Source: MEATINGPLACE, 8/26/11

The chicken industry finally may be headed in the right direction in reducing the oversupply that has wiped out profits for many operators, Wall Street analysts said in notes dissecting Sanderson Farms’ third-quarter earnings report.

Sanderson Farms on Thursday reported a much larger than expected fiscal third loss and said it would cut production by 4 percent by keeping in place indefinitely seasonal reductions set to begin this fall.

“July was likely the worst month for the industry, due to oversupply in the market and high levels of inventory,” Deutsche Bank analyst Christina McGlone said in a note to clients on Friday.

She noted the drop in weekly egg sets is accelerating, with the latest data pointing to a 6.6 percent decline. The industry is likely to make further production cuts in the fall due to higher feed costs and the lack of a recovery in consumer demand, McGlone predicted.

BB&T Capital Markets analyst Heather Jones said that while the industry is moving in the right direction in terms of supply cuts, reductions in the range of 8 percent to 9 percent are required to return the industry to profitability.

Sanderson Farms is still moving ahead with the ramp-up of its new Kinston, N.C., facility, she noted. “While we view its intention to leave normal holiday cuts in place into 2012 favorably, we are somewhat disappointed by the magnitude of the cut,” Jones said.

“In our opinion, the company is mulling heavier cuts, but is likely struggling how to balance needed reductions with its growers' needs,” she said.

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