August 26, 2010

Yuhe locks in favourable egg-supply contracts

Yuhe International Inc had signed a series of contracts between May and July of 2010 from two suppliers to secure external eggs at fixed prices of between RMB1.45-1.50 (US$0.21-$0.22) per egg to guard against future cost rises.

The Chinese company estimates that the unit cost per day-old broiler from externally-produced eggs purchased via these contracts will range RMB1.80-1.90 (US$0.26-$0.28), which is equivalent to the first half 2010 unit cost of the company's day-old broilers that relied on internally-produced eggs. The difference between the cost of broiler eggs and the cost of day-old-broilers comes from hatchery-related expenses.

At the time of the contract signings, all of the parent breeders were between two and 39 weeks of age and over 90% of them were in the middle of or close to entering their egg-laying cycle. The total egg-laying capacity of the parent breeders is estimated to be between 55 million and 60 million eggs, with more than 90% of the eggs expected to be produced before May 2011, and the remainder by August 2011.

Yuhe carefully inspected the quality of the breeder farms and the parent breeder stocks before entering into these supply contracts. Each supplier is obligated to continue to comply with Yuhe's quality control criteria on parent breeder mortality, broiler egg fertility, hatchability, and hatched broiler condition throughout its respective contract period.

The company expects these supply contracts to benefit its cost structure by locking in favourable prices for external eggs. However, these contracts are not expected to impact the company's projected broiler volume output, as it continues to expect to achieve a total 2010 output of 150 million broilers and 2011 output of 250 million broilers.

"We believe there will be a supply shortage in our market going forward as our broilers are currently commanding average selling prices that are up significantly from the prices in the second quarter of 2010," said Zhentao Gao, Chairman and CEO.

"Given our market outlook we took advantage of a down period in the broiler market to lock-in a steady supply of quality broiler eggs at highly competitive prices via these fixed-price contracts," he said.

The company entered into these contracts beginning in May of 2010 and finalised the vast majority of them by the end of June, a period of declining prices in the broiler market which led to significant price drops in the market for external eggs, he added.

"As the price movement of external eggs is positively correlated to that of broilers, we anticipate a substantial unit price increase for external eggs as the broiler market continues to recover. We believe that our strategic decision to fix our external egg supply prices during the broiler-market downturn was an important way for us to hedge against future cost increases," Gao said.