Cal-Maine Foods, Inc.

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Cal-Maine Foods, Inc.

3320 Woodrow Wilson Avenue
Jackson, Mississippi 39209
U.S.A.
Telephone: (601) 948-6813
Fax: (601) 969-0905
Web site: http://www.calmainefoods.com

Public Company
Incorporated: 1969
Employees: 1,520
Sales: $572.3 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: CALM
NAIC: 112310 Chicken Egg Production

Cal-Maine Foods, Inc. is the largest fresh egg producer in the United States. The Jackson, Mississippi-based company controls 13 percent of the market, selling more than 600 million dozen shell eggs each year in 28 states, mostly in mid-Atlantic, midwestern, southeastern, and southwestern states. Cal-Maine eggs are sold to supermarket chains, club stores, foodservice distributors, and egg product manufacturers, and marketed under several names: Cal-Maine, Rio Grande, and Sunups. The company also produces and markets specialty shell eggs under two brands: Egg-Land's Best for low-cholesterol eggs, and Farmhouse for eggs laid by uncaged hens. The Cal-Maine flock consists of 20 million laying hens and another five million young female chickens (pullets) and breeders. Cal-Maine is a public company trading on the NASDAQ, headed by its founder, Fred R. Adams, Jr., whose family owns a controlling interest.

Eggs Becoming Big Business in the 20th Century

Although Cal-Maine's laying hens produce on average almost one egg each day, laying a large number of eggs is far from a natural instinct for birds. Thousands of years ago people discovered that removing an egg from a nest prompted a hen to lay a compensatory egg, a process that could be repeated for an extended period of time. As a result, chickens were domesticated and bred for their eggs as well as their meat. Chickens were brought to the United States by European settlers and were raised on almost every farm, mostly for family consumption, while excess products were sold or traded. Many townspeople also kept chickens. It was not until the post–Civil War era that a large-scale poultry industry began to develop, but even then eggs were considered the province of women and children. Not until the 1920s when poultry science programs were started at American colleges were mass production techniques developed, so that the small-farm chicken enterprises run by women and children gave way to large organizations. Hatcheries gained wide use in the 1920s, as did research facilities funded by the major feed companies. In 1934 Kimber Farms in California began conducting genetic research on chickens to breed hens capable of laying a large number of eggs. Because chickens' immune systems were compromised by genetic hybridization, researchers also developed vaccines, which were made even more necessary because of the crowded conditions under which chickens were now kept. Battery cages arranged in rows and tiers became standard in the 1940s, a practice that helped to meet the increased demand for poultry and eggs in response to red meat rationing during World War II. People continued to eat eggs and chicken in large numbers after the war, resulting in many dairy barns being converted to the factory system to keep up with demand. But with the years, consumers began cutting back on eggs and eating more chicken, tipping the balance in the poultry industry.

The Launch of Fred Adams's Egg Business in the Late 1950s

Fred Adams was well versed with the egg business. After college he spent three years at Ralston Purina Company working in feed sales, and in 1957 he started his own egg operation in Mississippi. He then merged his company with a company in Maine and another in California in 1969 in an effort to launch a business with a national scope. A contest was held to name the new company and Cal-Maine was the winning entry. The egg business was still very much fragmented with a multitude of small operations dominating the marketplace. But consolidation would take on increasing importance in the industry, as demand for eggs dropped and along with it prices and profit margins. Per capita consumption peaked at about 400 eggs around World War II, then slipped to 321 eggs by 1960. Annual consumption by 1990 totaled just 234 eggs per person. As a result, limiting costs through economies of scale was paramount, and Cal-Maine became one of the industry's leading consolidators. To a much smaller degree, for the sake of diversity, the company also owned a dairy farm in Edwards, Mississippi, and a pork farm in Meadow, Georgia. Still, egg production accounted for about 95 percent of the company's revenues and was Adams's clear focus.

