EYE on Commodities - Chicken Egg sets

I was amazed to see this weekend that Sanderson's Farm (SAFM) is up 47% YTD, outperforming the S&P 500 by 51%. SAFM is a fully-integrated poultry processing company facing lower margins due to significantly higher feed cost. Despite the strong stock performance, consensus estimates are for SAFM EPS to be down 43% in FY2008, but showing 100% growth in FY2009. So the stock performance must be telling us something!

As it relates to the restaurant industry, if SAFM's profitability is going to improve despite higher feed costs, they need to be seeing better pricing. Obviously, this is not good for anybody buying chicken.

I found about an interesting leading indicator of chicken prices - chicken egg sets. Chicken eggs are set roughly 10 weeks before being sent to slaughter, so this statistic is a good indicator of future chicken production levels. As you can see from the chart below, the 6 week moving average has fallen significantly below year ago levels for the first time in nearly two years.

If we take the trend in chicken in egg sets, along with Pilgrim's Pride Corp's (PPC - the largest U.S. chicken producer) announcement that it was closing a processing facility and some distribution centers, we have a more rational industry as the producers adjust to higher feed costs and an oversupply of chicken.

Naturally, this means that the restaurant industry will be seeing higher chicken prices in 2H08 and 2009. The chains that appear to have more exposure to chicken are BWLD, PFCB, CAKE and those that have chicken as a part of their name!


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