SANDERSON FARMS INC (Form: 10-Q, Received: 08/23/2005 09:08:29)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(MARK ONE)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-14977

Sanderson Farms, Inc.

(Exact name of registrant as specified in its charter)


Mississippi		64-0615843

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


225 North Thirteenth Avenue Laurel, Mississippi		39440

(Address of principal executive offices)		(Zip Code)

(601) 649-4030

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $1 Per Share Par Value 20,393,210 shares outstanding as of July 31, 2005.

INDEX

SANDERSON FARMS, INC. AND SUBSIDIARIES


PART I.		FINANCIAL INFORMATION

Item 1.		Financial Statements (Unaudited)

		Condensed consolidated balance sheets—July 31, 2005 and October 31, 2004

		Condensed consolidated statements of income—Three months and nine months ended July 31, 2005 and 2004

		Condensed consolidated statements of cash flows—Nine months ended July 31, 2005 and 2004

		Notes to condensed consolidated financial statements—July 31, 2005

		Report of Independent Registered Public Accounting Firm

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Item 4.		Controls and Procedures

PART II		OTHER INFORMATION

Item 6.		Exhibits

SIGNATURES
EX-10.1 LEASE AGREEMENT
EX-10.2 BOND PURCHASE LOAN AGREEMENT
EX-10.3 SHARE PURCHASE AGREEMENT
EX-10.4 SHARE PURCHASE AGREEMENT
EX-15 ACCOUNTANTS' LETTER
EX-31.1 SECTION 302 CEO CERTIFICATION
EX-31.2 SECTION 302 CFO CERTIFICATION
EX-32.1 SECTION 906 CEO CERTIFICATION
EX-32.2 SECTION 906 CFO CERTIFICATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	July 31,			October 31,
	2005			2004
	(Unaudited)			(Note 1)
	(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	60,278		$	75,910
Accounts receivable, net		39,089			49,240
Inventories		79,376			75,603
Refundable income taxes		0			2,592
Prepaid expenses		12,714			13,077

Total current assets		191,457			216,422
Property, plant and equipment		482,580			399,398
Less accumulated depreciation		(248,253	)		(242,685	)

		234,327			156,713
Other assets		1,840			1,872

Total assets	$	427,624		$	375,007


Current liabilities:
Accounts payable and accrued expenses	$	62,192		$	61,413
Current maturities of long-term debt		4,391			4,385

Total current liabilities		66,583			65,798
Long-term debt, less current maturities		6,787			10,918
Claims payable		2,600			2,600
Deferred income taxes		14,695			16,350
Stockholders’ equity:
Preferred Stock:
Series A Junior Participating Preferred Stock, $100 par value: authorized 500,000 shares; none issued, Par value to be determined by the Board of Directors: authorized 4,500,000 shares; none issued
Common Stock, $1 par value: authorized 100,000,000 shares; issued and outstanding shares - 20,393,210 and 19,959,238 at July 31, 2005 and October 31, 2004, respectively		20,393			19,959
Paid-in capital		21,937			4,956
Unearned compensation		(14,306	)		0
Retained earnings		308,935			254,426

Total stockholders’ equity		336,959			279,341

Total liabilities and stockholders’ equity	$	427,624		$	375,007

See notes to condensed consolidated financial statements.

SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2005			2004			2005			2004
Net sales	$	264,650		$	293,923		$	757,116		$	793,074
Cost and expenses:
Cost of sales		207,304			222,011			611,038			609,304
Selling, general and administrative		18,406			16,137			47,818			41,640

		225,710			238,148			658,856			650,944


OPERATING INCOME		38,940			55,775			98,260			142,130
Other income (expense):
Interest income		331			101			952			196
Interest expense		(58	)		(383	)		(376	)		(1,247	)
Other		7			(69	)		75			(62	)

		280			(351	)		651			(1,113	)

INCOME BEFORE INCOME TAXES		39,220			55,424			98,911			141,017
Income tax expense		15,198			21,480			38,328			54,650

NET INCOME	$	24,022		$	33,944		$	60,583		$	86,367

Earnings per share:
Basic	$	1.20		$	1.71		$	3.03		$	4.38

Diluted	$	1.19		$	1.69		$	3.01		$	4.33

Dividends per share	$	.10		$	.08		$	.30		$	.24

Weighted average shares outstanding:
Basic		20,032			19,905			19,999			19,739

Diluted		20,149			20,090			20,130			19,960

See notes to condensed consolidated financial statements.

SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	Nine Months Ended
	July 31,
	2005			2004
	(In thousands)
Operating activities
Net income	$	60,583		$	86,367
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		18,834			19,659
Non-cash stock compensation		1,153			0
Change in assets and liabilities:
Accounts receivable, net		10,151			(8	)
Inventories		(3,773	)		(20,990	)
Other assets		113			489
Accounts payable and accrued expenses		1,716			2,537

Total adjustments		28,194			1,687

Net cash provided by operating activities		88,777			88,054
Investing activities
Other investment		0			(1,597	)
Capital expenditures		(96,197	)		(17,244	)
Net proceeds from sales of property and equipment		31			88

Net cash used in investing activities		(96,166	)		(18,753	)
Financing activities
Principal payments on long-term debt		(4,125	)		(10,420	)
Purchase and retirement of common stock (900 shares in 2004)		0			(33	)
Net proceeds from issuance of common stock (83,950 shares in 2005 and 363,012 shares in 2004)		1,956			7,865
Dividends paid		(6,074	)		(4,757	)

Net cash used in financing activities		(8,243	)		(7,345	)

Net change in cash and cash equivalents		(15,632	)		61,956
Cash and cash equivalents at beginning of period		75,910			22,224

Cash and cash equivalents at end of period	$	60,278		$	84,180

See notes to condensed consolidated financial statements.