In 1988 Cal-Maine had a flock size of 6.8 million birds, which produced 117.5 million dozen eggs that year. The company now embarked on an aggressive expansion program. In fiscal 1989 it paid $6.7 million to acquire an Arkansas company, Egg City, Inc., to add 1.3 million laying hens to its flock. A year later, in 1990, Cal-Maine completed a purchase that almost doubled its size, paying $21.6 million for Sunny Fresh Foods, Inc. Sunny Fresh controlled a flock of 7.5 million layers spread across operations located in Alabama, Arkansas, Kansas, New Mexico, North Carolina, Oklahoma, and Texas. Thus in one stroke Cal-Maine expanded its reach to the Southwest, Midwest, and mid-Atlantic areas. The company also grew internally in fiscal 1990, spending $10 million to build an egg production and processing facility in Mississippi, thus adding another one million layers to its flock.

Aside from industry consolidation, Cal-Maine faced other challenges during this period. Much of the decline in egg consumption during recent years was the result of time-pressed Americans electing to forgo large breakfasts, but there were also health concerns, in particular the amount of cholesterol found in eggs and the impact of cholesterol on heart disease. To make matters worse, in 1990 there were more than 2,000 cases of food poisoning and at least two deaths caused by salmonella poisoning (passed from the hen to the egg even before the shell was formed). Thus Cal-Maine and its competitors began to look for ways to allay consumer concerns. In the early 1990s a Pennsylvania company began to sell C.R. Eggs, produced by chickens fed on kelp and canola oil, with the promise that the eggs could help lower cholesterol levels. By 1991, however, the eggs were pulled off the shelves when it was learned that they contained extremely high levels of iodine. The Food and Drug Administration was also unhappy with the name, because "C.R." represented "cholesterol reduced," and the agency opposed health claims on packaging. As a result, C.R. Eggs became Egg-Land's Best and the iodine levels were reduced well below the recommended daily allowance. In 1992, Cal-Maine became an Egg-Land's franchisee.

Cal-Maine continued to add production capacity in the early 1990s. In 1991 it paid $6 million to acquire North Carolina-based Sunnyside Eggs, Inc., adding 1.8 million laying hens to the flock. The company then opened a pair of facilities in 1992: a $10 million Louisiana egg production facility with a layer capacity of one million, and a $3.5 million pullet growing site in Mississippi capable of handling 500,000 young female chickens. As a result of these investments, Cal-Maine's net sales reached $235.9 million in fiscal 1993 (which ended May 29, 1993). Net income totaled $3.1 million. Although it did not increase capacity during calendar 1993, Cal-Maine continued an effort to increase productivity by introducing the most automated, labor-saving technology available. Hens were housed in environmentally controlled units to avoid the problem of layers being affected by extreme hot or cold weather. Now egg production remained steady throughout the year. Moreover, automation played an increasing role in the industry, as described by the Mississippi Business Journal in a 2000 profile of Cal-Maine: "Eggs purchased by consumers have never been touched by human hands. Eggs are produced, rolled out on a conveyor belt to an egg washer and grader and inspection station. Then the eggs are sized automatically and moved right into the final package."

Cal-Maine resumed its expansion in the mid-1990s, opening another Mississippi egg production facility in 1994 with a one million layer capacity at a cost of $9.2 million. Also in fiscal 1994 the company paid nearly $12.2 million to acquire Wayne Detling Farms, an Ohio operation with 1.5 million laying hens. Next, in June 1994, Cal-Maine paid nearly $2.9 million for Kentucky-based A&G Farms, adding another million layers to the flock. The company then spent $14 million in 1996 to build a Texas facility capable of housing one million layers and 250,000 pullets. Revenues during this period grew to $254.7 million in fiscal 1994, then dipped to $242.6 million a year later, before rebounding to $282.8 million in fiscal 1996, when the company also turned a net profit of $10.9 million.

