May 25, 2011

Sanderson Farms posts Q2 profit loss on higher costs

Sanderson Farms Inc. (SAFM) swung to a second-quarter loss as a slightly higher volume of chicken meat production at a new plant opening was unable to offset lower chicken prices and soaring feed costs.

The results beat Wall Street forecasts thanks in part to a cut in non-production expenses. A loss was widely expected as operating margins throughout the industry have turned negative due to high corn prices and stubbornly high chicken supplies.

The price of corn, a key cost for Sanderson and other meat producers, jumped 82% versus a year ago, and many analysts expect the price to remain at historically high levels while traders watch the development of the US crop.

Meanwhile, chicken prices, particularly those for breast meat and jumbo wings, have slumped. Boneless breast meat prices were down 11% in the quarter and wings were down 46%. Sales have been hurt by weak restaurant demand, which will not recover until unemployment drops, Sanderson has said.

In the face of expensive corn and sluggish demand, analysts have for months been calling on the industry to cut back its production. But eggs set in incubators, a sign of future supplies, have continued to climb year-over-year until the past two weeks.

Another sign of future supplies, the number of breeding hens hatched, has continued to climb, with the number increasing in April for the 10th consecutive month.

Sanderson, of Laurel, Mississippi, "will continue to closely monitor the chicken markets and production levels" headed into the summer months.

Demand typically rises during the summer, but cold, wet weather across the US has helped depress demand for meats at the start of the grilling season.

Continued weakness in white meat prices could hasten the significant production cuts that are needed to restore the poultry industry's profitability.