Economic hysteresis in hog production

Abstract

German hog production only responds in a very limited way to price fluctuations in the pork market. The hog production concentrates on a few regions though it is not bound to special natural conditions such as soil quality. Furthermore, the volume of production does not vary over time. Relatively high market risks, sunk costs and the flexibility of the decision maker to defer investments characterize decision problems in hog production. Thus the real option approach is chosen to explain the inertia in production capacity. By the use of panel data of specialized hog farms from the German Farm Accountancy Data Network, an empirical investment model is estimated. Formally, the model has the structure of a generalized ordered probit model. This approach allows to test for economic hysteresis in the adjustment of hog production capacity. The results confirm that uncertainty and flexibility widen the optimal range of inaction.

Acknowledgements

We are grateful to Jutta Roosen and an anonymous referee for their valuable comments on an earlier version of the article. We also thank the Federal Agricultural Research Center, Germany (FAL) for providing the data. Financial support by the German Research Foundation (DFG) and the Klaus-Tschira–Foundation is gratefully acknowledged.

Notes

¹ Boehlje (1992) provides an overview of these models.