Prize Poultry

From humble beginnings Sanderson Farms has grown to become the fourth largest poultry producer in the US. But it could face its toughest challenge yet as rising costs and falling demand hit its bottom line hard. Diana Milne meets President Lampkin Butts to find out how Sanderson Farms will survive the storm.

Like most farming families across the US today, the Sanderson clan is experiencing one of the most challenging periods in its history. Business has been hit hard by the credit crunch resulting in low consumer demand for the family's products, and the cost of animal feed has risen sharply.

Where the Sanderson differ from most other American farming families however is that they are the fourth biggest poultry producers in the US - so while to some extent they are insulated from the effects of the credit crunch - the losses they could make are far bigger.

In the fourth quarter of 2008 the company reported a net loss of US$51.9million in net sales compared to the same period the pervious year - a sign of turbulent times for the poultry industry.

Lampkin Butts, Sanderson Farms' president (CHECK) says the factor that has hit Sanderson Farms' bottom line the hardest however is the rising cost of animal feed which he says is largely attributable to the use of corn crops for ethanol, or biofuel.

"In the US the government has encouraged the development of ethanol as a substitute for gasoline and there's a subsidy that is paid to farmers who grow corn to produce ethanol.

"In 2008 almost a third of the corn crop went towards the production of ethanol.

"That's been the main story of our industry in 2008 and it's had a huge impact on our costs which impacts on our profitability. It has driven the price of corn and soybean to historical highs." And this description is no exaggeration. In 2008 Sanderson Farms paid around US$168million in total for grain. In 2007 that figure was 125million more than in 2006. So over a two-year period the additional cost of its animal feed was US$300 million. Butts says the company has no choice but to continue paying these prices, as the alternative would cost even more:  "Our animal feed is made up of two-thirds corn and a third soybean. There's no substitute that will compete with that. Any substitution would cost more in terms of feed conversion and performance in the bird than we would save."

So serious is the impact of high feed prices that last year Sanderson Farms was forced to delay the building of a US$126.5million new feed mill, poultry processing plant and hatchery in North Carolina. Speaking at time of the announcement, Joe F. Sanderson, chairman and CEO of Sanderson Farms, said: "In light of escalating prices for corn and soybean meal, our primary feed ingredients, it has become increasingly difficult to predict our future output costs. Because a third of the United States corn crop is now expected to be used to produce ethanol, the poultry industry and other animal feeders are being challenged by increasingly tighter supplies of grain and historically high prices. While our balance sheet remains strong, we believe it is prudent to be conservative with our working capital and our balance sheet at this time."

The company drop in net sales for the fourth quarter 2008 is clear evidence of effect of the credit crunch on consumer demand for poultry products. Within retail outlets Butts says sales remain relatively strong, with the exception of demand for white meat. However it is the downturn in the restaurant trade that has really had a negative impact on Sanderson Farms' sales figures. This he says was aggravated by the rise in gasoline prices in 2008: "When we saw the price of gasoline rising, we saw the demand for protein, including chicken, falling in the restaurant industry, or what we call the National Chain Accounts. When people have to leave their houses and drive to a restaurant those restaurants have seen their profits drop by ten to 15% and that creates less demand for the chicken products. That's translates into lower prices particularly for boneless breast and tenders and somewhat in wings." He goes on to say however that export demand from countries such as Russia and China remain strong, with total exports from the US poultry industry having risen by 20% last year over 2007. This he says has resulted in particularly good sales of dark meat products.

Despite falling sales Sanderson Farm must continue to invest in improving the quality of its existing products and the conditions in which its flock is housed.
This has become particularly imperative given threat of Avian Influenza since it was discovered in Asia (CHECk) in 1997. Butts says the outbreaks the company has placed a stronger emphasis on bio security to prevent wild birds that are infected with the condition infecting its own flocks. "As a company the total percentage of our products that's condemned for any health issues is less than half of one percent. So we're doing a good job maintaining the good health of our flocks. There's been an occasional break out of what we call a low path influenza in the US. When that happens it's so contagious that the company and the grower will depopulate those flocks and quarantine the area for a while."
He goes on to say that the biggest fear for the US poultry industry is an outbreak of high path influenza (CHECK NAME). "We have not had that in the Northern Hemisphere and that is a huge concern and the main reason why we have so much emphasis on bio security on the farm. There's more and more time and money being spent in all countries to prevent this from becoming a problem."
As well as investing in bio security, Butts says the company is constantly investing in upgrading its facilities. Indeed it has come a long way from a small chicken processing operation in 1955 with on plant, one hatchery and one feed mill. Today it processes over two billion pounds of meat annually and operates eight poultry plants.