SANDERSON FARMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 31, 2005

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended July 31, 2005 are not necessarily indicative of the results that may be expected for the year ending October 31, 2005.

The consolidated balance sheet at October 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended October 31, 2004.

NOTE 2—INVENTORIES

Inventories consisted of the following:


	July 31,		October 31,
	2005		2004
	(In thousands)
Live poultry-broilers and breeders	$	45,430	$	45,318
Feed, eggs and other		9,700		10,081
Processed poultry		13,735		11,024
Processed food		6,596		5,172
Packaging materials		3,915		4,008


	$	79,376	$	75,603

NOTE 3—NEW STOCK PLANS

The following describes major changes to benefit plans that have occurred since October 31, 2004. Refer to Notes 7 and 8 of our October 31, 2004 audited financial statements for further information on our employee benefit plans and stock option plans.

On February 17, 2005, the shareholders of the Company approved the Sanderson Farms, Inc. and Affiliates Stock Incentive Plan (the “Plan”). The Plan allows the Company’s board of directors to grant certain incentive awards including stock options, stock appreciation rights, restricted stock, and other similar awards. The Company may award up to 2,250,000 shares under the Plan. Incentive awards granted under the Plan are accounted for in accordance with APB Opinion No. 25, “Accounting for Stock issued to Employees” and related interpretations.

Pursuant to the Plan, on February 23, 2005, the Company’s board of directors approved agreements for the issuance of restricted stock to directors, executive officers and other key employees as designated by the Company’s board of directors. Restricted stock granted to non-employee directors vests three years from the date of grant and all other restricted stock granted pursuant to the Plan vests ten years from the date of grant. The vesting schedule is accelerated upon death, disability or retirement of the participant or upon a change in control, as defined. Restricted stock grants are valued based upon the closing market price of the Company’s common stock on the date of grant. Restricted stock grants are recorded as unearned compensation and are recognized as compensation expense over the vesting period. During the quarter ended April 30, 2005, the Company issued a total of 354,000 shares of restricted stock valued at $44.56 per share. During the third quarter of fiscal 2005, 8,000 shares granted on February 23, 2005 were forfeited. Compensation expense related to restricted stock grants totaled $655,000 and $1,150,000 during the three and nine months ended July 31, 2005, respectively.

Also on February 23, 2005, the Company’s board of directors approved the Management Share Purchase Plan agreements (the “Purchase Plan”) that authorized the issuance of shares of restricted stock to the Company’s directors, executive officers and other key employees as designated by the Company’s board of directors. Pursuant to the Purchase Plan, non-employee directors may elect to

receive up to 100% of their annual retainer and meeting fees in the form of restricted stock. Other participants may elect to receive up to 15% of their salary and up to 75% of any bonus earned in the form of restricted stock. The purchase price of the restricted stock is the closing market price of the Company’s common stock on the date of purchase. The Company makes matching contributions of 25% of the restricted shares purchased by participants. Restricted stock issued pursuant to the Purchase Plan vests after three years or immediately upon death, disability, retirement or change in control, as defined. If a participant’s employment is terminated for any other reason prior to the three-year vesting period, the participant forfeits the matching contribution and the Company may, at its option, repurchase restricted stock purchased by the participant at the price paid by the participant. Matching contributions are recorded as unearned compensation and are recognized as compensation expense over the vesting period. During the nine months ended July 31, 2005, the participants purchased a total of 3,835 shares of restricted stock pursuant to the Purchase Plan valued at $44.92 per share and the Company issued 929 matching shares valued at $44.94 per share. Compensation expense related to the Company’s matching contribution totaled approximately $2,600 and $3,100 during the three and nine months ended July 31, 2005.

NOTE 4—STOCK SPLIT

On January 29, 2004, the Board of Directors declared a 3 for 2 stock split effected in the form of a 50% stock dividend. This dividend was paid February 26, 2004 to stockholders of record on February 10, 2004. Share and per share data in this report has been adjusted to reflect this stock split. Cash was paid in lieu of fractional shares.

NOTE 5—EARNINGS PER SHARE

Basic net income per share was calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share was calculated by dividing net income by the weighted-average number of common shares outstanding during the period plus the dilutive effects of stock options and restricted stock outstanding. There were 117,000 and 185,000 weighted average dilutive shares outstanding for the three months ended July 31, 2005 and July 31, 2004, respectively. For the nine months ended July 31, 2005 and 2004 there were 131,000 and 221,000 weighted average dilutive shares outstanding, respectively. The calculation of dilutive net income per share includes the dilutive effect of the restricted stock grant on February 23, 2005 for the quarter and the nine months ended July 31, 2005 of 3,300 and 200 shares, respectively.

NOTE 6—NEW ACCOUNTING PRONOUNCEMENT

In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 amends Accounting Research Bulletin No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities during fiscal years beginning after June 15, 2005. The Company is currently assessing the impact that SFAS No. 151 will have on the results of operations, financial position or cash flows.

In December 2004, the FASB issued SFAS Statement No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company is required to adopt SFAS No. 123(R) in the first quarter of fiscal 2006.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our October 31, 2004 audited financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the income tax benefits of such deductions were $72,000 and $893,000 for the three months ended July 31, 2005 and 2004, respectively, and $845,000 and $3,622,000 for the nine months ended July 31, 2005 and 2004, respectively.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Sanderson Farms, Inc.

