A N N U A L R E P O R T 225 North 13th Avenue Post Office Box 988 Laurel, Mississippi

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2 COMPANY PROFILE Sanderson Farms, Inc. is engaged in te production, processing, marketing and distribution of fres and frozen cicken and oter prepared food items. Te Company sells its cicken products primarily under te Sanderson Farms brand name to retailers, distributors and casual dining operators in te souteastern, soutwestern and western United States. Troug its foods division, te Company also sells, under te Sanderson Farms name, processed and prepared frozen entrees and oter specialty food products to distributors, food service establisments and retailers. Te common sares of Sanderson Farms, Inc. are traded on te Nasdaq National Market under te symbol SAFM. Sanderson Farms is a registered trademark of Sanderson Farms, Inc.

3 FINANCIAL HIGHLIGHTS (In tousands, except per sare data) OCTOBER THE FISCAL YEAR Net sales $ 1,052,297 $ 872,235 Net income $ 91,428 $ 54,061 Basic earnings per sare $ 4.62 $ 2.78 Diluted earnings per sare $ 4.57 $ 2.75 Dividends per sare $ 0.84 $ 0.61 Weigted average sares outstanding Basic 19,789 19,462 Diluted 19,995 19,689 AT FISCAL YEAR-END Working capital $ 150,624 $ 82,236 Total assets $ 375,007 $ 298,905 Long-term debt, less current maturities $ 10,918 $ 21,604 Stockolders' equity $ 279,341 $ 197,099 1

4 LETTER TO SHAREHOLDERS By every measure, fiscal 2004 was a very successful year for Sanderson Farms. Our focus on operational execution and ability to capitalize on favorable market conditions resulted in te strongest performance in our istory. We are proud to sare wit you our accomplisments and, more importantly, we are pleased to deliver anoter year of improved earnings to our sareolders. Fiscal 2004 was marked by record sales tat exceeded $1.0 billion for te first time, a significant milestone for Sanderson Farms. Notably, tis number exceeded te previous record of $872.2 million in sales for fiscal 2003 by over 20 percent. Net income for te year totaled $91.4 million, or $4.57 per diluted sare, compared wit net income of $54.1 million, or $2.75 per diluted sare, for last year. During fiscal 2004, te Company recognized $177,000, net of income taxes, for Sanderson Farms sare in te partial settlement of lawsuits against vitamin and metionine suppliers for overcarges, compared wit total similar recoveries of $7.6 million, net of income taxes, or $0.38 per diluted sare, during fiscal We were fortunate to benefit from favorable market conditions in fiscal 2004, caracterized by strong consumer demand for cicken and iger market prices. Overall, te average sales price for poultry products during fiscal 2004 was up over 17 percent compared wit fiscal Tese improved prices more tan offset te iger costs for corn and soybean meal, our primary feed ingredients, we experienced during te second alf of our fiscal year. Our plant costs during fiscal 2004 continued to rank among te lowest in te industry, and our live grow-out performed exceptionally well. We are especially pleased to report tat income from operations for te year was a record $150.2 million, a significant increase over $90.5 million in fiscal Our outstanding performance for te year reflects te strengt of our operations, a favorable sales mix and iger volumes. During fiscal 2004, we broadened our market scope and strengtened our position as a leading brand of te finest, 100% natural fres cicken. Our sales programs continued to gain momentum in 2004, and we will work ard to build on our success in te marketplace and furter extend te reac of our brand in Te Sanderson Farms name continues to be well received in te marketplace and our valued customers include a growing number of retail grocery stores, food service accounts and national distributors. Our strong customer relationsips and unwavering commitment to exceptional service allowed us to continue to grow our brand over te past year. We were also pleased wit te positive acceptance of our fres cicken advertising program we kicked off in all of our markets beginning in January We look forward to continuing tis program wit new ads during fiscal Our operations ave continued to run at near full capacity and te Company processed over 273 million cickens, or a record 1.6 billion dressed pounds, in fiscal We look forward to furter growt wit te construction of Sanderson Farms new poultry complex in Sout Georgia. In May 2004, we announced tat sites in Colquitt and Cook Counties, were selected for te construction of a new poultry complex. Sites near Adel in Cook County, were selected for a new feed mill and atcery, wile a site near Moultrie in Colquitt County, was selected for te construction of a new poultry processing plant and wastewater treatment facility. Tese facilities will comprise a state-of-te-art poultry complex wit capacity to process 1.25 million birds per week at full capacity. Construction is underway as planned and we expect initial operations at te new complex will begin during te Company s fourt fiscal quarter of We believe our expansion into te state of Georgia offers a unique opportunity to begin te next pase of growt for Sanderson Farms. Te location of tis new state-of-teart poultry complex will put us closer to a growing list of customers in te souteast region of te country. More importantly, we believe tis expansion will enance our ability to drive revenues and earnings, and allow us to continue our record of building value for our sareolders. 2

