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With no relief in sight from high corn prices and continued weak consumer demand for chicken, Sanderson Farms reported a net loss of $55.7 million in the third quarter of fiscal 2011, while predicting that a new round of industry production cuts would be needed this fall.
Like other U.S. chicken producers, Sanderson Farms' profitability is being skewered by high grain costs against weak chicken pricing. In its third fiscal quarter ended July 31, the company reported grain costs were up 12.6 cents per pound of processed chicken, while the average sales price of poultry products sold was down 5.3 cents, or 7.3%. Boneless breast prices in the third quarter were down even more sharply, by 22%.
The chicken market may have bottomed out in July, however, as the industry continued to ride out a cycle of deep losses with three broiler companies already having declared bankruptcy. In the second week of August, chicken prices strengthened by 2.5 cents a pound as the industry began reducing hatchery egg sets in July by 6%. Prices were also buoyed by reduced chicken supplies resulting from lower bird weights brought on by hot summer weather.
Industry will face new production decisions in October
Now two questions loom for chicken producers. First, at what levels will corn prices range once the final crop size is determined? And more importantly for chicken producers because it is influenced by their production decisions – Will the current production cuts be sufficient to keep chicken prices at profitable levels? Answers should come into focus by October as corn is brought into storage and cooler weather spurs weight gains in the industry’s flocks potentially putting more total pounds of chicken on the market.
Factoring in the seasonal drop in demand for chicken after Labor Day and the weight-inducing cooler broiler growing weather, the industry’s 6% reduction in the number of head probably won’t be enough to maintain profitability, said CEO Joe F. Sanderson, Jr., in the company’s third quarter earnings call. “It wouldn’t surprise me if the industry makes further, deeper reductions in egg sets in October or November,” he said.
“Nobody knows what cuts might be needed until we get to October,” he said, “but I think that the cutbacks may need to be more than the 6% in head that the industry already has in place.” If the 6% reduction in head translates into something less in total pounds, he added, it will not be enough to achieve the needed industry profitability.
Sanderson will keep seasonal adjustment in place beyond 2012
For its part, Sanderson Farms will implement its normal fall production cut of 4% and keep it in place beyond January of 2012. “Given what we expect to be a very high costs environment into calendar 2012 and sluggish demand from our foodservice customers, we will extend our previously scheduled November and December holiday production cuts into calendar 2012 to balance our supply with expected demand from our customers. We will leave that production cut in place until demand from our customers improves,” Sanderson said.
The company projects it will produce 711 million pounds of chicken in the fourth fiscal quarter of 2011, 663 million pounds in the first fiscal quarter of 2012 and 685 million pounds in succeeding quarters.
Sanderson said the company’s production cuts are to remain in place until demand improves – even if industry profitability returns in 2012. “We aren’t going to set any more eggs until we pick up a big account or we can’t supply our customers’ needs. We think demand improvement will require unemployment to drop,” he said.
He revealed that the pay of Sanderson Farms’ growers will be raised 0.25 cent a live pound to help offset the reduction in pounds of chickens grown on their farms. Ten points of the pay increase will be permanent, and 15 points will be temporarily in effect during the period of the company’s production cuts.
Higher chicken prices needed in 2012 to offset higher grain costs
What level of pricing will be needed in 2012 to restore profitability? Sanderson shared a model that he said should get profitability back to 2009 levels – the most recent period of widespread and healthy profitability for the chicken industry.
Based on $7.25 a bushel corn (Chicago Board of Trade) and $350 a ton soybean meal, Sanderson offered the following targets for average chicken prices in 2012: boneless breast meat at $1.41 a pound ($1.59 quoted by Urner Barry), wings at $1.20 a pound and leg quarters at 45 cents a pound. He said U.S. Department of Agriculture Georgia Dock whole bird prices would need to exceed 95 cents a pound.
Adding further perspective, Sanderson said the pricing factored in a doubling of the cost of fat since 2009. The cost increases for fat in feed amounted to more than the increases in soybean meal over the period. Also included was an additional $9 million in costs for increases in the basis for corn purchases.
Production plans in North Carolina
Sanderson said the company’s new chicken processing plant in Kinston, N.C., should reach full production in January. He said a second North Carolina plant would not make it off the drawing board until the company is making money and has lowered its indebtedness.