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Discounted cash flow valuation of conventional and cage-free production investments

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  • Trejo-Pech, Carlos J.O.
  • Thompson, Jada M.

Abstract

This study compares profitability and risk of conventional and cage-free egg production in the United States. Evaluating cage-free production is particularly relevant given ongoing consumer driven changes and new cage-free legislation. Results show that while the Modified Internal Rate of Return (MIRR) for conventional production is above an estimated industry opportunity cost of capital, cage-free production’s MIRR does not fully satisfy investors’ expectations. The MIRR of cage-free investment, between 5.6% (deterministic model) and 8.0% (stochastic) per 15-month flock, is below the 9.4% opportunity cost of capital. In addition, the simulations show that there is a 90% probability of conventional production’s MIRR falling between 18.5 and 20.3% per 15-month flock, and cage-free egg production’s MIRR ranging from 6.8 to 9.4%. In order for cage-free to be as equally profitable as conventional production, cage-free egg prices at the farmer gate should be 74% over conventional egg prices. Such high cage-free egg prices are highly unlikely to occur given recent cage-free price premia and consumer willingness to pay estimates from recent research. This study provides a framework egg producers can use to evaluate the potential effects of changes in their portfolio of products (i.e. conventional and cage-free mix) as they accommodate production schedules in this evolving industry.

Suggested Citation

  • Trejo-Pech, Carlos J.O. & Thompson, Jada M., 2021. "Discounted cash flow valuation of conventional and cage-free production investments," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 24(2), January.
    • Handle: RePEc:ags:ifaamr:316241
    DOI: 10.22004/ag.econ.316241
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    Agribusiness; Agricultural and Food Policy;

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