The company employees 10,000 staff and has partnerships with 700 independent growers. "As we have grown, the company, particularly from the mid 1990s to now, we've built a lot of new chicken houses and those houses are state of the art. They use the newest technology for ventilation, insulation and feeding equipment. These are top of the line facilities."

He goes on to say that the company has also developed technology which enables it to measure a vast range of conditions and factors at its processing plants. This enables it to increase yields and control costs: "In our business there are literally thousands of things we can measure. From the day old chicks through the breeder, through the hatcheries, the feed mills and the plants. There are many many ways of operational thresholds we cane measure. We participate in a benchmarking service called Agro stats which provides and gathers performance data from almost every company in our industry and puts it all back into a reporting form that allows participants to see operational numbers from our competition."

New technology has also allowed Sanderson Farms to continuously evolve its product range to meet current customer demand. This, says Butts, is vital as customer tastes evolve constantly: "A couple of years ago, the hot item was what they call a boneless chicken wing. Before that the stuffed breast was a hot item on restaurant menus and we were ahead of the curve on that. We're keeping our eyes out to see what's going to be the new item for the casual dining sector. We'll probably de-bone more dark meat now than we did in the future."

AS the fourth largest poultry producer in the US Sanderson farms is at the front line of the technological developments that are currently revolutionising the industry.
But, says Butts, Sanderson Farms has resisted speeding up parts of its processes, preferring instead to remain a low cost producer, despite performances from its competitors: "In our last quarter there were some companies that outperformed us so we recognise that our competition does a good job and we want to stay ahead of them. But the things we believe set us apart from them are that we're historically low cost producers. In terms of everything we do in the live side of our business through to our plants, in terms of processing yields, we're a low cost producer." This company philosophy is why Sanderson Farms has resisted installing technology at its plants that would speed up the rate at which chickens are processed - particularly when it comes to the evisceration process. "We're a little different from the rest of the industry, in that we don't run high speed lines in our plants. We run eviscerating lines that are the same speed they've been at since the mid 1980s."
He explains that the company believes installing higher speed lines could compromise the quality of the chicken products it produces: "There's technology that would allow us to double those speeds but to do that we've found you sacrifice too much in terms of product quality in yields and in what the employees can do in the plants."

This approach to running the business also extends to the company's approach to its balance sheet, which Butts describes as "conservative". "We maintain a conservative balance sheet which is probably the most conservative and the strongest in our industry. We do that particularly at times like this year when the industry as a whole isn't profitable. We operate our business consistently and not just make changes for the short-term cycle but in a way that is best for the long-term.

There's aren't many companies today that will admit to doing business in the old fashioned way.  But, having established itself from the start as a family run farm it's an approach that has worked well for Sanderson Farms so far.

Today though Sanderson Farms faces some very modern challenges - Avian flu and the credit crunch among them - and the need to merge old-fashioned values with the need to overcome 21^st century problems has never been greater.

Sanderson Farms corporate profile

Sanderson Farms has grown from a small general feed and seed business in 1947 to one of the nation's leading food corporations in 2008, with sales of more than $1.47 billion. We are currently the fourth largest poultry producer in the U.S., processing over two billion pounds of meat annually.

Our state-of-the-art facilities allow us to process more than 8.125 million chickens per week. We currently operate eight poultry plants with another one scheduled to come online located in Kinston, North Carolina. Combined with our company-owned feed mills and hatcheries, we are well positioned to keep up with the growing demand for our products.

Our 10,000+ employees and 700 independent growers are committed to offering our customers the very best products on the market today. Perhaps that's why the products carrying the Sanderson Farms® brand name can be found in nearly every state in the country as well as overseas.

Sanderson Farms was incorporated in Mississippi in 1955 as a fully integrated poultry processing company that produces, processes, markets and distributes fresh and frozen chicken products. Our stock became publicly traded in May 1987 and is listed on NASDAQ under the symbol SAFM.

Today, the company continues to build upon its rich traditions, believing that our success is largely due to the values instilled by the tenacious efforts of our founders and our extended family of employees. This includes the tradition of providing quality products to our customers and being responsive to their diverse needs, a hallmark of our business for the past 60 years.

Sanderson Farms at a Glance

Founded: 1947 (incorporated in 1955)
Market Position: 4th largest poultry producer in the U.S.
Total Annual Sales 2007: $1.47 billion
Weekly Production: 8.125 million chickens per week
Number of Plants: 9
Number of Employees: 10,000+
Number of Independent Growers: 700