Sanderson Farms Inc posted a better-than-expected quarterly profit on Tuesday, buoyed by higher prices for chicken wings and other products, and said it would further reduce production to protect earnings from rising feed costs.
The worst U.S. drought in more than half a century has sent the cost of corn and other animal feed soaring, and the news from Sanderson illustrates how that will translate into costlier food for consumers.
Shares in the poultry company jumped 9 percent on the strong results and word that it began trimming production by 2 percent earlier this month. The production cut follows a 4 percent reduction put in place in January, executives said on a conference call with analysts.
Lowering production helps support retail prices by limiting supply.
"With considerable uncertainty and a high degree of fear now priced into the market for corn and soybean meal," Sanderson is not locking in long-term prices for grain, Chairman and Chief Executive Joe Sanderson said on the call.
Based on Monday's closing prices, Sanderson's feed grain costs would be $61.1 million higher this fiscal year -- an increase of about 10 percent.
"Our view this morning may be very different from our view a few days from now," Chief Financial Officer Mike Cockrell said, citing volatile external factors such as feed grain costs, market prices for poultry and the overall health of the economy.
Jumbo wing prices averaged $1.59 per pound during the fiscal third quarter ended July 31, more than doubling from a year earlier. Boneless breast prices also rose, but at a significantly lower rate due to sluggish food service demand.
Higher poultry prices helped the company swing to a third-quarter profit of $28.7 million, or $1.25 per share, from a year-earlier loss of $55.7 million, or $2.51 per share.
Sales jumped 22 percent to $624.9 million.
Analysts on average expected earnings of $1.20 per share on revenue of $620.0 million, according to Thomson Reuters I/B/E/S.
Shares of Laurel, Mississippi-based Sanderson Farms leaped 9 percent to $44.25 in afternoon Nasdaq trading.
On the New York Stock Exchange, shares of poultry producer Tyson Foods Inc rose 4.4 percent, while pork processor Smithfield Foods Inc inched up 0.6 percent.
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