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Egg Market Deteriorates, Will Cal-Maine Hold?

 May 14, 2008 01:22 AM

About a month ago, I posted some data that suggested egg prices were coming down from their then-historic highs, and posited that prices had further to fall. At that time, realizable prices for a dozen large eggs in the southeast region of the US averaged $1.155; the latest data released from the USDA says that shell egg prices have since fallen a full 20% to under 95 cents per dozen.

The dramatic fall in egg prices of late has pushed the market to a price point equal to that of last year. Trade sentiment and inventory indicators suggest that the egg market may be pushed down several more cents before some kind of bottom is formed.

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[The dots indicate the date of Easter]

If things were otherwise static, this wouldn't be much of a problem for producers like Cal-Maine (CALM), as eggs were very profitable at these prices last time around. Of course, things aren't static – the cost for soybeans is up roughly 75% year-over-year, and corn is up roughly 40% year-over-year. Overall, this means that feed costs have increased about 50% year-over-year assuming a 30%/70% mixture of soy and corn. Egg prices simply have not kept pace with the rate of feed cost inflation.

Even so, the stock has held up well. The latest short interest data, however, shows that the short position actually increased between mid-April and the end of the month, despite the much-heralded notion that there would be a short squeeze to avoid paying Cal-Maine's variable dividend. Whichever funds are short CALM are obviously not backing off their already-substantial position, and I think that is with good reason. Cal-Maine's profitability year-over-year stands to be lower, if they don't show an outright loss.

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