ITEM 1A.
RISK FACTORS
Our
business
and
results
of
operations
are
subject
to
numerous
risks
and
uncertainties,
many
of
which
are
beyond
our
control. The following is a description of the known factors that may materially affect
our business, financial condition or results
of operations. They
should be considered
carefully,
in addition
to the information
set forth
elsewhere in
this Annual
Report on
Form
10-K,
including
under
Part
II.
Item 7.
Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations,
in
making
any
investment
decisions
with
respect
to
our
securities. Additional
risks
or
uncertainties
that
are
not
currently known
to us,
or that we
are aware
of but
currently deem
to be
immaterial or
that could
apply to
any company
could
also materially adversely affect our business, financial condition or results
of operations.
INDUSTRY RISK FACTORS
Market prices
of wholesale
shell eggs
are volatile,
and decreases
in these
prices can
adversely impact
our revenues
and
profits.
Our operating results are significantly
affected by wholesale shell egg
market prices, which fluctuate widely and
are outside our
control. As
a result,
our prior
performance
should not
be presumed
to be
an accurate
indication of
future performance.
Under
certain circumstances, small increases
in production, or small
decreases in demand, within
the industry might
have a large adverse
effect on shell egg prices. Low shell egg prices adversely affect
our revenues and profits.
Market prices for
wholesale shell eggs
have been volatile
and cyclical. Shell
egg prices have
risen in the
past during periods
of
high demand such as the initial outbreak of
the COVID-19 pandemic and periods when high protein
diets are popular. Shell egg
prices
have
also
risen
during
periods
of
constrained
supply,
such
as
the
latest
highly
pathogenic
avian
influenza
(“HPAI”)
outbreak
that
was
first
detected
in
domestic
commercial
flocks
in
February
2022.
We
believe,
based
on
published
industry
estimates, that the HPAI outbreak has impacted approximately 30.7 million
laying hens in 2022 through
June. During times when
prices are
high, the
egg industry
has typically
geared up
to produce
more eggs,
primarily by
increasing the
number of
layers,
which historically has ultimately resulted in an oversupply of eggs,
leading to a period of lower prices.
Table of Contents
13
As discussed
above under
the heading
“Seasonality” in
Part I.
Item 1.
Business, seasonal
fluctuations impact
shell egg
prices.
Therefore, comparisons of our sales
and operating results between different quarters within
a single fiscal year
are not necessarily
meaningful comparisons.
A decline in consumer demand for shell eggs can negatively impact our
business.
We
believe the
increase in
meals prepared
at home
due to
COVID-19 pandemic,
high-protein diet
trends, industry
advertising
campaigns
and
the
improved nutritional
reputation
of
eggs have
all contributed
at
one
time or
another
to
increased
shell egg
demand. However,
it is possible that the
demand for shell eggs
will decline in the future.
Adverse publicity relating
to health or
safety
concerns
and
changes
in
the
perception
of
the
nutritional
value
of
shell
eggs,
changes
in
consumer
views
regarding
consumption of
animal-based products,
as well
as movement
away from
high protein
diets, could
adversely affect
demand for
shell eggs, which would have a material adverse effect on our
future results of operations and financial condition.
Feed costs are volatile and increases in these costs can
adversely impact our results of operations.
Feed costs are the largest element of our shell
egg (farm) production cost, ranging from 55%
to 62% of total farm production cost
in the prior five fiscal
years. Although feed ingredients, primarily corn
and soybean meal, are
available from a number of
sources,
we do
not have
control over
the prices
of the
ingredients we
purchase, which
are affected
by weather,
various global
and U.S.
supply and demand
factors, transportation
and storage costs,
speculators, and
agricultural, energy
and trade policies
in the U.S.
and internationally and
most recently the Russia-Ukraine
war. While we
do not import
corn or soy directly
from the region, the
Russia-Ukraine
war has
had
a negative
impact on
the worldwide
supply of
grain, including
corn, putting
upward pressure
on
prices.
Increases in feed costs
unaccompanied by increases
in the selling price of
eggs can have a material
adverse effect on the
results of our
operations and cash flow.