We have reviewed the condensed consolidated balance sheet of Sanderson Farms, Inc. and subsidiaries as of July 31, 2005, and the related condensed consolidated statements of income for the three-month and nine-month periods ended July 31, 2005 and 2004, and the condensed consolidated statements of cash flows for the nine-month periods ended July 31, 2005 and 2004. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Sanderson Farms, Inc. as of October 31, 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated December 23, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of October 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


		/s/ Ernst & Young LLP
New Orleans, Louisiana
August 23, 2005

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following Discussion and Analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of the Company’s Annual Report on Form 10-K for its fiscal year ended October 31, 2004.

This Quarterly Report, and other periodic reports filed by the Company under the Securities Exchange Act of 1934, and other written or oral statements made by it or on its behalf, may include forward-looking statements, which are based on a number of assumptions about future events and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and estimates expressed in such statements. These risks, uncertainties and other factors include, but are not limited to the following:

(1) Changes in the market price for the Company’s finished products and feed grains, both of which may fluctuate substantially and exhibit cyclical characteristics typically associated with commodity markets.

(2) Changes in economic and business conditions, monetary and fiscal policies or the amount of growth, stagnation or recession in the global or U.S. economies, either of which may affect the value of inventories, the collectability of accounts receivable or the financial integrity of customers.

(3) Changes in the political or economic climate, trade policies, laws and regulations or the domestic poultry industry of countries to which the Company or other companies in the poultry industry ship product, and other changes that might limit the Company’s or the industry’s access to foreign markets.

(4) Changes in laws, regulations, and other activities in government agencies and similar organizations applicable to the Company and the poultry industry and changes in laws, regulations and other activities in government agencies and similar organizations related to food safety.

(5) Various inventory risks due to changes in market conditions.

(6) Changes in and effects of competition, which is significant in all markets in which the Company competes, and the effectiveness of marketing and advertising programs. The Company competes with regional and national firms, some of which have greater financial and marketing resources than the Company.

(7) Changes in accounting policies and practices adopted voluntarily by the Company or required to be adopted by accounting principles generally accepted in the United States.

(8) Disease outbreaks affecting the production performance and/or marketability of the Company’s poultry products.

(9) Changes in the availability and cost of labor and growers.

Readers are cautioned not to place undue reliance on forward-looking statements made by or on behalf of Sanderson Farms. Each such statement speaks only as of the day it was made. The Company undertakes no obligation to update or to revise any forward-looking statements. The factors described above cannot be controlled by the Company. When used in this quarterly report, the words “believes”, “estimates”, “plans”, “expects”, “should”, “outlook”, and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

The Company’s poultry operations are integrated through its management of all functions relative to the production of its chicken products, including hatching egg production, hatching, feed manufacturing, raising chickens to marketable age (“grow out”), processing, and marketing. Consistent with the poultry industry, the Company’s profitability is substantially impacted by the market prices for its finished products and feed grains, both of which may fluctuate substantially and exhibit cyclical characteristics typically associated with commodity markets. Other costs, excluding feed grains, related to the profitability of the Company’s poultry operations, including hatching egg production, hatching, growing, and processing cost, are responsive to efficient cost containment programs and management practices.

The Company’s processed and prepared foods product line includes over 100 institutional and consumer packaged food items that it sells nationally and regionally, primarily to distributors, food service establishments and retailers. A majority of the prepared food items are made to the specifications of food service users.

On January 29, 2004, the Company announced a three-for-two stock split effected as a 50% stock dividend. The new shares were distributed on February 26, 2004, to stockholders of record as of close of business on February 10, 2004. Per share information in this Quarterly Report reflects the stock split. Cash was paid in lieu of fractional shares.

EXECUTIVE OVERVIEW OF RESULTS

Market prices for all poultry products, except leg quarters, were significantly lower during the three months ended July 31, 2005 as compared to the same period during fiscal 2004. However, during the second and third quarter of fiscal 2005 the Company benefited from lower cost of feed grains, which partially offset the effect of lower poultry prices on the Company’s profitability. While severe hot and dry weather conditions in certain parts of the country have created uncertainty regarding the size of this year’s crop of corn and soybean in the United States, the Company expects feed grain costs to be lower during the fourth quarter of fiscal 2005 as compared to the same period of fiscal 2004. During the three and nine-month periods ended July 31, 2005 the Company incurred start-up related costs at its new complex in South Georgia of approximately $2.3 million and $4.1 million, respectively. The Company will continue to incur similar costs during the fourth quarter of fiscal 2005. Overall, poultry market conditions remain balanced with good consumer demand and expected continued growth in volumes for exports.

RESULTS OF OPERATIONS

Net sales for the third quarter of fiscal 2005 were $264.6 million as compared to $293.9 million during the third quarter of fiscal 2004, a decrease of $29.3 million. Net sales of poultry products decreased $24.8 million or 9.3%, which was caused by a decrease in the average sales price of the Company’s poultry products of 11.3%, offset by an increase in the pounds of poultry products sold of 2.3%. The increase in the pounds of poultry products sold was due to an increase in the average live weight of chickens sold of 1.2% and an increase in the number of chickens sold of 1.1%. Market prices for all poultry products except leg quarters were lower during the three months ended July 31, 2005 as compared to the same period during fiscal 2004. During the third quarter of fiscal 2005 as compared to the third quarter of fiscal 2004, market prices for boneless breast meat, tenders and wings decreased 41.0%, 42.1% and 23.1%, respectively. A simple average of the Georgia dock price for whole chickens during the three months ended July 31, 2005 as compared to the three months ended July 31, 2004 decreased approximately 6.3%. However, leg quarter market prices increased 25.4% on strong demand from Russia and other parts of the world. Net sales of prepared food products decreased $4.5 million or 17.0% during the third quarter of fiscal 2005 and resulted primarily from a reduction in the pounds of prepared food products sold of 15.1%.

