The US poultry sector has been under scrutiny in recent quarters, with a number of the largest processors named in a lawsuit alleging companies fixed prices and questions over the use of a key, weekly chicken-price index. Throw in tough market conditions, concerns over the trade priorities of the Trump administration and the rise of meat alternatives and there is much for poultry industry boardrooms to ponder. Dean Best chewed the fat with Sanderson Farms CFO Mike Cockrell.
In September, the US poultry market was rocked by a lawsuit alleging a number of its major companies had colluded to fix prices.
The suit, filed by New York-based distributor Maplevale Farms, claimed 14 businesses, including Tyson Foods, Pilgrim’s Pride and Sanderson Farms, “conspired and combined to fix, raise, maintain, and stabilise the price of broilers” from as early as January 2008.
Maplevale Farms argued the processors shared “competitively-sensitive data” and destroyed broiler breeder hens to increase the price of broilers sold at retail. It also alleged the processors transferred “vast amounts of production data” to Agri Stats, which was also named as a defendant. The plaintiffs argued the data is “supposedly anonymous” but “in fact provides defendant producers with sufficient detail to determine, with reasonable accuracy, producer-level data on production, cost, and general efficiencies”.
After the lawsuit was filed, more complaints were filed. Judges consolidated the suits into three actions.
Earlier this month, Tyson Foods, the largest chicken producer in the US, revealed it had received a subpoena from the US Securities and Exchange Commission. The company said it believed the subpoena was related to the Maplevale lawsuit.
At the centre of the allegations is Agri Stats, a service that collects data from US poultry processors and charges the companies for the reports it produces. Agri Stats argues its research does not break anti-trust laws; the Maplevale suit claims the data provider “acted as an agent and/or co-conspirator”. The case remains ongoing.
The autumn saw another US poultry industry benchmark called into question. The Georgia Dock wholesale chicken price index, used for over 40 years, was an index put together from a survey of processors operating in the state and often used in contracts with national retailers. However, last autumn, questions emerged over the accuracy of the data and the federal US department of agriculture stopped publishing the index.
Reports pointed to separate figures that showed the Georgia Dock had drifted upwards from another index, maintained by the USDA, suggesting there may have been over-inflation in the supermarket prices for chicken.
By December, the Georgia Department of Agriculture, which had run the index, pulled the benchmark, citing a lack of submissions. The GDA relaunched the index last month.
Both affairs have prompted concern among some in the investment community about the real profitability of US poultry processors.
The Maplevale lawsuit (and others consolidated into three actions) remain live. Many of the processors have, since the Maplevale suit first emerged, made brief statements, ranging from dismissals to insistence they would defend against the claims. One of those is Sanderson Farms, the third-largest poultry processor in the US. At the time, Mike Cockrell, Sanderson Farms’ CFO, the company would “vigorously defend the suit” but would make no further comment.
Speaking to just-food last week (16 February), a day after Bloomberg published an in-depth article into Agri Stats, Cockrell opted to make some brief comments about Sanderson Farms’ use of Agri Stats and why “benchmarking” benefits the consumer.
“Agri Stats has been reviewed by the Justice Department,” Cockrell says. “One, it’s all historical and the article yesterday said that we gauge future supply numbers using Agri Stats. That is not true. There’s no data. The data we use to try to guess production numbers going forward is all government numbers, USDA-published numbers. They publish pullet placements, breeder numbers, and egg sets once a month or every week and we use that to try to guess how much productions coming on-line. Agri Stats is all historical. Yes, we use Agri Stats heavily – part of my bonus is determined by how well we perform versus our peers and Agri Stats is a very important benchmark.
“Benchmarking is good for consumers because it makes us all more efficient, and that has been decided by courts, by the government, everybody’s looked at benchmarking.”
In December, in the wake of the end of the Georgia Dock index, Sanderson Farms announced it had agreed a new pricing formula with its customers. Cockrell says Sanderson Farms would not use the new Georgia Premium Poultry Price Index. “We historically used [the Georgia Dock index] to price a small portion of our product because our consumers trusted it, our customers trusted it, we trusted it. Since it’s gone away, we are putting in new formulas for all our customers and we’re negotiating that now,” Cockrell says. “We can’t use the Georgia Dock anymore. They’re going to publish a number but it’s not going to be useful for us. It’s going to do one number for every chicken, no matter where it’s going, and that really is not helpful to us. We don’t sell to fast food companies, and we don’t want that supply/demand dynamic to be influencing our pricing because it doesn’t reflect the supply/demand dynamics in our particular markets.”
One foodservice customer – Sysco – accounts for 40% of Sanderson Farms’ group revenue, which in the year to the end of October amounted to $2.82bn, up slightly on the $2.8bn generated a year earlier. However, Sanderson Farms’ 2015/2016 financial year was one in which the processor’s operating income and net income fell year-on-year.
