Cal-Maine Foods (NAS: CALM) , the largest domestic shell egg producer, reported a 35% plunge in its first-quarter net income to $3.1 million, hurt by higher feed costs. This drop comes despite growing revenues. Let's take a closer, more Foolish look at what happened.
The Jackson, Miss.-based company's revenue rose by 28% to $243.8 million, primarily on the back of price increases. But net income declined because of a 45% jump in the year-on-year cost of corn to $0.484 per dozen eggs produced. The company's chief executive, Dolph Baker, said feed costs are likely to remain very high and volatile until May of next year. The dividend got a serious haircut in the process -- down from 10.2 cents per share last quarter to just 4.4 cents.
Not just a chicken-and-egg situation
It's not just Cal-Maine that is embroiled in this problem. The poultry industry has also been affected by escalating feed prices, particularly those of corn, forcing some growers to switch to wheat to feed their clucking commodities.
Broiler-meat companies like Sanderson Farms (NAS: SAFM) and Pilgrim's Pride (NYS: PPC) have been hit hard as record low gross margins have prompted cuts in output. Arkansas-based Tyson Foods (NYS: TSN) also reported a 21% drop in third-quarter net profits, largely because of suppressed margins. Tyson's chief executive noted that the company's chicken segment realized just a 1% return on sales.
On the other hand, hog producer Smithfield Foods (NYS: SFD) seems to be well insulated from rising costs because of hedges that keeps its corn prices below $7 per bushel.
The Foolish bottom line
Given the high input prices, many food producers like Cal-Maine will continue to face challenges -- and the problem is compounded by the high degree of competition in this sector, which, in turn drives margins further down. It will be interesting to see how the next few quarters pan out for the industry in general and Cal-Maine in particular.
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At the time thisarticle was published Fool contributor Keki Fatakia holds no shares in any of the companies mentioned in this article. The Motley Fool owns shares of Cal-Maine Foods. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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