PRICES, COSTS AND THE REAL OPTION TO EXPAND THE COMMERCIAL EGG PRODUCTION UNIT IN MEXICO

Abstract

The tendency of falling prices of generic egg in Mexico directly affects primary producers, reduces the income generated per hen and provokes the loss of 30% of the small businesses and the concentration of the national market. The objective of the present study was to estimate the financial convenience of continuing the production of commercial generic egg. The hypotheses were that the small commercial production units of generic egg tend to have lower value in the option of investing in a risk free instrument which allows the medium and large businesses to be in a better financial position for expanding their production, and if the present market tendencies continue, production will be concentrated in the large companies. The cost of the real option for expanding the business was estimated for each production level, taking into account the volatile behavior of the price of egg and yield per hen, by means of the calculation of the tendency of the value per hen with the Black-Scholes model. The cost of expansion resulted considerably higher for the small producers with respect the medium and large producers. If the market tendency continues, 50% of the small egg producers will abandon the business because of its financial unviability