Going Public in the Mid-1990s

To fuel further growth, Cal-Maine filed for an initial public offering of stock in December 1996. Underwritten by Paulson Investment Company Inc., the offering placed 1.4 million shares of common stock in December 1996, followed by another 330,000 shares in January 1997. Altogether, Cal-Maine netted $10.6 million, money that was put to use in April 1997 when the company spent $10.6 million to acquire Southern Egg Farm, Inc. The 40-year-old Georgia-based company had 1.3 million laying hens and established supermarket and institutional accounts in Georgia, South Carolina, and other southeastern states. In November 1997, Cal-Maine bought two more Georgia companies, paying $2 million for J&S Farms Inc. and $3.7 million for Savannah Valley Company Inc., adding a total of 900,000 layers to the flock.

Company Perspectives:

We are the largest producer and marketer of shell eggs in the United States.

By 1998, 61 egg companies were estimated to control about three-quarters of the country's flock of laying hens. Nevertheless, the industry remained fragmented, with many of the operations still family-owned and lacking succession plans. In addition, competition was increasing, making it more difficult for smaller producers to survive. With a solid management system in place, which management believed was capable of operating anywhere in the country, Cal-Maine was well positioned to take advantage of these conditions to achieve even greater growth. In June 1999 Cal-Maine added 1.2 million layers by acquiring Kentucky-based Hudson Brothers, Inc., followed in September 1999 by the purchase of Smith Farms, adding 3.9 million layers in Texas and Arkansas. Also during fiscal 1999 the company opened a new Kansas facility with a layer capacity of 1.25 million and pullet capacity of 250,000.

A growing concern for Cal-Maine in the late 1990s was lower egg prices, the result of increased supplies and a reduction in export sales. The company was further troubled by a sluggish stock price and began buying back shares, which management believed were undervalued. Revenues grew to more than $309 million in fiscal 1998, and then slipped to $288 million in fiscal 1999 and $287 million in fiscal 2000, when the company lost $17.4 million. Cal-Maine returned to the black in fiscal 2001, due in large measure to better egg prices, as sales soared to $358.4 million and the company posted net income of $6.8 million. Still dissatisfied with the price of its stock, however, Cal-Maine began in September 2001 to explore the possibility of returning the company to private status, but several weeks later dismissed the idea.

Business fell off again in fiscal 2002, as sales dropped to $326.2 million and Cal-Maine lost $10.6 million. Then demand for eggs began to surge due to the sudden popularity of the Atkins diet, which placed an emphasis on sources of protein, making eggs once again highly popular. As a result the price of eggs spiked, leading to an increase in Cal-Maine's revenues to $387.5 million in fiscal 2003 and a $12.2 million profit. The trend continued in fiscal 2004, even as Cal-Maine was taking steps once again to go private, due in part to the high cost of being a public company given the regulatory changes in the wake of the Enron and Worldcom accounting scandals. In August 2003 the board approved a 1-for-2,500 reverse split of the company's common shares in order to take the company private. Cal-Maine shareholders who owned less than 2,500 shares were to receive $7.35 for each share. Some shareholders cried foul and sued to stop the split, alleging that Cal-Maine was on the verge of seeing its stock price skyrocket because of increasing egg prices and was taking advantage of its management-owned status to squeeze out minority investors. In November 2003 the board reconsidered the privatization plan and terminated it. According to Adams, the board changed direction because the price of Cal-Maine's stock finally began to reflect what he thought was an appropriate value.

As a result of continued interest in the Atkins diet, Cal-Maine's sales reach $572.3 million in fiscal 2004, and net income totaled $66.4 million. But the popularity of the diet began to wane and egg prices, which had more than doubled over the course of several months, began to fall off in December 2003. The drop in prices also brought out the short-sellers on Wall Street, who were convinced that the price of Cal-Maine's stock, which reached an all-time high of $45.60 in February 2004, was due for a fall. Further interest was fueled when Adams and other insiders took advantage of the high stock price to sell some of their shares. Despite the intense speculation over the price of its stock, Cal-Maine remained a leader in the shell egg market and was well positioned to enjoy a dominant position for years to come.