Feed costs, consumer spending impacts Sanderson

by Clay Chandler

Published: April 6,2009

The rising cost of oil in 2008 crippled many a business.

As the numbers on gas station price billboards went up, profits went down. The cost of transporting goods soared.

Along with gasoline, the price for ethanol rose. And, with the price for ethanol rising, the cost of the ingredients to produce ethanol went up, too. Way up.

A bushel of corn, the primary ingredient used to manufacture ethanol, sold for $2 a bushel most of this decade. Last July, a bushel of corn went for $8.

The poultry industry, whose large producers such as Laurel-based Sanderson Farms buy astronomical amounts of corn and soybeans for chicken feed, was devastated.

“2008 was bad,” said Sanderson Farms Treasurer and CFO Mike Cockrell.

Oil prices and related jump in ethanol costs hurt Sanderson’s balance sheet when it came to feed costs. The cost for corn increased 30 percent overall. Soybeans, which are the other ingredient used in chicken feed, went up 48 percent. With consumers spending more to fill up their tanks and less at restaurants, Sanderson’s sales to foodservice distributors, which service restaurants, took a major hit.

Largely due to those two factors, Sanderson in 2008 lost $43 million, $11 million after adjustments. Last year also saw the poultry industry experience its first domestic decline in demand for its products in the history of the modern chicken industry.

Cockrell said 42 percent to 45 percent of the company’s production is sold to away-from-home merchants such as restaurants and casual-dining establishments.

“That market remains tough,” Cockrell said. “We sell a lot to Sysco and other foodservice distributors, who then sell to restaurants. People just aren’t eating out as much as they once were. That has hurt us.”

The net loss in 2008 carried over into the first quarter of 2009. According to its Q1 2009 filing with the Securities and Exchange Commission, Sanderson had a jump in net sales from Q1 2008 – from $362.6 million to $388.9 million – but still lost $6.7 million, as opposed to a net income of $6.2 million in Q1 2008.

There is reason to think 2009 could be better. Cockrell, due to oil prices remaining low after record highs last summer, estimates the company will spend $162 million less on feed in 2009 than it did in 2008. Overall, 50 percent of Sanderson’s expenses are feed or feed-related.

Along with the expectation that feed costs will greatly diminish this year, indicators for the company’s retail grocery market are holding steady, he said. Chicken products have forever been wildly popular in the Southeast. The major difference now, Cockrell said, is people are eating chicken at home, and a lot less at restaurants. Thirty-five percent of Sanderson’s production is sold to grocery stores.

“That business remains very good, and we expect it to remain that way,” Cockrell said. “The chicken market on the retail side is good. At some point chicken is going to remain very attractive as a source of protein, as opposed to pork or beef. We think we’ll come out of this, but we need the foodservice side to contribute (more than it is).

“I’m always optimistic about the future. I’m optimistic about Mississippi’s economic future, and I’m optimistic about our country’s economic future. That doesn’t mean we haven’t had some challenges.”

Contact MBJ staff writer Clay Chandler at clay.chandler@msbusiness.com .

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