For the nine months ended July 31, 2005, the Company’s net sales were $757.1 million as compared to $793.1 million, a decrease of $36.0 million or 4.5%. The Company’s net sales of poultry products during the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004 decreased $28.9 million or 4.0%. The Company’s pounds of poultry products sold increased 5.5% during the first nine months of fiscal 2005 as compared to the pounds of poultry products sold during the first nine months of fiscal 2004. This increase in the pounds of poultry products sold resulted from an increase of 2.0% in the number of chickens sold, a 1.7% increase in the average live weight of chickens sold and the resumption during fiscal 2005 of sales of certain products to countries in the Far East, which sales were curtailed during the comparable period of fiscal 2004 because of political and food safety issues related to avian influenza. Despite the increase in the pounds of poultry products sold, net sales decreased as a result of lower prices for the Company’s poultry products. Market prices for boneless breast meat, tenders and wings were down 27.7%, 33.1% and 11.2%, respectively. However, market prices for leg quarters reflect strong demand and have averaged 6.5% higher during the nine months ended July 31, 2005 as compared to the same period during fiscal 2004. Net sales of prepared food products decreased $7.1 million or 8.9% during the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004 due to a reduction in the pounds of prepared food products sold of 9.9%.

For the three months ended July 31, 2005 the Company’s cost of sales was approximately $207.3 million, a decrease of $14.7 million or 6.6% as compared to the three months ended July 31, 2004. The Company’s cost of poultry products sold during the third quarter of fiscal 2005 was $187.3 million, a decrease of $5.5 million or 2.9%, which decrease is the result of lower grain costs, offset by the increase in the pounds of poultry products sold of 2.3%. The average cost of sales of poultry products per pound decreased approximately 5.0% during the three months ended July 31, 2005 due to lower cost of feed grains. Market prices for corn and soybean meal during the third quarter of fiscal 2005 were significantly lower, by 18.3% and 24.2%, respectively. For the third quarter of fiscal 2005 as compared to the same quarter during fiscal 2004, cost of sales of the Company’s prepared foods operation decreased $9.2 million or 31.4%. This decrease is a result of a decrease in the price of poultry products, which is a primary raw material for the

prepared foods division and, to a lesser extent, a decrease in the pounds of prepared food products sold. The prepared foods operation purchases most of its chicken from the Company’s poultry operations.

For the nine months ended July 31, 2005 the Company’s cost of sales was $611.0 million, an increase of $1.7 million or .3% as compared to the Company’s cost of sales for the same nine month period during fiscal 2004. Cost of sales of poultry products increased $19.4 million or 3.7% during the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004. This increase in the Company’s cost of sales of poultry products resulted from an increase in the pounds of poultry products sold of 5.5% offset by lower grain costs. Average market prices for corn and soybean meal were 20.1% and 30.0% lower during the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004. Cost of sales of prepared food products decreased $17.7 million as a result of the decrease in the pounds of prepared food products sold of 9.9% and lower prices for poultry products.

Selling general and administrative costs increased $2.3 million and $6.2 million during the three-month and nine-month periods ended July 31, 2005 as compared to the same periods in fiscal 2004. The increases are the result of expenses related to the preparations for start-up of the Company’s new poultry complex in South Georgia, which complex began operations on August 22, 2005, and increased advertising costs. During the three and nine-months ended July 31, 2005 the Company incurred costs associated with the new South Georgia complex of approximately $2.3 million and $4.1 million, respectively. Until the new plant began operations on August 22, 2005, all costs related to the plant, including salaries of management and supervisory personnel, training expenses and related costs, were recorded as general and administrative costs. The Company will continue to incur costs for training and other start-up related expenditures through the remainder of fiscal 2005. However, now that the plant is operational, most of such costs will be recorded in the Company’s financial statements as cost of sales.

The Company’s operating income for the three months ended July 31, 2005, was $38.9 million, a decrease of $16.8 million when compared to the Company’s operating income for the three months ended July 31, 2004. For the first nine months of fiscal 2005 the Company’s operating income was $98.3 million as compared to the first nine months of fiscal 2004 of $142.1 million, a decrease of $43.8 million. The lower operating margins for the three- and nine-month periods ended July 31, 2005 resulted from lower prices for the Company’s poultry products, higher grain prices incurred in late fiscal 2004 that negatively impacted earnings in the first quarter of fiscal 2005, and administrative costs associated with the start-up of the new complex in Moultrie and Adel Georgia. The Company began to benefit from favorable market prices for feed grains towards the end of the first quarter and into the second quarter of fiscal 2005. The Company expects feed grain costs to be significantly lower during the fourth quarter of fiscal 2005 as compared to the fourth quarter of fiscal 2004. Based on grain needs already priced for fiscal 2005 and current market trends in grain prices, the Company expects grain costs to be between $60.0 million and $65.0 million lower during fiscal 2005 as compared to the previous year.

