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. 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.
As discussed
above in
Part I.Item 1.Business –Seasonality
, 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 concerns and restrictions during the initial outbreak
of the 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.
13
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 63% of total farm production cost
in the last 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.
More
recently,
the Russia-Ukraine
War
has had
a negative
impact on
the worldwide
supply of grain,
including corn,
putting upward
pressure on
prices. We
saw increasing
prices for
corn and
soybean meal
for fiscal
years 2022
and 2023
as a
result of
weather-
related shortfalls
in production
and yields, ongoing
supply chain disruptions
and the Russia-Ukraine
War
and its impact
on the
export markets.
Our costs for
corn and
soybean meal are
also affected
by local basis
prices. Factors that
can affect
basis levels
include transportation
and storage costs. We
saw basis levels
increase in our
areas of operation
during fiscal 2023
as a result of
higher transportation and storage costs, resulting in higher farm production
costs during the year.
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.
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,
has 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 25,
2023. 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.
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.
We
have
little,
if
any,
control
over
proper
handling
once
the
product
has
been
shipped
or
delivered. 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. We
currently maintain insurance
with respect to certain of
these risks, including product
liability insurance,
business interruption insurance and general liability
insurance, but in many cases such insurance is expensive,
difficult to obtain
and no assurance can
be given that such insurance
can be maintained in
the future on acceptable
terms, or in sufficient
amounts
to protect us against losses due to any such events, or at all.
Our profitability
may be adversely
impacted by
increases in other
input costs such
as packaging materials
and delivery
expenses, including as a result of inflation.
In addition to feed ingredient costs, other significant input costs include costs of packaging materials and delivery expenses. Our
costs of packing materials increased
during fiscal 2023 and 2022
due to rising inflation and labor
costs, and during 2022 also as
a
result
of
supply
chain
constraints
initially
caused
by
the
pandemic,
and
these
costs
may
continue
to
increase.
We
also
14
experienced increases in delivery expenses during fiscal 2023 and 2022 due to increases in fuel and labor costs for both our fleet
and contract
trucking, and
these costs
may continue
to increase.
Increases in
these costs
are largely
outside of