Sanderson Farms, Inc. (NASDAQ:SAFM)

CAPS Rating: 5 out of 5

A fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products.

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Player Avatar TMFDeej (99.41) Submitted: 6/30/2008 2:13:46 PM : Underperform Start Price: $34.84 SAFM Score: -19.36

Since I began to short restaurant stocks, I have been keeping a close eye on meat prices. Beef and pork prices have risen quite a bit but chicken prices have remained surprisingly low. As a result, I began to short chicken producers to protect my restaurant shorts. I know that it's a strange hedge, but here's the logic: $8.00 corn is going to cause someone pain. If the chicken producers are dumb and they refuse to cut their production quickly enough, I'll just have to ride them down as well.

I came across an article again in Down Jones newswires this morning which indicates that chicken producers may finally be starting to crack (so to speak). Sanderson Farms Inc. (SAFM) announced on Thursday evening that it is indefinitely postponing the construction of its planned new chicken-processing plant. Regarding the closing the company's CEO Joe Sanderson said "In light of escalating prices for corn and soybean meal, our primary feed ingredients, it has become increasingly difficult to predict our future input costs."

This announcement comes on the heels of Tyson Foods (TSN) announcing that it is selling its Canadian meat-processing business. Earlier in 2008, Pilgrim's Pride (PPC) closed a chicken plant, closed six distribution centers, and sold off its turkey business.

The following will give you an idea of what sort of pain producers are facing if they don't cut chicken production and force the price of meat to rise. Sanderson doesn't hedge its feed grain costs. It bought 90% of its current supply of feed corn for $5.50 and $6.00 per bushel. This supply is only enough to last it until the end of July. Corn for July delivery is currently trading at over $7.50 and I would not be surprised to see it head towards $8, $9,. or even $10 unless something drastic happens, like the government pulling the plug on its ethanol mandates, or at least easing the import tax on ethanol.

This whole corn situation is a mess and most people don't realize how bad it is going to get. Meat prices are either going to explode or producers are going to start dropping like flies (to use a gross analogy when talking about meat).

Deej
Short SAFM

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