Interest expense for the third quarter of fiscal 2005 decreased $325,000 as compared to the third quarter of fiscal 2004. Interest expense for the first nine months of fiscal 2005 decreased $871,000 as compared to the first nine months of fiscal 2004. The decrease in interest expense during fiscal 2005 resulted from interest capitalized to the cost of construction of the new complex in South Georgia, the new general office facility under construction in Laurel, Mississippi and lower outstanding debt.

The Company’s effective tax rate during fiscal 2005 and fiscal 2004 was 38.75%.

Net income for the third quarter of fiscal 2005 was $24.0 million or $1.19 per diluted share as compared to $33.9 million or $1.69 per diluted share during the third quarter of fiscal 2004. Net income for the first nine months of fiscal 2005 was $60.6 million or $3.01 per diluted share as compared to $86.4 million or $4.33 per diluted share for the first nine months of fiscal 2004. During the first quarter of fiscal 2004, the Company recognized $177,000, net of income taxes, for Sanderson Farms’ share in the partial settlement of lawsuits against vitamin and methionine suppliers.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s working capital at July 31, 2005 was $124.9 million and its current ratio was 2.9 to 1. This compares to working capital of $150.6 million and a current ratio of 3.3 to 1 as of October 31, 2004. During the first nine months ended July 31, 2005, the Company spent approximately $96.2 million on planned capital projects, which includes $73.3 million on the new complex in South Georgia.

The Company’s capital budget for fiscal 2005 is approximately $133.6 million, and will be funded by cash on hand, internally generated working capital and cash flows from operations. If needed, the Company has a $100.0 million revolving line of credit available. The $133.6 million fiscal 2005 capital budget includes approximately $7.2 million in operating leases, $13.0 million for the construction of a new corporate office building, and $88.5 million on the new poultry complex in South Georgia. The new complex began operations on August 22, 2005. Without operating leases, the new office building and the Georgia complex, the Company’s capital budget for fiscal 2005 would be a maintenance level budget of approximately $24.9 million.

The Company regularly evaluates both internal and external growth opportunities, including acquisition opportunities and the construction of new production assets, and conducts due diligence activities in connection with such opportunities. The cost and terms of any financing to be raised in conjunction with any growth opportunity, including the Company’s ability to raise debt or equity capital on terms and at costs satisfactory to the Company, and the effect of such opportunities on the Company’s balance sheet, are critical considerations in any such evaluation.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and assumptions, and the differences could be material.

The Company’s Summary of Significant Accounting Policies, as described in Note 1 of the Notes to the Consolidated Financial Statements that are filed with the Company’s latest report on Form 10-K, should be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management believes that the critical accounting policies and estimates that are material to the Company’s Consolidated Financial Statements are those described below.

Allowance for Doubtful Accounts

In the normal course of business, the Company extends credit to its customers on a short-term basis. Although credit risks associated with our customers are considered minimal, the Company routinely reviews its accounts receivable balances and makes provisions for probable doubtful accounts. In circumstances where management is aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve is recorded to reduce the receivable to the amount expected to be collected. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us), our estimates of the recoverability of amounts due us could be reduced by a material amount, and the allowance for doubtful accounts and related bad debt expense would increase by the same amount.

One of the Company’s long-standing customers filed for protection under Chapter 11 of the United States Bankruptcy Code on February 22, 2005. The Company’s exposure to that customer at the time of the filing was not material to its financial position and results of operations.

Inventories

Processed food and poultry inventories and inventories of feed, eggs, medication and packaging supplies are stated at the lower of cost (first-in, first-out method) or market. If market prices for poultry or feed grains move substantially lower, the Company would record adjustments to write down the carrying values of processed poultry and feed inventories to fair market value, which would increase the Company’s costs of sales.

Live poultry inventories of broilers are stated at the lower of cost or market and breeders at cost less accumulated amortization. The cost associated with broiler inventories, consisting principally of chicks, feed, medicine and payments to the growers who raise the chicks for us, are accumulated during the growing period. The cost associated with breeder inventories, consisting principally of breeder chicks, feed, medicine and grower payments are accumulated during the growing period. Capitalized breeder costs are then amortized over nine months using the straight-line method. Mortality of broilers and breeders is charged to cost of sales as incurred. If market prices for chickens, feed or medicine or if grower payments increase (or decrease) during the period, the Company could have an increase (or decrease) in the market value of its inventory as well as an increase (or decrease) in costs of sales. Should the Company decide that the nine month amortization period used to amortize the breeder costs is no longer appropriate as a result of operational changes, a shorter (or longer) amortization period could increase (or decrease) the costs of sales recorded in future periods. High mortality from disease or extreme temperatures would result in abnormal charges to cost of sales to write-down live poultry inventories.

Long-Lived Assets

Depreciable long-lived assets are primarily comprised of buildings and machinery and equipment. Depreciation is provided by the straight-line method over the estimated useful lives, which are 15 to 39 years for buildings and 3 to 12 years for machinery and equipment. An increase or decrease in the estimated useful lives would result in changes to depreciation expense.

The Company continually evaluates the carrying value of its long-lived assets for events or changes in circumstances that indicate that the carrying value may not be recoverable. As part of this evaluation, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposal. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized to reduce the carrying value of the long-lived asset to the estimated fair value of the asset. If the Company’s assumptions with respect to the future expected cash flows associated with the use of long-lived assets currently recorded change, then the Company’s determination that no impairment charges are necessary may change and result in the Company recording an impairment charge in a future period. The Company did not identify any indicators of impairment during the current fiscal period.

