Staying the course
June 1, 2011
by Alicia Karapetian
Like most companies in the poultry industry, 2011 is shaping up to be a challenging one for Sanderson Farms. As volatility in the grain markets continues and production levels remain high, prices are of a great concern. But Sanderson officials are optimistic, too, as they remain confident in the company’s business approach, and more importantly, its balance sheet.
“We made a lot of money in October of last year and began losing money in November,” says Lampkin Butts, president and COO. “That’s a huge swing.”
A swing for the fences, indeed, thanks in no small part to soaring corn prices and the unwillingness of other poultry companies to cut production. Like many of his competitors, Butts acknowledges, “We’re surprised egg set numbers have stayed the same and increased a bit. There is no indication in pullet placements or egg sets that industry has curtailed production.” Yet, he adds, “Virtually everybody is losing money, and a lot of companies are losing a lot of money.”
Ironically, Sanderson Farms is upping its own volumes, as a new plant in Kinston, NC, came on line in January operating at 25 percent of capacity, or 325,000 chickens per week, and on May 16 increased its output to 650,000 chickens per week. Butts says the plan is to have the facility at full capacity, 1.25 million chickens per week, by the end of the year. The company has demand from new retail customers to justify the increases, though Butts declined to name the buyers. Expansion plans
The company has also announced plans to open another new plant in North Carolina, as Sanderson officials have long said the North Carolina expansion plans always included two plants. Construction was supposed to have begun on that facility early this year, though the build was delayed due to market forces. “We want to see how the grain prices respond later this year,” Butts says. “We make investments like that for the long term. It’s a little delay. It’s not what we want, but it’s the prudent thing to do.”
Butts also states, as other Sanderson executives have, that the company remains committed to the project. While the company has not officially announced a site for the facility, which would serve the big bird deboning market and process approximately the same volume as the Kinston plant, residents near the site considered to be the top contender have launched a months-long battle aiming to derail the project.
A group of residents joined together to form the Nash County Landowners Association, which has spent considerable money – with the aid of Nash County government – in a public relations and marketing campaign against the proposed facility. On its website, SayNoToSanderson.com, the group cites concerns about the plant’s environmental impact – particularly on the water supply – influence on neighboring property values and the plant’s economic impact, which the group contends will be negative due to the wage ranges of plant employees.
Sanderson officials have done much to allay residents’ concerns, including meeting with the group and inviting lawmakers and others to visit Sanderson Farms’ Moultrie, Ga., facility to view its wastewater treatment approach, and making available information on the proposed wages and insurance benefits for workers.
Regardless, some in North Carolina remain committed to fighting the plant as much as the company is committed to building it.
But first, an important economic hurdle must be cleared. As corn prices continue to hover around $7, input costs are sky-scraping. However, Sanderson Farms hasn’t historically gone long in the grain market in an attempt to reduce costs, and as Butts notes, that strategy works as often as it doesn’t. A bushel and a peck
“We started feeding $6 corn to our chickens in November, and we did not have a position on any corn going into November. We pretty much went into the first of the year that way,” he says. “Two of our competitors did have grain prices [locked] through December – Tyson and Pilgrim have both reported that. From November through now, their grain costs are lower than ours. With the higher grain prices right now, if someone had priced ahead of the rise, they can avoid [the high prices] for a few months, but you can’t dodge it forever. It shakes out [because] high grain costs get to every company eventually.”
But in the publicly traded world of quarterly reports for companies like Sanderson Farms, Butts acknowledges, “It’s a competitive disadvantage for us in this quarter. In the long term, it won’t be. It’s more important to be a low-cost producer.”
Butts harkens back to 2008, in which the run-up in grain prices scared many companies into locking in grain prices for the rest of the year. Prices then memorably dropped by the end of the summer and into the fall, forcing a lot of companies to continue to pay much more for inputs than those with shorter-term contracts.
This year is a bit of a new ball game, however. “We went 25 years and corn averaged $2.50 a bushel,” Butts says. “We’re in a whole different price range for corn. The crop was short, and carryout is going to be short. It will take a year or two to get inventory built back up, but once we do, the norm will be below current levels.”
Heightened corn and gas prices in 2008 and now 2011 are two of the three events that have largely negatively impacted the poultry industry. These, along with the avian influenza scare of 2006, have adjusted the more-typical three-year poultry industry cycle of supply and demand, which makes industry waters even more difficult to navigate. “We’re subject to these events, and it’s part of the climate that we operate in now,” Butts concedes, though, he says, Sanderson Farms remains committed to its low-cost producer approach, regardless of outside events. “[A downturn] is going to happen, and sometimes you cannot see it coming,” he adds. “We operate consistently whether in good times or bad. And to do that, you need a good balance sheet and a good line of credit.” Alicia Karapetian is a contributing editor from the Chicago area