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Egg market conditions lead to losses for Cal-Maine Foods

3dmentat/iStock/Thinkstock White eggs lined up in neat rows
Company reports slowing demand for cage-free eggs.

Fourth-quarter results for Cal-Maine Foods Inc. reflect the volatile and challenging egg market fundamentals that have prevailed throughout this fiscal year, according to Dolph Baker, chairman, president and chief executive officer.

Net sales for the fourth quarter and 53 weeks ended June 3, 2017, were $274.6 million, down 9.4% from $303.0 million for the fourth quarter of fiscal 2016. The company also reported a net loss of $24.5 million, or 51 cents per basic and diluted share, for the fourth quarter of fiscal 2017, compared with net loss of $376,000, or 1 cent per basic and diluted share, for the fourth quarter of fiscal 2016. These results include a payment of $5.5 million included in other income for the final BP settlement from the Deepwater Horizon oil spill in 2010, the company said. In addition, the 2017 fourth quarter was a 14-week period compared with 13 weeks for the same period in fiscal 2016.

For the 53-week period, net sales were $1.075 billion, compared with $1.909 billion for the prior-year period. Cal-Maine reported a net loss of $74.3 million, or $1.54 per basic and diluted share, for 2017, compared with net income of $316.0 million, or $6.56 per basic share and $6.53 per diluted share, for the year earlier. Fiscal 2017 included 53 weeks, compared with 52 weeks for fiscal 2016.

Baker said while volumes were up due to the extra week of sales, the company’s average customer selling prices for the fourth quarter were down 15.5% from the same period a year ago. For fiscal 2017, average customer selling prices were down 42.0% compared with fiscal 2016, he added.

“The egg markets have been affected by increased production levels as producers repopulated their flocks after the 2015 avian influenza (AI)-related laying hen losses, and the younger, more productive hen population has produced a higher number of eggs. Overall, market demand trends have not kept pace with these production levels,” Baker said.

According to Nielsen data, retail customer demand for shell eggs has remained seasonal. However, Baker said relatively weak institutional and export demand have placed additional pressure on the egg markets.

“During the AI-related price spike, institutional egg customers reformulated their products to use fewer eggs, and while egg prices have since come down, these customers have not returned to their previous usage levels,” he explained.

The U.S. Department of Agriculture reported that egg export demand has improved since the beginning of fiscal 2017, but Baker said U.S. egg exports are still below the peak levels prior to the AI outbreak.

“Together, these factors have created an oversupply and market prices have fallen accordingly. We do not expect to see any meaningful improvement until there is a better balance of supply and demand,” he said.

Recent USDA reports do indicate a lower chick hatch for the last 10 out of 11 months, which Baker said suggests that the size of the laying hen flock may be moderating moving forward.

Specialty eggs, excluding co-pack sales, accounted for 22.7% of the company’s total sales volume for the 2017 fourth quarter, compared with 23.3% for the same period a year ago. Specialty egg revenue was 42.0% of total shell egg revenues, compared with 40.2% for the fourth quarter of 2016.

The average selling price for specialty eggs, which is typically higher and less volatile than conventional eggs, was down 9.3% over the fourth quarter of last year. For the year, specialty eggs accounted for 43.6% of total shell egg revenues, compared with 29.1% last year, and specialty egg prices were down 12.4% versus fiscal 2016 prices.

“Our specialty egg business has continued to be a primary focus of our growth strategy. We have made 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,” Cal-Maine explained.

According to Baker, however, the recent low prices of conventional eggs and typical seasonal fluctuations have led to slowing demand trends for cage-free eggs in the fourth quarter, resulting in a higher supply of specialty eggs.

“We have adjusted our production levels to meet the demands of our customers who still prefer cage-free eggs, and we are well positioned to serve our customers as demand trends change," he said. "In addition to cage-free eggs, our product mix provides a wide variety of healthy choices for consumers, including conventional, nutritionally enhanced and organic eggs.”

Baker continued, “In spite of challenging market conditions, we have remained focused on managing our operations in an efficient and responsible manner. We were able to benefit from lower grain costs for the past year due to favorable harvest results.”

Feed costs for 2017 have been lower and overall farm production costs per dozen were at the same level as the prior year, even with higher capital expenditures for recent conversion and other improvement projects. Looking ahead, Baker said the company expects to have an adequate supply of primary feed ingredients in fiscal 2018 while grain prices remain volatile.

“While we faced extraordinary market conditions in fiscal 2017, we continued to demonstrate consistent execution of our growth strategy. We will follow this same direction in the year ahead, and we believe Cal-Maine Foods is well positioned to benefit from improved market conditions," he said. "As always, our top priority is to meet the demands of our customers with exceptional service.”

Baker concluded, “Importantly, our strong balance sheet provides us with the flexibility to pursue acquisitions and additional growth opportunities that add value to our operations. Together, we believe these efforts will reward both our customers and shareholders in fiscal 2018.”

TAGS: Business
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