The stock market isn't paying enough attention to the price of corn or soy meal. It should. History is unfortunately about to repeat itself. In 2008, corn reached stratospheric prices and, so doing, decimated the chicken business. Pilgrim's Pride went under and the rest of the chicken producers were clobbered. What were the astronomical corn and meal prices? Well, listen to straight-talking Joe Sanderson, CEO of Sanderson Farms (NASDAQ:SAFM), in 2008 as the sky fell down on the chicken producers:
Well that’s going to take a miracle and an angel or something looks to me...There’s going to take divine intervention somewhere to make a profit...But I know the chicken people can’t pay $6.50 for corn. I don’t know much about the economics of cattle feeding and hog feeding, but I don’t think they can either and I know chicken people can’t pay $6.50 for corn and $375 for meal and sell chicken and pork and beef for traditional prices. That doesn’t happen. That can’t happen. The economics doesn’t work." (Joe Sanderson, conference call 2008) (http://seekingalpha.com/article/92783-sanderson-farms-inc-f2q08-qtr-end- 07-31-08-earnings-call-transcript?part=qanda)
So where are corn and soy meal today? Corn is sitting at $6.32, up from the $2.50 to $3.50 that futures have traded for most of the decade. Meal is at $382, over Mr. Sanderson's chicken "drop dead" price. It is time to take Mr. Sanderson's advice and pray for divine intervention.
Last quarter, SAFM reported earnings that more than doubled. Yet, the stock plummeted over 10%. Why? Management volunteered that SAFM hadn't bought any of its feed for next year and estimated that, at the current price, it would cost $243 million more for feed in 2011. Again, during the call, management foretold an extremely trying 2011. Keep in mind, the company has averaged $62 million a year in net income over the last 4 years! SAFM's report was December 14. Corn and soy meal have escalated since the 14th, making $243 million seem optimistic.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.