The company is set to announce the results for the first quarter of its new financial year tomorrow and, asked how the business expects its annual sales and profits to evolve in the current fiscal period, Cockrell says: “The environment we’re in should allow us to make good margins. I don’t know if we’ll meet last year’s margins or not. Grain costs are going to be a little bit higher it appears, even though there’s more grain available in the United States then there was last year. You would think that cost would react accordingly, but right now it looks like grain is going be a little bit more expensive.
“We don’t ever try to predict margins because we don’t know what the price of chicken is going to be next week, much less six months from now. The chicken markets are behaving like they normally do. They’re starting to move up now, as we get through the winter, and get into the springtime. People eat more chicken and prices are improving now. Retail grocery store demand for our product is outstanding. We should make good margins there.”
Cockrell describes two chunks of Sanderson Farms’ business as “wildcards” – foodservice and export. Parts of the US foodservice market, particularly casual dining, have been under pressure for a number of quarters, while there is some uncertainty about the prospects for Sanderson Farms’ export business – which accounts for 10% of its turnover – due to the unpredictability of President Trump’s trade policies.
“Do American consumers stay home and watch the news and see what happens with the latest on Donald Trump? Or do they go out to eat? Last year they didn’t go out to eat in very large numbers. Traffic through casual dining restaurants was down again, year over year. January was no better, but we’re hopeful that foodservice demand will pick up a little bit,” Cockrell says. “The other wildcard is export demand. There are a lot of question marks around our new leader’s trade stance and whether or not he builds a wall, or cuts Mexico off, and they’re one of our largest trading partners. We need a good, viable trade relationship with Mexico. China would help as well. A lot of our outlook is cloudy right now because we don’t know what that export environment is going be like. Right now it’s fine – but will that change?”
Mexico accounts for 50% of Sanderson Farms’ export sales, with other notable markets a varied mix of Cuba, Kazakhstan, Angola and Taiwan. Sanderson Farms ships 20% of its productions volumes outside the US, which Cockrell says is “about right” for the company. “We don’t want to export much more than that. We can make more money domestically,” The product Sanderson Farms exports is dark meat unloved by American consumers who prefer “chicken parmesan, or chicken fried chicken, or chicken sandwich”.
However, Sanderson Farms is keeping a watching brief on what could happen to the trading relationship between the US and Mexico and, most pertinently, the North American Free Trade Agreement, or NAFTA, which Trump has criticised both before and after his election.
“Not just chicken but agriculture in general in the United States has been a tremendous benefactor of NAFTA,” Cockrell says. “NAFTA has allowed us to sell not just to Canada, but Mexico as well, and our trade with Mexico has grown exponentially since NAFTA was put in place. That’s true not only of chicken. We sell, as an industry, we sell about 4% of our total production to Mexico but they buy 20% of our corn and 20% of our soy beans, 90% of our high fructose corn syrup. They buy a lot of ag products from us, and if Mr. Trump does something that causes that to go away, our ag industry generally will feel the pain, which leads me to believe he won’t do it. I think surely to God he’s a business man. He knows the impact overall is going to be negative. But, hell, who knows what he’s going to do.”
Domestically, Sanderson Farms has moved to expand its production network. Last month, the company opened a US$155m processing facility at its site in St. Pauls, North Carolina, in a bid to improve its presence on the East Coast. Cockrell says the plant would serve the foodservice channel. “St. Pauls is going to be a big bird de-boning foodservice plant. It will add 14% more capacity in terms of pounds to the company. If you look historically, it should provide a 20% increase in our revenue, because those plants fetch more per bird than the retail grocery store product does. That’s not true right now, right now retail grocery store plants are outperforming foodservice plants because of the weakness in boneless/skinless breast prices.”
Could Sanderson Farms turn to inorganic moves to expand its domestic business? In late November, one of its larger peers, Pilgrim’s Pride, struck a deal to buy fellow US poultry processor GNP for $350m. Cockrell says Sanderson Farms will keep an eye out for possible deals but has, in recent years, grown organically. “Frankly, we built the last eight plants that have been built in our industry. This worked for us because you can put the plant in an environmentally sound place that you know that is going to be environmentally sustainable for the next 100 years. You can put it near a customer and near a labour force that meets your needs. Finding a location and building ourselves has worked for us, but we would not rule it out. If we saw some assets that met our requirements, we would certainly consider it.”
One potential avenue Cockrell does take off the table is following the likes of Tyson and Maple Leaf Foods and investing in the meat-free sector. “We have completely ruled that out. We are a chicken company and that’s all we do.”
Click here for part one of just-food’s interview with Sanderson Farms CFO Mike Cockrell, in which he discusses the company’s policy on the use of antibiotics in its supply chain and the market for antibiotic-free meat in the country.