Accrued Self Insurance

Insurance expense for workers’ compensation benefits and employee-related health care benefits are estimated using historical experience and actuarial estimates. Stop-loss coverage is maintained with third party insurers to limit the Company’s total exposure. Management regularly reviews the assumptions used to recognize periodic expenses. If historical experience proves not to be a good indicator of future expenses, if management were to use different actuarial assumptions, or if there is a negative trend in the Company’s claims history, there could be a significant increase or decrease in cost of sales depending on whether these expenses increased or decreased, respectively.

Income Taxes

The Company determines its effective tax rate by estimating its permanent differences resulting from differing treatment of items for financial and income tax purposes. The Company is periodically audited by taxing authorities and considers any adjustments made as a result of the audits in considering the tax expense. Any audit adjustments affecting permanent differences could have an impact on the Company’s effective tax rate.

Contingencies

The Company is a party to a number of legal proceedings as discussed in Note 10 of our consolidated financial statements filed with our most recent Form 10-K. We recognize the costs of legal defense in the periods incurred. A determination of the amount of reserves required, if any, for these matters is made after considerable analysis of each individual case. At this time, the Company has not accrued any reserve for any of these matters. Further reserves may be required due to changes in the Company’s assumptions, the effectiveness of legal strategies, or other factors beyond the Company’s control. Future results of operations may be materially affected by the creation of or changes to reserves.

New Accounting Pronouncements

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company is a purchaser of certain commodities, primarily corn and soybean meal, for use in manufacturing feed for its chickens. As a result, the Company’s earnings are affected by changes in the price and availability of such feed ingredients. Feed grains are subject to volatile price changes caused by factors described below that include weather, size of harvest, transportation and storage costs and the agricultural policies of the United States and foreign governments. The price fluctuations of feed grains have a direct and material effect on the Company’s profitability.

Generally, the Company purchases its corn, soybean meal and other feed ingredients for prompt delivery to its feed mills at market prices at the time of such purchases. The Company sometimes will purchase feed ingredients for deferred delivery that typically ranges from one month to twelve months after the time of purchase. The grain purchases are made directly with our usual grain suppliers, which are companies in the regular business of supplying grain to end users, and do not involve options to purchase. Such purchases occur when senior management concludes that market factors indicate that prices at the time the grain is needed are likely to be higher than current prices, or where, based on current and expected market prices for the Company’s poultry products, management believes it can purchase feed ingredients at prices that will allow the Company to earn a reasonable return for its shareholders. Market factors considered by management in determining whether or not and to what extent to buy grain for deferred delivery include:

	•		Current market prices;

	•		Current and predicted weather patterns in the United States, South America, China and other grain producing areas, as such weather patterns might affect the planting, growing, harvesting and yield of feed grains;

	•		The expected size of the harvest of feed grains in the United States and other grain producing areas of the world as reported by governmental and private sources;

	•		Current and expected changes to the agricultural policies of the United States and foreign governments;

	•		The relative strength of United States currency and expected changes therein as it might impact the ability of foreign countries to buy United States feed grain commodities;

	•		The current and expected volumes of export of feed grain commodities as reported by governmental and private sources;

	•		The current and expected use of available feed grains for uses other than as livestock feed grains (such as the use of corn for the production of ethanol, which use is impacted by the price of crude oil); and

	•		Current and expected market prices for the Company’s poultry products.

The Company purchases physical grain, not financial instruments such as puts, calls or straddles that derive their value from the value of physical grain. Thus, the Company does not use derivative financial instruments as defined by SFAS 133, “Accounting for Derivatives for Instruments and Hedging Activities.” The Company does not enter into any derivative transactions or purchase any grain-related contracts other than the physical grain contracts described above.

The cost of feed grains is recognized in cost of sales, on a first-in-first-out basis, at the same time that the sales of the chickens that consume the feed grains are recognized.

The Company’s interest expense is sensitive to changes in the general level of U.S. interest rates. The Company maintains certain of its debt as fixed rate in nature to mitigate the impact of fluctuations in interest rates. The fair value of the Company’s fixed rate debt approximates the carrying amount at July 31, 2005. At July 31, 2005, none of the Company’s outstanding debt had a variable interest rate. Management believes the potential effects of near-term changes in interest rates on the Company’s debt is not material.

The Company is a party to no other market risk sensitive instruments requiring disclosure.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of July 31, 2005. There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended July 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

The following exhibits are filed with this report.

Exhibit 3.1 Articles of Incorporation of the Registrant dated October 19, 1978. (Incorporated by reference to Exhibit 4.1 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

Exhibit 3.2 Articles of Amendment, dated March 23, 1987, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.2 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

Exhibit 3.3 Articles of Amendment, dated April 21, 1989, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.3 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

Exhibit 3.4 Certificate of Designations of Series A Junior Participating Preferred Stock of the Registrant dated April 21, 1989. (Incorporated by reference to Exhibit 4.4 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

Exhibit 3.5 Article of Amendment, dated February 20, 1992, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.5 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

Exhibit 3.6 Article of Amendment, dated February 27, 1997, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.6 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

Exhibit 3.7 Bylaws of the Registrant, amended and restated as of December 2, 2004. (Incorporated by reference to Exhibit 3 filed with the Registrant’s Current Report on Form 8-K on December 8, 2004.)

Exhibit 10.1* Lease Agreement dated as of December 1, 2004 between Moultrie-Colquitt County Development Authority, as Lessor, and Sanderson Farms, Inc. (Processing Division) as Lessee.

Exhibit 10.2* Bond Purchase Loan Agreement between Moultrie-Colquitt County Development Authority, as Issuer, and Sanderson Farms, Inc. (Processing Division), as Purchaser.

