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Sanderson supply cut a welcome first step: analysts
Story Date: 8/31/2012
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Source: MEATINGPLACE, 8/30/12
Sanderson Farms’ decision to cut egg sets by 2 percent points the way to wider chicken industry production cuts that will be needed to offset rising feed costs and protect profit margins, Wall Street analysts said after the company posted a better-than-expected profit on Tuesday.
The question is, to what extent will the rest of the industry follow Sanderson’s lead?
BB&T Capital Markets analyst Heather Jones, noting the production cut announcement sparked a rally in chicken producers’ shares on Tuesday, said she has learned recently of other producers implementing much deeper cuts than Sanderson.
While encouraging, industry cuts to date are just the beginning, with reductions in the range of 6 percent needed to support pricing, she said. Sanderson Chief Executive Joe Sanderson Jr. anticipates more industry cuts in October to November but does not intend to make deeper cuts of its own, she added.
Sanderson also indicated retail chicken prices would need to rise about 20 percent to make 2009 profit margins possible, Jones said. At the same time, Sanderson expects feed costs to increase by 8 cents in the next month or two and does not see any feed cost relief until next fall, she said.
With Tyson Foods not cutting production, Pilgrim's Pride likely cutting only 5 percent, and Sanderson cutting only 2 percent, the remaining 48 percent of the industry will have to slash production by 8 to 10 percent for the industry to be able to pass along higher grain costs, Stephens Inc. analyst Farha Aslam said.
“Other players in the industry will likely be less proactive with production cuts because the cuts required to restore the industry to profitability will have to be deep,” Aslam cautioned.
She said Sanderson is being proactive on cuts in the current cyclical downturn to protect its balance sheet as much as possible in order to facilitate plans to build a new North Carolina facility, which have been put on hold until market conditions improve.
BMO Capital Markets analyst Kenneth Zaslow said Sanderson’s cuts will be largely offset by additional production from its Kinston facility. He said the industry appears reluctant to follow Sanderson’s lead, and if it does, 2 percent is not enough to restore chicken margins to the historical average given elevated feed costs.
“While we applaud — albeit cautiously — SAFM for taking the lead role in a production cut for the first time in history, the chicken margin outlook remains tenuous,” Zaslow wrote.
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