by the supply, but just how much too low. Exact measurement is necessary in order to perceive when unusual factors are at work. The price indicated by a mathematical interpretation of supply and demand may be $1.25 for corn, whereas the actual price, because of a purely speculative drive, may be only $1. It is wise to measure prices to some extent by purely mathematical considerations, in order that we may perceive more clearly when extraordinary forces are at work.

After having arrived at a price based on a mathematical interpretation of supply and demand, the problem is to determine to what extent extraordinary forces are at work and to what extent it may be worth while to combat them by extraordinary measures. If corn is 15 cents a bushel below the mathematically justified price, will it be advisable for farmers generally to hold their corn and cause a shortage at the terminal markets? Will it be advisable to put out newspaper propaganda showing the public how the market price of corn is below cost of production, or put on an advertising campaign to increase the demand? These matters of larger policy are mostly outside the field of mathematics. They are largely matters of strategy. How much bargaining force do the farmers represent? To what extent will they follow directions? At what season of the year is it best to strike?

Generally speaking, a farmers’ drive for higher prices would best begin about January 1st, and should reach its greatest intensity about March 1st. After March 1st, seasonal scarcity begins, and no further propaganda is needed. A consumers’ drive for lower prices best begins about August 15th, and reaches its greatest intensity about October 15th. After October 15th the seasonal surplus, especially of corn and hogs, begins, and there is no further need for consumers to bring artificial propaganda to bear. It is interesting to note in this connection that the “bear” campaign engineered by the governments of the world in 1919 began in late July and continued until about October 15th, at which time the weight of the season’s marketings was sufficient to hold prices down without additional use of newspaper space.

After a mathematical study of prices, the leaders of farm organizations, in so far as they attempt to influence prices, must consider the state of the export trade, rate of foreign exchange, ocean freights, world crop conditions, business conditions at home and abroad, and, in fact, all the factors which the trained speculators take into account on the Board of Trade. They must take all of these things into account, and yet be able on occasion to act decisively. They must learn to play the game in the same fashion as a skillful whist player. They must not “overbid” their hand, but bid its full worth, and they must take all the tricks they can.

To have even a fair chance of success in an effort of this sort, farmers must set up a very strong statistical organization, in charge of a highly competent staff of thoroly trustworthy experts. For farmers themselves have neither the time nor the opportunity to secure the training necessary to enable them to acquire and assimilate the information needed.

Dissatisfied farmers and city consumers have been told often that “supply and demand” makes the price. Economists have backed up the Board of Trade people and the packers in making this assertion.

But is it not almost equally true to say that “price” makes the “supply and demand”? Is it not possible to set a price which, as can be demonstrated mathematically, is out of line with the present supply and demand, and thru this price to create new and unexpected supply-and-demand conditions?

It is conceivable, for example, that oleomargarine might be sold for several years at a price below that warranted by supply and demand and equally below a price warranted by cost of production. It is conceivable that the abnormally low price, without reducing the supply, would increase the demand and result in the formation of the oleomargarine habit among millions of people. And it is equally conceivable that later on the price of oleomargarine might be increased more nearly to a parity with butter, and that the oleomargarine eating public might continue the oleomargarine, even tho it was underselling butter by only 10 cents a pound, instead of the 15 cents a pound differential which was existing when the habit was formed.

A low price may be used to create a demand, which will continue even after the low price no longer exists. In like manner, a low price may be used to curtail the supply of the competing article. In the illustration, an artificially low price for oleomargarine might reduce the demand for butter, thereby reducing the supply, and increase the demand for oleomargarine, and this situation of a reduced supply of butter and an increased supply of oleomargarine might continue, even tho the price of oleomargarine were later raised to its customary relationship with butter. Price may act as a cause and “supply and demand” may be a result.

In open, competitive markets, “supply and demand” generally comes first and price follows after. Before the war, for instance, the dominating factor in the corn market was the supply of corn, and during the months of July and August, when the new corn crop was being made, the price of corn varied with almost mathematical accuracy with the rainfall and temperature which were making the new corn crop. The demand for corn was a fairly constant factor. The supply of corn was the price-making force.