Exhibit 10.3* Form of Agreement between Registrant and its non-employee directors who participate in its management share purchase plan, as amended.

Exhibit 10.4* Form of Agreement between Registrant and its officers and employees who participate in its management share purchase plan, as amended.

Exhibit 15* Accountants’ Letter re: Unaudited Financial Information.

Exhibit 31.1* Certification of Chief Executive Officer.

Exhibit 31.2* Certification of Chief Financial Officer.

Exhibit 32.1** Section 1350 Certification.

Exhibit 32.2** Section 1350 Certification.


*		Filed herewith.

**		Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SANDERSON FARMS, INC.

		(Registrant)

Date: August 23, 2005		By: /s/ D. Michael Cockrell

		Treasurer and Chief
		Financial Officer

Date: August 23, 2005		By: /s/ James A. Grimes

		Secretary and Principal
		Accounting Officer

INDEX TO EXHIBITS


Exhibit
Number		Description of Exhibit
3.1		Articles of Incorporation of the Registrant dated October 19, 1978. (Incorporated by reference to Exhibit 4.1 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

3.2		Articles of Amendment, dated March 23, 1987, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.2 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

3.3		Articles of Amendment, dated April 21, 1989, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.3 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

3.4		Certificate of Designations of Series A Junior Participating Preferred Stock of the Registrant dated April 21, 1989. (Incorporated by reference to Exhibit 4.4 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

3.5		Article of Amendment, dated February 20, 1992, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.5 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

3.6		Article of Amendment, dated February 27, 1997, to the Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 4.6 filed with the registration statement on Form S-8 filed by the Registrant on July 15, 2002, Registration No. 333-92412.)

3.7		Bylaws of the Registrant, amended and restated as of December 2, 2004. (Incorporated by reference to Exhibit 3 filed with the Registrant’s Current Report on Form 8-K on December 8, 2004.)

10.1*		Lease Agreement dated as of December 1, 2004 between Moultrie-Colquitt County Development Authority, as Lessor, and Sanderson Farms, Inc. (Processing Division) as Lessee.

10.2*		Bond Purchase Loan Agreement between Moultrie-Colquitt County Development Authority, as Issuer, and Sanderson Farms, Inc. (Processing Division), as Purchaser.

10.3*		Form of Agreement between Registrant and its non-employee directors who participate in its management share purchase plan, as amended.

10.4*		Form of Agreement between Registrant and its officers and employees who participate in its management share purchase plan, as amended.

15*		Accountants’ Letter re: Unaudited Financial Information.

31.1*		Certification of Chief Executive Officer

31.2*		Certification of Chief Financial Officer

32.1**		Section 1350 Certification.

32.2**		Section 1350 Certification.


* Filed herewith.

**		Furnished herewith.

PARTIES AND RECITALS........................................................................................................ 1 ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION.......................................................... 3 Section 1.1. Definitions..................................................................................... 3 Section 1.2. Construction Of Certain Terms................................................................... 10 Section 1.3. Table of Contents; Titles and Headings.......................................................... 10 Section 1.4. Contents of Certificates or Opinions............................................................ 10 ARTICLE II REPRESENTATIONS AND UNDERTAKINGS................................................................................. 12 Section 2.1. Representations by the Issuer................................................................... 12 Section 2.2. Representations by the Company.................................................................. 14 ARTICLE III LEASING CLAUSE; SECURITY; TITLE................................................................................. 15 Section 3.1. Lease of the Project............................................................................ 15 Section 3.2. Security for Payments Under the Bond............................................................ 15 Section 3.3. Warranties and Covenants of Issuer as to Title.................................................. 15 ARTICLE IV ACQUISITION AND INSTALLATION OF THE PROJECT; ISSUANCE OF THE BOND; FUNDS......................................... 16 Section 4.1. Agreement to Acquire and Install the Project.................................................... 16 Section 4.2. Agreement to Issue the Bond; Application of Proceeds............................................ 16 Section 4.3. Disbursements of Bond Proceeds.................................................................. 16 Section 4.4. Obligation of the Parties to Cooperate in Furnishing Documents; Reliance of the Custodian....... 17 Section 4.5. Excess Costs.................................................................................... 17 Section 4.6. Authorized Company and Issuer Representatives................................................... 17 Section 4.7. Enforcement of Remedies Against Contractors and Subcontractors and Their Sureties and Against Manufacturers and Vendors....................................................................... 17 Section 4.8. Establishment of Completion Date................................................................ 18 ARTICLE V EFFECTIVE DATE OF THIS LEASE; DURATION OF LEASE TERM; RENTAL PROVISIONS; NATURE OF OBLIGATIONS OF COMPANY........ 19 Section 5.1. Effective Date of this Lease; Duration of Lease Term............................................ 19 Section 5.2. Delivery and Acceptance of Possession........................................................... 19 Section 5.3. Rents and Other Amounts Payable................................................................. 19 Section 5.4. Place of Rental Payments........................................................................ 20 Section 5.5. Nature of Obligations of Company Hereunder...................................................... 20 Section 5.6. Restrictions on the Use of Project.............................................................. 21

