Learn something new every day
More Info... by email
In finance, a feed ratio is a measure of the profitability of raising livestock calculated by dividing the price of an animal by the price of the food needed to raise it to market weight. The ratio is important in futures markets because it can act as a predictor of the supply of livestock. If farmers anticipate a high profit from investing their corn supply in livestock breeding, they are more likely to expand their livestock holdings. In turn, this lowers the ratio as expanding supply drives the price of animals down. Thus, feed ratios fuel the cycles that characterize livestock markets by shaping farmers’ expectations of profit.
A feed ratio is a useful measurement of livestock profitability because the majority of the cost of raising an animal is feeding it, so the price of feed can be used as a proxy for total raising costs. The value of the measurement depends on the relative stability of the other costs of raising livestock. This assumption is not completely accurate, but feed ratios are widely accepted in livestock futures markets.
In practice, feed ratios are based on approximations of the prices of the animals and feed. The price of the animal is not always the most relevant price, as markets focus on usable parts of the livestock. It would be impractical to keep track of the food fed to each animal, and it would be difficult to predict. This practice would also yield individual ratios, which would not be useful for the industry as a whole. There are conventional approximations for exact feed ratios that provide useful information about the livestock market.
One variation on the traditional feed ratio is to replace the price of the animal with the price of a commodity produced by the livestock. This is useful in industries that do not rely on the direct sale of animals. For example, egg-feed and milk-feed ratios are often reported.
Another variation is to replace the price of feed with a proxy, since farmers’ feeding practices and the animals’ consumption varies across individuals. One commonly referenced feed ratio approximation is the hog-corn ratio. It is found by dividing the price of 100 pounds (45.4 kg) of hog meat by the price of one bushel (35.2 liters) of corn. The price of corn is a useful proxy because corn constitutes the majority of hog feed. Corn is also a highly liquid commodity, so the price of corn can influence the decision to raise livestock, as selling the corn is a viable alternative.