The set up for SAFM looks to be very bullish for the next couple of years if all of the pieces of the puzzle fall into place.
(1) The surge in corn prices in 2008 caused domestic chicken processors to cut back on production, reducing the supply of chickens
(2) As we sit here today, feed costs look to be headed lower. A bumper crop of corn could send it to $2.50.
(3) Retail demand remains robust, but food service demand is challenged.
(4) If food service demand picks up in 2010 and supplies are tight - chicken prices are headed higher.
(5) Higher chicken prices combined with favorable feed costs means better margins.
(6) In 2011, SAFM will be bringing on a new production facility, improving operational efficiencies.
Clearly, weather can ruin any good story, but the set up for SAFM looks to be positive for the foreseeable future.
Some comments from SAFM senior management as it relates to Restaurant investors:
FOOD SERVICE DEMAND – “We continue to believe we will not see a meaningful rebound in food service demand until well into calendar 2010 at the earliest, and then only if employment numbers begin to improve. Consumers need to get their jobs and confidence back before they're going to start eating out again. Fewer chickens than normal will be needed this fall to meet demand, and fewer chickens will be available, but we won't know until we get there whether or not the industry has balanced supply with what we believe will be reduced demand.”
CHICKEN PRICES – “Overall market prices for our fresh chicken improved during the quarter, compared to last year's third quarter. But I continue to believe the improvement has more to do with production cuts than demand improvement.”
FOOD COSTS – ($2.50 Corn?) “We expect feed cost to remain below a year ago for the rest of this year. The USDA August crop report indicated there should be an adequate supply of corn next year, and that the record number of soybean acres should produce a harvest that should help prepare the soybean balance sheet.
However, while all indications are this year's corn and soybean crops will be adequate, and that significant progress should be made replenishing depleted soybean stocks, market volatility will continue as concerns grow for an early frost and yield issues. This is particularly true for soybeans, as old crop supplies remain tight and the expected large crop is needed.”
CHICKEN SUPPLY – “The chicken markets are no easier to predict than the grain markets. While egg sets have remained below a year ago, and we are heading into the fall with fewer chickens on the market, we are also heading into the fall and the seasonal reduction in chicken demand with weak demand at most food service establishments.”