Price Discovery Now and in the Future: Alternative Pricing Models

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Price Discovery Now and in the Future
Alternative Pricing Models Current Market
Analysis

• Urner Barry Executive Conference
• April 23, 2002
• Caesars Palace, Las Vegas
• Randy Pesciotta
• Richard A. Brown

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FOCUS

• Why is the shell egg price where it is?
• Shell egg production trends and their affect on
  regional trade.
• Alternative pricing models.
• Egg Products Have they met their saturation
  point?
• Enhanced shell egg markets.
• Conclusion

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UB Northeast Large vs. Egg Type Layers 1992 - 2001
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UB Northeast Large vs. Egg Type Layers 2000 - 2002
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2001 Cases Broken vs. Dried Egg Inventory
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UB Northeast Large vs. Egg Type Layers 2000 - 2002
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Egg Type Layer DistributionSource USDA
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2001 Top 25 US ProducersSource Watt
Publications

• Cal Maine Foods 20.4
• Rose Acre Farms 16.0 -0.2
• Michaels Foods 14.0 .5
• DeCoster Egg 12.8 .2
• Buckeye Egg 10.5
• Sparboe Comp 8.0 1.0
• Dutchland Farms 7.3 3.0
• Moark LLC 6.4 -0.1
• Fort Recovery 6.3 -1.7
• Midwest Poultry 5.9
• ISE America 5.5
• Hillandale Farms 5.4 0.1
• Daybreak Foods 5.0 0.7

• Mahard Egg 4.8
• Golden Oval 4.7 2.1
• Fremont Farms 4.2 2.2
• Wabash Valley 3.7 -0.5
• National Foods 3.3 0.3
• Sonstegard Foods 3.0 0.5
• Valley Fresh 3.0 -0.2
• Maxim Egg 2.9 -0.3
• Crystal Farms 2.8
• Creighten Brothers 2.5
• Daylay Egg 2.5
• Kofkoff Egg 2.5 -0.3

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Production Trends

• Largest increase in production for breakers
  located in the Midwest
• Breaker increases displaced other suppliers
• Midwest will continue to be surplus
• Competitive pressure will continue

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Goal of Urner Barry in Price Discovery

• To report timely, accurate, unbiased price
  quotations and market conditions.

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Goal of Producer in Price Discovery

• To maximize returns on
• egg marketing and production.

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Advantages DisadvantagesOf Current System

• Advantages
• Established
• Trusted
• Accurate
• Traders Know How to Work With it

• Disadvantages
• Growing Discounts
• Trading Relationships
• / Back-of-the-Market

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Alternatives to the Benchmark

• Index Quotations
• Benchmark Reformulation or Restructuring
• Costs Plus
• Fixed Price
• Percentage Discount vs. Fixed
• Moving Average (5 day)

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Alternatives to the Benchmark Index Quotations

• Extra large index (Class1s loose extra
  large)/ 2
• Large index (Class1s loose large)/ 2
• Medium index (Class3s loose mediums)/ 2
• Small index (Class4s loose smalls)/ 2
• Given average retail movement

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2001 UB Northeast Index
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2002 UB Northeast Index
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Advantages Disadvantagesof Index System

• Advantages
• No Discounts
• May Take Some Controversy Out of the Market
• Completely Responsible to Pass on Costs

• Disadvantages
• Not Established
• No Track Record
• Have to Sell to Buyers
• Completely Responsible to Pass on Costs

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Alternatives to the Benchmark Reformulation or
Restructure

• Effective on date X take 15 cents out of our
  Benchmark quotation.

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Advantages Disadvantages of Reformulation or
Restructure

• Advantages
• Get Closer to the Actual Selling Price of
  Cartoned Eggs
• Complicated
• Re-negotiation Avoided / Minimized
• Removes Discounts from PCT

• Disadvantages
• Will Not Eliminate Discounting
• No Track Record
• Have to Sell to Buyers

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Alternatives to the Benchmark Cost Plus

• As described by others Take all production
  costs, add a profit and sell cartoned product to
  retail or loose to food service.

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Advantages Disadvantages of Cost Plus

• Advantages
• Guaranteed a Profit
• No Discounts

• Disadvantages
• Buyers May Not Honor Agreement During Low Shell
  Egg Markets
• May Not Make as Much Money When Markets are High
• Hard To Sell To Buyers

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Alternatives to the Benchmark Fixed Price

• Sell for a period of time at a fixed price.
• 1. Monthly
• 2. Quarterly
• 3. Yearly

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Advantages Disadvantages of Fixed Price

• Disadvantages
• May Not Make You More Money
• May be More Competitive Such as On-Line Auctions
• Buyers May Not Honor Agreement During Low Shell
  Egg Markets
• May Not Make as Much Money When Markets are High
• Hard To Sell To Buyers

• Advantages
• Less Volatile
• May Guarantee a Profit

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Alternatives to the Benchmark Percentage
Discount

• Selling price based on a percentage back of Urner
  Barry

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Advantages Disadvantages of Percentage Discount

• Disadvantages
• May not return producer as much when market is at
  its high
• Trading partners may not honor when disadvantaged

• Advantages
• Producer captures more return during lowest
  markets
• Buyer captures lower price when market is at its
  highest

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Alternatives to the Benchmark Moving Average

• 5-Day moving average
• 4-Thursday moving average

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Advantages Disadvantages of Moving Averages

• Advantages
• Removes volatility
• Limits inventory manipulation
• Retailer may be able to feature at higher market

• Disadvantages
• Limits retailers ability to feature at lowest
  market
• May not allow producer ability to capture highest
  market

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Alternative to the BenchmarkConclusion

• Current price discovery model complicated but
  proven
• No other model would have significantly changed
  current market values
• UB is exploring alternative methods
• There are significant advantages disadvantages
  to each idea
• Index will continue to be developed in house
• Further discussion is warranted, particularly
  given enhanced eggs

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Egg Products Have they met their saturation
point?

• 2001 breaking even with last year
• Dried inventory increased to 21.1mil pounds -- up
  25 from last year
• Egg product export up 5 percent
• Liquid whole egg margins at times challenged

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Enhanced Shell Egg Markets

• Enhanced shell eggs could become a significant
  part of the market in a very short time.
• Our job is to report the market.
• What form will it take?
• When will it begin?

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Conclusion

• The Current Price Discovery Model Can be
  Complicated
• No Other Model Would Have Resulted in
  Significantly Different Market Values
• Tendency of the Market Place Question Price
  Discovery When Markets are Low

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Conclusion

• UB is Exploring Alternative Methods
• There are Significant Pros Cons to Each Idea
• Egg product growth slowing
• Enhanced shell eggs
• Easter market review

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• THANK YOU