Dean Z

Cal-Maine Foods: Buy This Golden Egg

Yes, this stock has had a dedicated group of short sellers but for good reasons. On the positve side, this is a well run company and the industry is slowly consolidating. On the negative side, however newcomers tend to miss the fact that egg producers have just gone through the best 5 year period ever for egg prices and profit for egg producers. Traditionally egg prices have rarely breached 1.00/dz but in 2008 we saw wholesale prices reach record levels of 1.40/dz. It took a while but producers have expanded as usual leading to a glut of eggs (I recently talked to a producer which has several trailer loads of eggs sitting with no buyer). Prices have now fallen into the .75/dz. which is below a break-even price of about .80/dz -give or take a few cents based on feeds costs. So at current prices Calmaine is losing money. If Calmaine loses money, out goes the dividend (it's based on a % of profit). In talking to people in the industry, the next year doesn't look good. It will take time to get the slupply back into balance with demand. Eventually, that will happen and Calmaine will make good money again but that could likely be a few years off. People forget that this is still a highly cyclical business which will go through booms and busts and it looks like we are entering a bust period. Full disclosure: I am short Calmaine and will remain short until I see egg prices back near $1.00/dz wholesale.