SAN FRANCISCO, Sept 22 (Reuters) - Wall Street will closely watch Cal-Maine Foods' quarterly report on Monday as the largest U.S. egg producer struggles with too much production and uncertainty about consumer demand for cage-free eggs.
The Jackson, Mississippi-based company has been targeted by short sellers since 2015, when avian flu ravaged U.S. flocks and producers over-reacted to losses by adding more new hens than demand warranted, causing a slump in egg prices.
Accounting for around a quarter of U.S. egg sales, Cal-Maine is expected on average to post its second straight quarterly loss and a 53 percent drop in revenue, according to Thomson Reuters data. The company does not provide revenue projections because egg prices are typically highly unpredictable.
Part of the difficulty in predicting egg prices is that when they rise, processed food makers sometimes increase their use of substitutes and do not always switch back to eggs when prices fall, said Eric Gottlieb, analyst at D.A. Davidson.
"Maybe at this very moment it's easier to use eggs, but you can't change your formulation constantly," Gottlieb said.
Going against that trend in a bid to appeal to customers craving more authentic foods, Dunkin' Brands Group in July said it was working on higher-quality egg products, which also include soybean oil and corn starch.
Shares of Cal-Maine have fallen 25 percent in the past year. Cal-Maine rose 1.3 percent on Thursday ahead of its report on Monday.
The company has continued to lose favor on Wall Street. In the last quarter, 80 institutional investors, like hedge funds and pension funds, sold their stakes in Cal-Maine, a 74 percent increase from the previous quarter, according to Morningstar. In the same period, 58 institutional investors became new owners of Cal-Maine, a 15 percent decrease.
Short interest peaked at $900 million in February, and has since fallen to $584 million, equivalent to a quarter of Cal-Maine's market capitalization, according to S3 Partners, a financial analytics firm.
Complicating matters in the egg industry is growing demand from consumers and animal welfare groups that hens be allowed to live outside of cramped cages and given free run in barns, a change meant to reduce the animals' suffering but which increases costs.
Companies including Wal-Mart Stores, Target, McDonald's, General Mills Inc and Kellogg Co have committed to stop using eggs laid by caged hens within the next several years. But with cage-free eggs up to twice as expensive as normal eggs in supermarkets, it remains unclear how quickly consumers will make the shift.
Specialty eggs, a category including cage free, accounted for 23 percent of Cal-Maine's sales volume in the May quarter, up from 21 percent a year before. But the company also warned that low prices for regular eggs were pressuring demand for its specialty eggs.
Cal-Maine and its smaller rivals are adding cage-free hens at a pace outstripping demand for their eggs, according to CJS Securities analyst Craig Bibb.
"If you're standing in the grocery store, and the cage-free eggs are $2 and the regular eggs are 79 cents, most people are taking 79 cents," Bibb said.