Alternatively,
low feed costs can
encourage industry overproduction,
possibly resulting
in lower egg prices and lower revenue.
Shell
eggs
and
shell
egg
products
are
susceptible
to
microbial
contamination,
and
we
may
be
required
to,
or we
may
voluntarily, recall
contaminated products.
Shell eggs
and shell
egg products
are vulnerable
to contamination
by pathogens
such as
Salmonella. The
Company maintains
policies and procedures designed to comply with the complex rules and regulations governing egg production, such as The Final
Egg Rule issued
by the
FDA "Prevention
of Salmonella Enteritidis
in Shell
Eggs During Production,
Storage, and
Transportation,”
and the FDA’s Food Safety Modernization Act.
Shipment of contaminated
products, even if
inadvertent, could result
in a
violation
of law and
lead to increased
risk of exposure
to product liability
claims, product recalls
and scrutiny by
federal and state
regulatory
agencies. In
addition,
products
purchased
from
other
producers
could
contain
contaminants
that
might
be
inadvertently
redistributed by us. As such, we might decide or be required
to recall a product if we, our customers
or regulators believe it poses
a potential
health risk.
Any product
recall could
result in
a loss
of consumer
confidence in
our products,
adversely affect
our
reputation
with existing
and potential
customers and
have a
material adverse
effect
on our
business, results
of operations
and
financial condition.
Agricultural risks, including outbreaks of avian
disease, could harm our business.
Our shell egg
production activities are
subject to a variety
of agricultural risks.
Unusual or extreme
weather conditions, disease
and pests can materially and adversely affect the quality and quantity of shell eggs
we produce and distribute. Outbreaks of avian
influenza among poultry occur periodically
worldwide and have occurred sporadically
in the U.S. Most recently,
an outbreak of
HPAI,
which
was
first
detected
in
February
2022,
impacted
the
industry.
Prior
to
2022,
there
was
another
significant
HPAI
outbreak in the U.S. impacting poultry during 2015. There have been no positive tests for HPAI
at any Cal-Maine Foods’ owned
or contracted facility as
of July 19,
2022. The Company maintains
controls and procedures designed
to reduce the
risk of exposing
our flocks to harmful
diseases; however, despite these efforts, outbreaks of avian
disease can and do
still occur and may
adversely
impact the
health of
our flocks.
An outbreak
of avian
disease could
have a
material adverse
impact on
our financial
results by
increasing
government
restrictions
on
the
sale
and
distribution
of
our
products
and
requiring
us
to
euthanize
the
affected
layers. Negative publicity from an outbreak within our
industry can negatively impact customer perception, even if
the outbreak
does
not
directly
impact
our flocks.
If
a
substantial portion
of
our
layers
or production
facilities are
affected
by
any
of these
factors in any given quarter or year, our business, financial condition, and results of operations could be materially and adversely
affected.
BUSINESS AND OPERATIONAL
RISK FACTORS
Table of Contents
14
The COVID-19 pandemic has had an adverse impact on our business and operations
Since early
2020, the
coronavirus ("COVID-19")
outbreak, characterized
as a
pandemic by
the World
Health Organization
on
March 11, 2020,
has caused significant
disruptions in international
and U.S. economies
and markets. The
effects of COVID-19
have had,
and may
continue to
have (if
a significant
resurgence occurs
including due
to variants
or related
strains of
the virus
become prevalent)
a negative impact on our business. Negative impacts have included, and
may include in the future, disruptions
in
the
supply
chain
resulting
in
increased
costs
and
decreased
availability
of
packaging
supplies,
increased
labor
costs
and
increased medical costs.
Our acquisition growth strategy subjects us to various risks.
As discussed in
Part I. ItemI. Business –Growth Strategy
, we plan
to pursue a
growth strategy that includes
selective acquisitions
of other
companies engaged
in the
production and
sale of
shell eggs,
with a
priority on
those that
will facilitate
our ability
to
expand our cage-free shell egg production capabilities in key locations and markets. We may over-estimate or under-estimate the
demand
for
cage-free
eggs,
which
could
cause
our
acquisition
strategy
to
be
less-than-optimal
for
our
future
growth
and
profitability.
The
number
of existing