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Most companies in the livestock industry are getting hurt by crippling corn prices, from Smithfield (NYSE: SFD ) to Pilgrim's Pride (NYSE: PPC ) . Now rising feed costs are hurting the bottom line of yet another poultry producer: Sanderson Farms (Nasdaq: SAFM ) posted losses in its fiscal third quarter. With no relief in sight from high corn prices, is this a good stock to hold?
The last quarter
The fourth- largest U.S. chicken processor posted a worse-than-expected loss of $56 million, or $2.51 per share, in the third quarter, on top of an $85 million operating loss. The top line did inch up to $511 million, a 4.5% increase from the same quarter last year, but it was still below estimates. A 41% surge in cost of goods sold over the same quarter last year heavily influenced Sanderson's losses.
The rising use of ethanol is the dominant reason behind the long-term trend in surging corn prices, with almost 40% of the U.S. corn crops produced now being used in fuel production. More recently, corn production as a whole took a hit as a drought in the Southeast damaged fields. The USDA National Agricultural Statistical Service projected the total corn yield in 2011 to be only 148.1 bushels per acre, the lowest figure since 2005.
With all the uncertainty about the direction of the grain markets, the company has delayed the planned expansion of a new plant in North Carolina. It aims to maintain its top line by producing a projected 711 million pounds of chicken in the fourth quarter of 2011, 663 million pounds in Q1 2012, and 685 million pounds in succeeding quarters.
The Foolish bottom line
Sanderson will continue to struggle with profitability unless corn prices correct to normal levels. Once corn prices begin to decline -- whenever that may be -- things could start to turn around.
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