5 LETTER TO SHAREHOLDERS Since inception, Sanderson Farms as adered to a business model tat balances te need to deliver longterm sareolder value wit social responsibility. As a testament to tis model, we were pleased to again ave te opportunity to sare our success wit oters less fortunate in fiscal Among te many oter organizations te Company supported wit financial gifts during te year, our Board of Directors approved a substantial contribution to te general operating fund of te United Service Organizations, or USO, marking te tird consecutive year we ave supported tis organization. We continue to support te mission of te USO and its efforts to assist our armed forces, particularly wile our nation is engaged in conflict. We ope tat our contribution will benefit te men and women wo ave been deployed in Iraq and around te world to protect our freedom, as well as te many families and individuals wo stand beind tem. In te fall of 2004, we witnessed wat is clearly te most devastating urricane activity in recent istory in bot Florida and te Gulf Coast areas of Alabama and Mississippi. We are proud tat, in addition to te support given to te local capter of te American Red Cross, te Company s Board approved a special $100,000 contribution to te American Red Cross Disaster Relief Fund to support te many families and individuals, including our customers, affected by tese urricanes. We commend te men and women of Sanderson Farms wo spent many ours boxing ice in our plants and distributing tons of ice to families left witout electricity in te days following te storms. We are proud of Sanderson Farms record of social responsibility and we remain committed to te guiding principals tat ave provided a framework for our continued success. Looking aead, we enter fiscal 2005 wit confidence tat we will continue to build on our momentum and furter extend our record of growt. Wile we certainly do not expect te peak pricing we experienced during fiscal 2004, te outlook appears promising for continued strong consumer demand for cicken and improvement in exports, wic sould produce a favorable market environment in fiscal We also will realize a significant reduction in our operating costs wit materially lower prices projected for corn and soybean meal, our primary feed ingredients. We ave already contracted for a portion of our feed grain needs for fiscal 2005, and we expect to realize savings of between $60 and $65 million during fiscal 2005 compared wit fiscal Just as we did at te beginning of fiscal 2004, we met wit our managers early tis fiscal year to identify opportunities in our plants, in te field and in sales tat we will work to capture during fiscal 2005, and we expect our overall operating performance to continue to improve. Our success in fiscal 2004 reflects our ability to execute and a commitment to continually raising our standards of performance. We salute te incredible efforts of everyone associated wit Sanderson Farms - our Board, managers, employees and our contract producers - wo worked tirelessly over te past decade to execute a growt plan tat as tripled te size of te Company. Tese same people are to be commended for a performance during 2004 tat once again saw Sanderson Farms operating at te top of our industry, and we look forward wit great expectations to wat we can accomplis in te future. We are excited about te opportunities aead for Sanderson Farms and our prospects for continued growt. As always, our primary objective is to deliver greater value to our sareolders. Our core strengts, including operational excellence, a proven product mix, exceptional customer service, financial strengt and our new expansion opportunity in Georgia, make us confident tat we will reac our objectives in fiscal Tank you for te support your investment provides. Sincerely, Joe F. Sanderson, Jr. Cairman and Cief Executive Officer 3

