Source:  MEATINGPLACE.COM, 6/17/10

Seeing no signs that feed costs or production levels will offset a "precipitous" decline in chicken prices, BB&T Capital analyst Heather Jones on Thursday downgraded shares of Sanderson Farms to "hold" from "buy."

The pullback in chicken breast prices since Memorial Day has been sharper than expected and may be due to both weaker food service demand and softer retail demand resulting from greater promotion of dark meat, Jones said.

"There is some indication that dark meat has made up a greater proportion of retailer feature activity than last year, which may have also resulted in lower-than-expected breast meat demand at retail," Jones said in a note to investors.

Overall retail demand has been solid, and spot pricing has stabilized and should improve going into the July 4 holiday, she said. While production has been trending higher, it has not accelerated, further suggesting the decline in pricing is related to demand, she added.

"There is little indication that production will slow in the face of lower pricing and the overall industry is still solidly profitable," Jones wrote.

Despite anecdotal reports that producers are scrambling to secure hatching egg stock and newspaper ads to buy poultry, Jones said she thinks demand for hatching egg stock has slowed somewhat.

Jones said she no longer expects lower feed costs to offset the decline in chicken pricing.

The analyst maintained a "buy" rating on shares of Tyson Foods, saying the company is not as exposed to the spot breast market as Sanderson.

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