Dive Brief:
- Sanderson Farms reported $11.5 million, or $0.50 per share, in third-quarter net income for fiscal 2018, compared with $115.8 million, or $5.09 per share, in the same quarter last year, according to a company release. Quarterly revenue at $852.4 million fell 8.5% from $931.9 million in last fiscal year's third quarter.
- The company's results "reflect significant counter-seasonal weakness in market prices for boneless breast meat produced for food service customers,” Chairman and CEO Joe Sanderson Jr. said in a statement.
- Rising feed costs, up an average of 5.8% per pound of chicken products processed compared to last year, also played a role in the quarter's profit dip. The prices the company paid for corn and soybean meal increased by 4.3% and 15.5%, respectively, compared with the third quarter of fiscal 2017.
Dive Insight:
Sanderson Farms had already forewarned shareholders in previous quarterly earnings statements about the pressure that rising feed costs would put on the company's fiscal 2018 earnings. However, the company referenced a report the U.S. Department of Agriculture released earlier this month, in which the USDA's supply estimates for both corn and soy surpassed analysts' predictions.
Higher corn and soy supplies could ease the pressure on market prices, potentially lowering feed costs in the future. But uncertainty lies ahead regarding international trade deals and tariff disputes with major trading partners — which could have unforeseen effects on prices and demand for both feed and chicken products.
Still, the USDA's feed crop estimates are welcomed good news for a company otherwise struggling to maintain margins in the face of poor feed crop weather, international trade disputes and unexpected pressures on the poultry market.
"We believe the counter-seasonal softness is due, at least in part, to a lack of chicken promotions at both food service and retail grocery stores and an ample supply of competing proteins," Sanderson said in a statement. "Market prices for poultry produced for retail grocery stores continue to reflect a more balanced supply and demand environment."
Weak poultry market prices, especially among its foodservice customers, continue to plague Sanderson Farms' earnings this fiscal year, and the fourth quarter will bring its expected seasonal decrease in demand. One silver lining: While last year's disruptive hurricane season exacerbated the company's Q4 profit struggles in fiscal 2017, government officials recently lowered their initial May forecast and now predict less hurricane activity in the Atlantic Ocean this season.
Besides lower market prices for chicken and higher feed costs, Sanderson Farms also referenced an $0.08 per share net of income tax accrual for probable liability for the company's contribution to its employee stock ownership program, compared to $0.36 per share net of income tax in the same year-ago period. Analysts still seem to have been caught off-guard by this earnings report, with the Zacks Consensus Estimate of $1.08 per share turning into a -46.3% earnings surprise compared to the company's actual reported profit for the fiscal quarter.
But assuming demand gets stronger again, a higher rebound is possible. Construction on Sanderson Farms' new facilities in Tyler, Texas remains on target for completion in the first quarter of the calendar year 2019.
The slow chicken market hasn't just impacted Sanderson Farms. Tyson also saw chicken sales tumble in the last quarter — though the company's overall earnings increase was buoyed by its acquisition of prepared foods giant AdvancePierre. With only one product, Sanderson Farms can't rely on other segments to help its bottom line. Weak demand also doesn't show whether its continued truth-telling campaign — including the use of antibiotics and advertisements discussing how chickens are raised — is still effective in a segment where many producers are moving in the opposite direction.