Because chickens are essentially just a commodity, profit margins for chicken companies can be highly volatile, even in normal times. Sanderson's gross margin can be 23% one year and -5% in the next year, depending on cost pressures, chicken supplies, and even the price of other meats. From 2001 to 2007, the price of corn for feed was at least pretty predictable, staying between $2 and $3 per bushel. Since then, corn hasn't fallen below $3, and more recently it's reached nearly $7.
The sudden spike in costs has put pressure on poultry producers, who, due to supply and demand factors, are unable to raise prices enough to compensate. Typically, companies in the industry respond by producing less, which has the benefit of keeping losses down and also raises prices by lowering supply. This year was different, with all of the major producers trying to outdo each other to steal market share. This just ended up hurting everyone's margins, as you can see below.
|Company||Year-Ago Gross Margin||Current Gross Margin|
Source: Company filings.
The price of corn has fallen from its high earlier this year, but it's still substantially higher than its 10-year average and likely to remain so, while chicken prices have only risen very modestly. Cal-Maine, which sells eggs but not meat, illustrates how costs can be managed if only selling prices can be raised. Eggs have their own supply and demand characteristics, and so Cal-Maine isn't as affected as other chicken raisers.
Similarly, better-diversified companies like Tyson Foods and Brasil Foods