ARTICLE VI MAINTENANCE, TAXES, INSURANCE AND EMINENT DOMAIN................................................................. 22 Section 6.1. Maintenance of Project.......................................................................... 22 Section 6.2. Removal of Fixtures and Equipment............................................................... 22 Section 6.3. Taxes, Other Governmental Charges, and Utility Charges.......................................... 23 Notwithstanding the foregoing, under the Act the Project, being property of the Issuer, is subject to the same exemption from ad valorem taxation as property of the City and County, and it is not expected that any actual ad valorem taxes will be due with respect to any tax year if on January 1 of such year the Project is owned by the Issuer................................................... 23 Section 6.4. Insurance Required.............................................................................. 23 Section 6.5. Application of Net Proceeds of Insurance........................................................ 24 Section 6.6. Advances by the Issuer or the Holder............................................................ 24 Section 6.7. Eminent Domain.................................................................................. 25 ARTICLE VII DAMAGE, DESTRUCTION, AND CONDEMNATION........................................................................... 26 Section 7.1. Election to Repair, Restore or Replace.......................................................... 26 Section 7.2. Election Not to Repair, Restore or Replace...................................................... 26 ARTICLE VIII ADDITIONAL COVENANTS; ADDITIONAL BONDS......................................................................... 27 Section 8.1. No Warranty of Condition or Suitability by the Issuer........................................... 27 Section 8.2. Access to the Project and Records............................................................... 27 Section 8.3. Company to Maintain its Existence; Conditions Under Which Exceptions Permitted.................. 27 Section 8.4. Good Standing in the State...................................................................... 27 Section 8.5. Indemnity....................................................................................... 27 Section 8.6. Licenses and Permits............................................................................ 28 Section 8.7. Compliance with Laws............................................................................ 28 ARTICLE IX ASSIGNMENT, SUBLEASING, ENCUMBERING, AND SELLING; REDEMPTION; RENT PREPAYMENTS AND ABATEMENT; INSTALLATION OF COMPANY'S OWN MACHINERY AND EQUIPMENT............................................................................ 30 Section 9.1. Assignment and Subleasing....................................................................... 30 Section 9.2. Restrictions on Sale, Encumbrance, or Conveyance of the Project by the Issuer................... 31 Section 9.3. Pledge of this Lease by the Company; Easements.................................................. 31 Section 9.4. Redemption of Bond.............................................................................. 31 Section 9.5. Prepayment of Rents............................................................................. 31 Section 9.6. Company Entitled to Certain Rent Abatements if Bond Paid Prior to Maturity...................... 32 Section 9.7. Installation of Other Machinery and Rented Equipment............................................ 32 Section 9.8. Reference to Bond Ineffective After Bond Paid................................................... 32 ARTICLE X EVENTS OF DEFAULT AND REMEDIES................................................................................... 33 Section 10.1. Events of Default Defined....................................................................... 33 Section 10.2. Remedies on Default............................................................................. 33 Section 10.3. Remedies Not Exclusive.......................................................................... 34

Section 10.4. Company to Pay Fees and Expenses................................................................ 34 Section 10.5. Waiver of Events of Default..................................................................... 35 ARTICLE XI OPTIONS IN FAVOR OF COMPANY...................................................................................... 36 Section 11.1. Company's Option to Terminate Lease Term........................................................ 36 Section 11.2. Option to Purchase Project...................................................................... 36 Section 11.3. No Obligation to Exercise Options............................................................... 36 Section 11.4. Conveyance on Exercise of Option to Purchase.................................................... 36 Section 11.5. Public Purpose of Lease and Option to Purchase.................................................. 37 Section 11.6. Priority Position of Option..................................................................... 37 ARTICLE XII MISCELLANEOUS................................................................................................... 38 Section 12.1. Quiet Enjoyment................................................................................. 38 Section 12.2. Notices......................................................................................... 38 Section 12.3. Construction and Binding Effect................................................................. 39 Section 12.4. Severability.................................................................................... 39 Section 12.5. Amounts Remaining in the Funds.................................................................. 39 Section 12.6. Fees Paid by the Company........................................................................ 39 Section 12.7. No Issuer Liability; Immunity of Members, Officers, and Employees of Issuer..................... 39 Section 12.8. Amendments, Changes, and Modifications.......................................................... 40 Section 12.9. Execution of Counterparts....................................................................... 40 Section 12.10. Law Governing Construction of this Lease........................................................ 40 Section 12.11. Covenants Run with Project...................................................................... 40 Section 12.12. Subordination to Security Document.............................................................. 40 Section 12.13. Net Lease....................................................................................... 40 Section 12.14. Surrender of Project............................................................................ 40 Section 12.15. Immunity of Members, Managers, and Employees of Company......................................... 40 Section 12.16. Payments Due on Other than Business Days........................................................ 41 Section 12.17. Clawback Provision.............................................................................. 41

To the Issuer: Moultrie-Colquitt County Development Authority 116 First Avenue, S. E. Moultrie, GA 31776 Attn: Chairman Fax: (229) 890-2638 To the Company Sanderson Farms, Inc. (Processing Division) P.O. Box 988 Laurel, Mississippi 39441 Attn: CF0 Fax: (601) 425-0704

By:____________________________ Chairman ____________________________________ ATTEST: Unofficial Witness _______________________________ ____________________________________ Secretary Notary Public My Commission Expires:______________ (NOTARY SEAL) (AUTHORITY SEAL)

Signed and sealed in the presence of: By:____________________________ Name:__________________________ Title:_________________________ ____________________________________ Unofficial Witness ATTEST: ____________________________________ _______________________________ Notary Public Name:__________________________ Title:_________________________ My Commission Expires:______________ (NOTARY SEAL) (CORPORATE SEAL)

______ None ______ As described on the attached page. MOULTRIE-COLQUITT COUNTY DEVELOPMENT AUTHORITY BY: SANDERSON FARMS, INC. (PROCESSING DIVISION) By: ________________________ Authorized Company Representative