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 high
-protein diet trends, industry advertising campaigns,
the improved nutritional reputation of eggs and an increase
in at-home consumption
of eggs during
the COVID-19 pandemic,
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 could 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 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.
For
example, while feed
costs declined during fiscal
2024, we saw higher
prices for corn and soybean
meal in fiscal 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.
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
egg industry overproduction,
possibly resulting in
lower egg prices and lower revenue.
14
Agricultural risks,
including outbreaks
of avian
diseases such as
HPAI,
have harmed
and in
the future
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. Since the
HPAI
outbreaks in
2015, there were no reported
significant outbreaks of HPAI in the commercial table egg
layer flocks in the
U.S. until the February
– December
2022 time
period and
then again
beginning in
November 2023.
During the
third and
fourth quarters
of our
fiscal
2024, we
experienced HPAI
outbreaks within
our facilities
located in
Kansas and
Texas,
resulting in
total depopulation
of 3.1
million laying hens
and 577,000 pullets.
Both locations have
been cleared by
the USDA to resume
operations and repopulation
is expected to
be completed
before calendar
year end. As
of July 5,
2024, the
U.S. Centers for
Disease Control
and Prevention
(“CDC”) reported
outbreaks in 138
dairy herds in
12 states and
five cases in
the U.S. in
persons who were
exposed to infected
cows or poultry.
The CDC has not
reported any case of
human-to-human transmission. The
CDC considers that the
overall risk
to the general U.S. public
posed by the virus remains
low; however,
as a precautionary measure,
the U.S. Department of
Health
and
Human
Services
has
awarded
funding
to
Moderna
to
develop
a
human
vaccine
against
avian
influenza.
For
additional
information, refer to
Part II. Item 7. Management’sDiscussion and Analysis of Financial Conditionand Results of Operations –
HPAI
.
We
maintain
controls
and
procedures
designed
to reduce
the risk
of
exposing
our
flocks and
employees
to harmful
diseases;
however,
despite these
efforts, outbreaks
of avian
diseases can
and do
still occur
and have
adversely impacted,
and may
in the
future adversely impact, the health of our flocks and could in the future adversely impact the health of our employees. Continued
or intensified spread of HPAI 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 outbreaks
within our industry
can negatively impact
customer perception. 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,
product
recall
insurance
and
general
liability
insurance,
but
in
many
cases
such
insurance
is
expensive, difficult
to obtain
and no