Cal-Maine Foods Inc. recently reported that net sales for the third quarter of 2017 and 39 weeks ended Feb. 25, 2017, were $306.5 million, a 31.8% decrease from the same period in 2016. The company reported net income of $4.1 million, or 9 cents per basic and diluted share, compared with net income of $64.2 million, or $1.33 per basic and diluted share, for the third quarter of fiscal 2016.

For the 39 weeks ended Feb. 25, 2017, net sales were $799.9 million, compared with $1.6 billion for the prior-year period. The company reported a net loss of $49.8 million, or $1.03 per basic and diluted share, for the 39 weeks ended Feb. 25, 2017, compared with net income of $316.4 million, or $6.57 per basic share and $6.54 per diluted share, for the year-earlier period.

“Our results for the third quarter of fiscal 2017 reflect the volatile market conditions the egg industry has experienced throughout this fiscal year,” Dolph Baker, Cal-Maine chairman, president and chief executive officer, stated. “Our results were affected by lower market prices and weaker demand trends compared with the third quarter last year. Market prices moved significantly higher after Thanksgiving but dropped back down after Christmas, and our average customer selling prices for the third quarter of fiscal 2017 were down 27.9% from the same period a year ago.”

Baker said the egg markets have remained under pressure, and the company does "not expect to see any meaningful improvement until there is a better balance of supply and demand.”

Following the 2015 laying hen losses due to highly pathogenic avian influenza (HPAI), the egg industry repopulated farms, and laying hen numbers were reported to approach pre-HPAI levels. This younger, more productive hen population has produced a greater number of eggs.

Additionally, in February 2017, the U.S. Department of Agriculture issued revised data showing that the size of the laying hen flocks in 2015 and 2016 was actually meaningfully higher in both years than previously reported.

“Overall, market demand trends have not kept pace with these higher production levels,” Baker explained.

According to Nielsen data, retail customer demand for shell eggs has remained strong. USDA reported that egg export demand has improved since the beginning of fiscal 2017 but still has not fully recovered to levels prior to the HPAI outbreak. Additionally, Cal-Maine said the egg industry has experienced reduced demand for egg products, as many commercial customers reformulated their products to use fewer eggs when prices spiked and have been slow to resume previous levels of egg usage.

“Together, these factors have created an oversupply of eggs, with continued pressure on market prices,” the company said.

Recent USDA reports, however, do show that the chick hatch has been trending downward, suggesting that a moderation in the size of the laying hen flock is likely as the year progresses.

Specialty eggs, excluding co-pack sales, accounted for 23.6% of Cal-Maine's total sales volume for the third quarter of fiscal 2017 — the same proportion as the third quarter last year. Specialty egg revenue comprised 40.8% of total shell egg revenues, compared with 31.0% for the third quarter of fiscal 2016. The average selling price for specialty eggs, which Cal-Maine said is typically higher and less volatile, was down 5.2% over the third quarter of last year, while the average selling price for non-specialty eggs was down 38.7% over the prior-year period.

Growth strategy

Baker said the specialty egg business is a primary focus of Cal-Maine's growth strategy.

“We have continued to make significant investments across our operations to meet anticipated demand for cage-free eggs as foodservice providers, national restaurant chains and major retailers, including our largest customers, have stated objectives to exclusively offer cage-free eggs by future specified dates. While we expect the multiyear conversion to cage-free production will present new challenges and higher costs for our industry, we believe it also provides additional market opportunities for Cal-Maine Foods,” Baker said, adding that the company is working with its customers to facilitate a smooth transition to meet this demand.

Cal-Maine's growth strategy also includes expanding business through selective acquisitions, which Baker said is supported by a strong balance sheet and financial strength.

“During the third quarter, we completed the acquisition of substantially all of the assets of Happy Hen Egg Farms Inc. relating to their commercial production, processing, distribution and sale of shell eggs," the company said. "The acquired assets include commercial egg production and processing facilities with current capacity for approximately 350,000 laying hens and related distribution facilities located near Harwood and Wharton, Texas.”

Happy Hen Egg Farms' current site is near other Cal-Maine locations in Texas and is designed for capacity of up to 1.2 million laying hens. Baker said the company intends to capitalize on specific market opportunities created by this additional production capacity. “We look forward to the opportunity to extend our market reach and deliver greater value to both our customers and shareholders,” he said.