Since the war, corn prices have not been the result of “supply and demand” in the sense that they were before the war. During 1919, price often came first in the corn market, and supply and demand followed afterward. For example, in January and February, 1919, corn prices broke 20 cents a bushel, in spite of the fact that receipts at central markets were decidedly below their customary level. Influential people had postulated the theory that the war was over, and that supply and demand, if given an opportunity, would operate to bring about a lower price level. They set a lower price level, but supply and demand refused to operate on the new level. The lower corn prices which prevailed during the spring of 1919, however, probably had a very material effect on the acreage planted. At any rate, there was about four per cent less corn planted in 1919 than in 1918.

According to the customary view, when the supply is smaller than usual, the price should be greater than usual, and vice versa. In the hog market this does not necessarily hold true. In November of 1907, hog prices were dropped with a terrific jerk, as a result of certain unusual conditions. The drop was so great that farmers refused to market their hogs, and receipts of hogs in November of 1907 were about one-third smaller than in the ordinary November. The price of hogs was lower than customary by about one-fourth, and the supply of hogs marketed was less by about one-third. A similar situation prevailed in August of 1919. Prices dropped about $5 per hundredweight, or faster than ever before in history. Receipts also dropped, and much fewer hogs were received than in the ordinary August.

In both 1907 and 1919, the packers figured that the business world was so upset that to be on the safe side they would best buy their hogs cheaper than they had been buying them. Farmers were slow to realize just how great the disturbances had been in the business world, and failed to understand that in a situation of this sort the packers could put thru their program for lower prices, in spite of reduced hog receipts for a month or two. It is in the very nature of things that the packers can outlast the farmers at such a game. The packers know more accurately than the farmers the supply-and-demand conditions, and they know that after a hog reaches two hundred pounds, it is only a question of weeks till the farmer will let him go, no matter what the price. It will take an extraordinarily able farmers’ organization to beat the packers at this game, an organization which holds as its trump card “ultimate supply and demand.”

Prices may make supply and demand, and supply and demand may make prices. First one has the lead, and then the other; they are constantly acting and reacting. Before the war, the relationship in some commodities might be expressed with almost mathematical exactness, but there were constant little departures. Since the war prices have much more often taken the initiative than they did before the war. The result, of course, is a more violently fluctuating condition of both supply and demand.

The problem which farmers and city consumers should put to the Board of Trade people and the packers is: What are you doing to place prices at a point which will result in a more uniform supply and a more uniform demand?

The common man prefers to approach the question of price not from the standpoint of supply and demand, but from the standpoint of cost of production. The laboring man says that he has no quarrel with the farmer, that in fact he is glad to pay the farmer what it costs him to produce food. Most people take it for granted that the just price is cost of production. In July of 1917, President Wilson gave his scholarly definition of a just price: “By a just price I mean a price which will sustain the industries concerned in a high state of efficiency, provide a living for those who conduct them, enable them to pay good wages and make possible the expansion of their enterprises which will, from time to time, become necessary, as the stupendous undertaking of this great war develops.”

The idea of a just price, covering cost of production and reasonable profit, is considerably different from market price or supply-and-demand price. The market price typically alternates considerably above and considerably below the production cost of the bulk of the people engaged in the enterprise. For instance, when prices go up and profits become larger, new people are attracted into the business and production is increased until finally there is more supply than there is demand, and then prices have to go down and profits become losses, and the people who can not produce except at the high prices must go out of business. Both the farming world and the business world are composed of a great many different men, each of whom is chasing a profit in his own way. Many of these men are very short-sighted and are lured into an apparently profitable business just at the wrong time, and in like manner become discouraged with an apparently unprofitable business at just the wrong time. Under the competitive regime, it is apparent to any thoughtful business man that both in business and in farming the market price or supply-and-demand price is almost never the same as cost of production, but fluctuates in rather rhythmical manner, now above and then below cost of production, tending to equal almost exactly, over any long period of years, true production cost.

Under the market price or supply-and-demand price system as it has prevailed, the constant tendency is for the wealthier people, both among farmers and among business men, to increase their wealth at the expense of the poorer people. Poor people who embark in general business or in farming, no matter how intelligent, are likely to go into and come out of any particular enterprise at just the wrong time. The average man who is moderately well fixed and stays by a particular enterprise year in and year out, manages to secure for himself just a little better than ordinary wages. The man who is wealthy and expands his operations just as prices are starting up, and reduces operations just as prices are starting down, secures large profits.