6 Sales exceeded $1 billion tis year Our record financial and operating performance in fiscal 2004 as positioned Sanderson Farms among te top six poultry producers in te United States. Founded in 1947, Sanderson Farms was built on a foundation of onesty, integrity and family values. We are very proud tat tese same values ave allowed us to acieve record growt and consistently operate at te top of our industry. Today, Sanderson Farms is recognized in te market as a leading provider of a wide range of cicken products and processed and prepared food items. We sip over 1.5 billion pounds of cicken products annually to nearly every state in te United States, muc of it packaged under te Sanderson Farms label. Consumers can find our products werever tey prefer to eat or sop for food, from casual dining restaurants, retailers, and club stores to teir favorite local grocery store. No matter were our products are sold, te Sanderson Farms brand always stands for te finest cicken on te market. We ave built our reputation in te marketplace wit an unrelenting focus on superior product quality, exceptional customer service and a strong brand identity. 4

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10 Sanderson Farms cicken is 100% natural Sanderson Farms as always delivered value to its customers wit fres, ig-quality products. In every market we serve trougout te United States and te world, our cicken receives te same care and attention. Sanderson Farms brand of fres cicken is 100% natural, witout any added salt, pospates or brots. Our trusted brand is supported by an exceptional sales and marketing team. We offer additional value by packaging and labeling our products to meet our customers specific mercandising needs. In addition, we sell over 100 prepared food items tat reflect te same quality wit added innovation and convenience suited for today s lifestyles. From soups and appetizers to fabulous entrees, Sanderson Farms offers a full menu of delicious, ig-quality prepared foods. In packaging our cicken and frozen foods, we make sure eac piece is of te absolute finest, most wolesome quality available. No matter were tey buy our products, wen consumers see te Sanderson Farms label on fres cicken, tey know tey are getting delicious, natural, 100% cicken. 8

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14 Now serving many of te nation s most popular grocery cains and restaurants Sanderson Farms enjoys a long-standing tradition of providing fres, quality products and exceptional customer service. Our ability to anticipate and meet te current demands of te marketplace as been a allmark of our success. We work ard to offer a product line tat reflects te canging taste preferences of consumers, and provides te assurance of always serving fres, ig-quality cicken. Customer satisfaction as always been a top priority for everyone associated wit Sanderson Farms. We place a ig value on te strong long-term relationsips we enjoy wit many customers. Our customers know te Sanderson Farms brand stands for quality, trust and convenience. Weter it is fres cicken served at a favorite restaurant, a ome-cooked family dinner, or prepared food items for busy working families, we ave te products people want. And wen customers buy our products, tey know tey are getting more tan just ig-quality products. Tey are also getting a strong commitment to service and te expertise of te entire Sanderson Farms team. Our customers always know tey can count on us to deliver exceptional value. 12

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18 MESSAGE FROM THE CHIEF FINANCIAL OFFICER Sanderson Farms delivered a record financial and operating performance in fiscal Our ability to drive revenues and earnings reflects solid execution of a strategy tat as allowed us to continue to acieve considerable, but manageable growt. At te same time, we significantly enanced our financial position, providing us wit a strong foundation for furter success. Our disciplined approac to financial management as been a key differentiator for te Company and as allowed us to consistently maintain a financial position tat ranks among te strongest in te poultry industry. More importantly, we ave te financial flexibility to pursue te next stage of our growt and continue to take advantage of new market opportunities as tey present temselves. Maintaining a strong balance seet and carefully managing our working capital ave always been top priorities for Sanderson Farms. At te end of our fiscal year, our balance seet reflected $75.9 million in cas and cas equivalents, stockolders equity of $279.3 million and net working capital of $150.6 million. Te current ratio was a ealty 3.3 to 1 at te end of fiscal An inerent focus of our financial strategy is an empasis on strong cas flow tat allowed us to retire over $10 million of debt tis year. As a result, our total debt at year-end was $15.3 million and our debt to total capitalization ratio was 5.2 percent compared wit 11.6 percent a year ago. For fiscal 2004, interest expense was $1.6 million, a 40 percent decrease from te $2.5 million paid for interest during fiscal 2003, reflecting our lower outstanding debt. During fiscal 2004, we generated cas flow well in excess of our capital expenditure needs and were pleased to again significantly reduce debt and reward our sareolders troug dividends. During te fourt fiscal quarter, te Board of Directors declared a special dividend of $0.50 per sare and increased te regular quarterly dividend to reflect a new annual dividend rate of $0.40 per sare. We are pleased tat our substantial progress enabled te Board to take tese actions and provided an opportunity to sare our success wit our sareolders. During fiscal 2004, we spent approximately $27.5 million on planned capital projects. We expect tat our capital expenditures for fiscal 2005 will be approximately $125 million, and will be funded by cas on and, internally generated working capital and cas flows from operations. Our capital budget includes approximately $7.2 million in operating leases, $13 million for construction of a new corporate office building, and $88.3 million for te Company s new poultry complex in Colquitt and Cook Counties, Georgia. We are proceeding on scedule and expect tat initial operations at te new complex will begin during te Company s fourt fiscal quarter of Our conservative approac to financial management as served us well and allowed us to witstand te business cycles tat caracterize our industry. As we enter fiscal 2005, we intend to stay on course by maintaining a strong financial position and creating a secure foundation for te future. We recognize tat our primary objective as a public company is to protect te interests of our sareolders and to reward tem for teir investment and confidence in Sanderson Farms. Tank you for your unwavering support. Sincerely, D. Micael Cockrell Treasurer and Cief Financial Officer 16

