Matthew Cox, a third-generation producer of eggs based in the small town of Pickton, Texas, converted...

  

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Matthew Cox, a third-generation producer of eggs based in the small town of Pickton, Texas, converted production in 2019 from conventional caged white eggs to specialty eggs. His company is called Pickton Egg Company (PEC). PEC has a total of 230,000 hens with a contract to produce organic cage-free (OCF) eggs. It was early September of 2023 and the retail specialty egg market, which included cage-free, was weak, mostly due to an oversupply of conventional caged white eggs. Conventional caged eggs were a commodity and producer prices were sensitive to shifts in supply and demand. But specialty eggs were often grown under contracts that protected producers. This differential had gotten so large that consumers of specialty eggs were switching back to conventional eggs. Until now, his margins on production had been largely protected by a contract that guaranteed a fix price purchase, but that contract would expire soon, and Cox would be competing in the open market for egg prices that were now a fraction of his production costs. Cox wondered how he could protect his investment and minimize his losses. Cost Structure at PEC PEC uses the Hyline Brown breed-commercial layers that will lay 26 to 28 dozen eggs in their lifetime. He gets them from the hatchery at $0.95. By 24 weeks, when they really start laying, there is a pre- production cost. The costs are provided in the table below. The profit margins are estimated conditioning that PEC sells on this year's contract. Without the contract, Cox would have to sell eggs on the open market where brown eggs were trading at 65 cents per dozen. In the current contract, the price of cage-free eggs is $1.9 per dozen. Approximate costs structure for OCF (if hens are spent on week 78) Acquisition from Hatchery Total pre-production cost weeks 1-23 Fixed overhead cost (facilities, debt service, etc.) Variable production costs (feed, transportation, labor, etc.) Optional: Organic Feed Depopulation On average, peak hen egg production occurred around week 35 and decreased thereafter. Hens "productive" for 55 weeks beginning with week 24 (table below), when the hens were "spent" i.e. not producing many eggs, but they were still consuming the same amount of food and thus it was no longer financially feasible to keep the hens alive. When the hens were spent, the layer house was "depopulated," costing 15 cents per hen, and the house was readied for the next flock. Currently, the farms' contract ends by week 55. Week # of eggs per hen per week 1-23 0 3 4 5 24 25 26-27 $/Per Bird $0.95 $6.35 $4.14 $30.32 $4.3 $0.15 28-29 30-50 51-67 68-77 78 Questions: 6 7 6 5 4 1. Assume that market remains undisturbed and PEC can renew her contract with the same rate. Calculate cumulative fixed cost, variable cost, total cost, total revenue, and total profit for each week (i.e. 1-78) and draw 3 charts: one that shows Cumulative Fixed Costs, Variable Costs and Total Costs per hen, one that shows Marginal Revenue and Total Revenue (per hen), and one that shows Cumulative Total Cost, Total Revenue and Total Profit (per hen) 2. Now assume that PEC lose contract at the end of week 55 and has no option but to sell eggs in the open market. Repeat all calculations and charts on question 1. Cox has to make a hard choice to euthanize his hens early. What week should he euthanize to maximize his profit? Would your answer change if the price of open market change from 65 cents to 75 cents? 3. Now assume the market condition is getting worse in 2023. Still, he assessed that there is a 65% chance that he can secure contract for specialty egg but if he can't, he is forced to sell at open market (and accept the loss). Cox has to make a decision whether to revert his farm to a regular (non-specialty) egg production. If he chooses to do so, his cost structure significantly reduce (table below) but he incurs a one-time cost of $250,000. For regular eggs, the current contract price is $0.9 and seems stable at least for the next year. What would you recommend? Do a sensitivity analysis to show your recommendation is robust. Approximate costs structure for OCF (if hens are spent on week 78) $/Per Bird Acquisition from Hatchery $0.95 Total pre-production cost weeks 1-23 Fixed overhead cost (facilities, debt service, etc.) Variable production costs (feed, transportation, labor, etc.) Depopulation $4.25 $3.24 $18.7 $0.15 Matthew Cox, a third-generation producer of eggs based in the small town of Pickton, Texas, converted production in 2019 from conventional caged white eggs to specialty eggs. His company is called Pickton Egg Company (PEC). PEC has a total of 230,000 hens with a contract to produce organic cage-free (OCF) eggs. It was early September of 2023 and the retail specialty egg market, which included cage-free, was weak, mostly due to an oversupply of conventional caged white eggs. Conventional caged eggs were a commodity and producer prices were sensitive to shifts in supply and demand. But specialty eggs were often grown under contracts that protected producers. This differential had gotten so large that consumers of specialty eggs were switching back to conventional eggs. Until now, his margins on production had been largely protected by a contract that guaranteed a fix price purchase, but that contract would expire soon, and Cox would be competing in the open market for egg prices that were now a fraction of his production costs. Cox wondered how he could protect his investment and minimize his losses. Cost Structure at PEC PEC uses the Hyline Brown breed-commercial layers that will lay 26 to 28 dozen eggs in their lifetime. He gets them from the hatchery at $0.95. By 24 weeks, when they really start laying, there is a pre- production cost. The costs are provided in the table below. The profit margins are estimated conditioning that PEC sells on this year's contract. Without the contract, Cox would have to sell eggs on the open market where brown eggs were trading at 65 cents per dozen. In the current contract, the price of cage-free eggs is $1.9 per dozen. Approximate costs structure for OCF (if hens are spent on week 78) Acquisition from Hatchery Total pre-production cost weeks 1-23 Fixed overhead cost (facilities, debt service, etc.) Variable production costs (feed, transportation, labor, etc.) Optional: Organic Feed Depopulation On average, peak hen egg production occurred around week 35 and decreased thereafter. Hens "productive" for 55 weeks beginning with week 24 (table below), when the hens were "spent" i.e. not producing many eggs, but they were still consuming the same amount of food and thus it was no longer financially feasible to keep the hens alive. When the hens were spent, the layer house was "depopulated," costing 15 cents per hen, and the house was readied for the next flock. Currently, the farms' contract ends by week 55. Week # of eggs per hen per week 1-23 0 3 4 5 24 25 26-27 $/Per Bird $0.95 $6.35 $4.14 $30.32 $4.3 $0.15 28-29 30-50 51-67 68-77 78 Questions: 6 7 6 5 4 1. Assume that market remains undisturbed and PEC can renew her contract with the same rate. Calculate cumulative fixed cost, variable cost, total cost, total revenue, and total profit for each week (i.e. 1-78) and draw 3 charts: one that shows Cumulative Fixed Costs, Variable Costs and Total Costs per hen, one that shows Marginal Revenue and Total Revenue (per hen), and one that shows Cumulative Total Cost, Total Revenue and Total Profit (per hen) 2. Now assume that PEC lose contract at the end of week 55 and has no option but to sell eggs in the open market. Repeat all calculations and charts on question 1. Cox has to make a hard choice to euthanize his hens early. What week should he euthanize to maximize his profit? Would your answer change if the price of open market change from 65 cents to 75 cents? 3. Now assume the market condition is getting worse in 2023. Still, he assessed that there is a 65% chance that he can secure contract for specialty egg but if he can't, he is forced to sell at open market (and accept the loss). Cox has to make a decision whether to revert his farm to a regular (non-specialty) egg production. If he chooses to do so, his cost structure significantly reduce (table below) but he incurs a one-time cost of $250,000. For regular eggs, the current contract price is $0.9 and seems stable at least for the next year. What would you recommend? Do a sensitivity analysis to show your recommendation is robust. Approximate costs structure for OCF (if hens are spent on week 78) $/Per Bird Acquisition from Hatchery $0.95 Total pre-production cost weeks 1-23 Fixed overhead cost (facilities, debt service, etc.) Variable production costs (feed, transportation, labor, etc.) Depopulation $4.25 $3.24 $18.7 $0.15

Answer rating: 100% (QA)

1 For the contract renewal scenario Chart 1 The cumulative fixed cost per hen increases linearly fro... View the full answer