The fluctuating price system, which means great profits to a wealthy few, serious losses and wrecked lives for a few, and a bare livelihood for many, is the natural result of the laissez faire policy of the old classical economists. Their idea was to let things alone, on the theory that, let alone, prices would sooner or later adjust themselves to the proper point. In practice, prices almost never reach a proper point, but are constantly moving either above or below cost of production. One hundred years of laissez faire policy have demonstrated beyond a doubt that under such a system the wealthy few inevitably become richer, whereas the bulk of the people get just enough to keep them going.

The laissez faire, supply and demand, speculative, or market price system, is condemned by nearly every one except the business men who run it and believe they understand its beneficent workings, and the economists of the classical type who, in their careful reasoning, are unable to think of any other way of determining satisfactory prices over any period of time. The common people and the lofty idealists were greatly elated during 1917 and 1918 at the apparently successful working of fixed prices established more or less in defiance of the speculative or laissez faire price system.

Those who have given the most thought to price fixing advocate as a guide “cost of production plus a reasonable profit.” But what is cost of production? Even in industries so well controlled by man as coal mining, where the weather does not enter in, there are some mines that can produce a ton of coal for two or three dollars, while other mines can not produce a ton of coal for less than six or seven dollars. The North Dakota wheat farmer, in a year of rust, may produce wheat at a cost of four or five dollars a bushel, whereas the Kansas farmer the same year may produce wheat at a cost of only a dollar or a dollar and a half per bushel. Shall both the Dakota farmer and the Kansas farmer be paid cost of production plus a reasonable profit for their wheat? From this standpoint we see that there is no such thing as a standard cost of production. A single producer may be able to determine his personal cost of production of a given quantity under a given set of conditions. But in the general sense, as it is commonly thought of, cost of production is a will-o’-the-wisp, a creature that seems to exist but really does not.

Nevertheless, there is a rough-and-ready method of determining cost of production or just price as distinguished from laissez faire or supply-and-demand price. We refer to the ratio method of price determination. Over a long series of years, cost of production plus a reasonable profit is roughly expressed by the relationship which exists between a raw product and the finished product. In rough form it may be most easily grasped in the case of corn and hogs. Over any long period of years, hogs sell on the Chicago market at a price per hundredweight equal to the Chicago price of 11.5 bushels of corn. When hogs have sold for fourteen bushels of corn, they have sold for more than cost of production plus a reasonable profit, while, on the other hand, when they have sold for nine bushels of corn, they have sold for less than cost of production plus a reasonable profit. All this is not saying that certain producers have not been able to make a profit when hogs have sold for nine bushels of corn. Neither is it saying that certain producers may not have been selling at a loss when hogs sold for as much as fourteen bushels of corn. It is simply saying that it has required the pulling power of a price for hogs which is equal to the price of 11.5 bushels of corn to keep enough men in the hog business year in and year out to supply the demand of this country for hog products during the past sixty years. This is what we mean by the ratio method of price determination. It is the only practical method of determining cost of production in such a business as farming, where there are millions of producers working under a variety of conditions.

We have the greatest respect for the old laissez faire or speculative method of price determination. It worked very nicely under competitive conditions, such as existed before the war. No one knows as to whether or not times now are right for adopting a different machinery thru which the law of supply and demand may work. We offer the ratio method as a method which is probably better adapted to a thoroly democratized co-operative society than the old-fashioned laissez faire method, which was adapted primarily to a competitive society.

The spirit of the ratio method is highly technical. The examples given in this book must necessarily be simple. But in actual practice, the ratio method would necessarily become quite technical, requiring for its administration highly specialized statisticians. At the present time very few men are available for work of this sort. The ordinary man who tries to fix prices by the ratio method is biased by either personal or class interests. A notable example of this was the Chicago Milk Commission, composed of leading citizens of the state of Illinois, which sat from December, 1917, to February, 1918, and finally offered as a method of milk price determination the ratio method. The majority of the members of this Milk Commission were city people, and on that account, consciously or unconsciously, they twisted the ratio method so as to bring about a low price for milk. If the majority of the commission had been farmers, they could have twisted the ratio method to bring about a much higher price for milk. But there are now, and in the future will be more, men properly trained in the weighting of agricultural index numbers, who can look into matters of this sort with a scientific nicety and determine prices by the ratio method with the greatest accuracy, by which we mean the minimum of bias toward either producer or consumer.

It is our intention in this book to indicate ways of securing ratio prices for various agricultural products. The methods outlined in succeeding chapters are definite and exact; we grant, however, that they may be made more comprehensive and be further refined so as to cover their respective fields in more effective fashion.