Pork cycle

Pork cycle

In economics, the term pork cycle, hog cycle, or cattle cycle [Sherwin Rosen, Kevin Murphy, and José Scheinkman (1994), "Cattle cycles", "Journal of Political Economy" 102 (3), pp. 468-92, Fig. 1.] describes the phenomenon of cyclical fluctuations of supply and prices in livestock markets. It was first observed at pig markets by Mordecai Ezekiel and in Europe by the German Scholar Arthur Hanau. [ [http://www.diw.de/deutsch/dasinstitut/jubilaeum/docs/viertel_1928.pdf | Hanau, Arthur (1928). Die Prognose der Schweinepreise. In: Vierteljahreshefte zur Konjunkturforschung, Verlag Reimar Hobbing, Berlin.] ]

Explanations of cycles in livestock markets

The cobweb model

Nicholas Kaldor proposed a model of fluctuations in agricultural markets called the cobweb model, based on production lags and adaptive expectations. In his model, when prices are high more investments are made. However their effect is delayed due to the breeding time. Then the market becomes saturated which leads to a decline in prices. As a result of this production is reduced but the effects take a long time to be noticed but then lead to increased demand and again increased prices. This procedure repeats itself cyclically. The resulting supply-demand graph resembles a cobweb.

This type of model has also been applied in certain labour sectors: high salaries in a particular sector lead to an increased number of students studying the relevant subject. When all these students after several years start looking for a job at the same time their job prospects are much worse which then in turn deters students from studying this subject.

An alternative model

Kaldor's model involves an assumption that investors make systematic mistakes. In his model, investing (i.e. breeding cattle rather than slaughtering them) when prices are high causes future prices to fall, and foreseeing this would have yielded higher profits for the investors (i.e. they should have slaughtered more when prices were high). Rosen, Murphy, and Scheinkman (1994) proposed an alternative model in which cattle ranchers have perfectly rational expectations about future prices. They showed that even in this case, the three-year lifetime of beef cattle would cause rational ranchers to choose breeding versus slaughtering in a way that would make cattle populations fluctuate over time.

References

See also

*Cobweb model
* Feedback
* Oscillation
* Mordecai Ezekiel


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