Well that’s going to take a miracle and an angel or something looks to me. I mean if a boneless breast is $1.29 and corn is over… Actually, our corn and soy are booked and they’re booked at very similar prices, maybe a little bit higher than we had for May, June, and July. There’s going to take divine intervention somewhere to make a profit.
We were looking at locking in values at a dead loss, a significant loss. We were looking at $1.30 breast meat and everything else was a loss. I felt like we had big prayer meeting with our advisors and everything...
He expresses a hopeless predicament for Sanderson Farms and other chicken producers in making money in a slow down (worse restaurant sales, likely worsening export markets, no chicken pricing) in the face of killer feed costs:
And the dollar. 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.
He went on to make a startling prediction that a chicken producer with a large debt on its balance sheet will likely go under in this current nasty high feed environment.
We’re glad, we’re very glad because of our balance sheet that our bankers are not down here visiting us regularly, but they’re visiting some of our friends in the chicken business. We’re glad we’re good operators and our margins, we’re not taking deep losses. But what’s going to happen we believe is these people that are taking deeper losses and whose balance sheets are stretched more than ours and some other people, they’re the ones that are going to have to adjust first, and they’re going to have to adjust more. I don’t know that that means people close or what. I don’t know how it’ll happen or what’ll happen, but that’s the way it’s going to happen.
Although not actually named, it is not hard to figure out which one he is likely discussing: Pilgrim's Pride (PPC). This chicken producer is burdened with a colossal debt of $1.5 billion after making the ill timed acquisition Gold Kist a few years ago. It's burning cash losing $230 million in the last 3 quarters and putting out secondaries in order to try to survive. No other publicly traded chicken producer has this awful a balance sheet -- not Tyson (TSN) or Perdue. Pilgrim's had a fairly dramatic rise, from its low of $11.42 to a high $17.74, on the basis of prayer, not being as big a disaster in losses in the quarter, and what appears to be a very ill timed buying spree by Fidelity driving up the price. I agree with Sanderson: a chicken producer will likely go under. The most probable candidate is Pilgrim's Pride. It will take alot more than prayer to keep Pilgrim's Pride afloat.
Disclosure: Author is short PPC, no position in SAFM or TSN