19 SELECTED FINANCIAL DATA (In tousands, except per sare data) YEAR ENDED OCTOBER Net sales $ 1,052,297 $ 872,235 $ 743,665 $ 706,002 $ 605,911 Operating income (loss) 150,154 90,522 49,977 51,094 (588) Net income (loss) 91,428 54,061 28,840 27,784 (5,571) Basic earnings (loss) per sare (0.27) Diluted earnings (loss) per sare (0.27) Working capital 150,624 82,236 68,452 76,969 71,334 Total assets 375, , , , ,856 Long-term debt, less current maturities 10,918 21,604 49,969 77, ,491 Stockolders equity 279, , , , ,015 Cas dividends declared per sare $ 0.84 $ 0.61 $.27 $ 0.13 $ 0.13 Q U ARTERLY FINANCIAL DATA (In tousands, except per sare data) (Unaudited) FISCAL YEAR 2004 FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER Net sales $ 226,441 $ 272,710 $ 293,923 $ 259,223 Operating income 31,383 54,972 55,775 8,024 Net income 18,986 33,437 33,944 5,061 Diluted earnings per sare $ 0.95 $ 1.67 $ 1.69 $ 0.25 (In tousands, except per sare data) (Unaudited) FISCAL YEAR 2003 FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER Net sales $ 184,188 $ 201,184 $ 232,151 $ 254,712 Operating income 9,404 21,322 25,726 34,070 Net income 5,337 12,816 15,408 20,500 Diluted earnings per sare $ 0.27 $ 0.65 $ 0.78 $

20 MANAGEMENT S DISCUSSION AND ANALYSIS CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE PERFORMANCE Tis Annual Report, te periodic reports filed by te Company under te Securities Excange Act of 1934, and oter written or oral statements made by it or on its bealf, may include forward-looking statements, wic are based on a number of assumptions about future events and are subject to various risks, uncertainties and oter factors tat may cause actual results to differ materially from te views, beliefs and estimates expressed in suc statements. Tese risks, uncertainties and oter factors include, but are not limited to te following: (1) Canges in te market price for te Company s finised products and feed grains, bot of wic may fluctuate substantially and exibit cyclical caracteristics typically associated wit commodity markets. (2) Canges in economic and business conditions, monetary and fiscal policies or te amount of growt, stagnation or recession in te global or U.S. economies, eiter of wic may affect te value of inventories, te collectability of accounts receivable or te financial integrity of customers. (3) Canges in te political or economic climate, trade policies, laws and regulations or te domestic poultry industry of countries to wic te Company or oter companies in te poultry industry sip product, and oter canges tat migt limit te Company s or te industry s access to foreign markets. (4) Canges in laws, regulations, and oter activities in government agencies and similar organizations applicable to te Company and te poultry industry and canges in laws, regulations and oter activities in government agencies and similar organizations related to food safety. (5) Various inventory risks due to canges in market conditions. (6) Canges in and effects of competition, wic is significant in all markets in wic te Company competes, and te effectiveness of marketing and advertising programs. Te Company competes wit regional and national firms, some of wic ave greater financial and marketing resources tan te Company. (7) Canges in accounting policies and practices adopted voluntarily by te Company or required to be adopted by accounting principles generally accepted in te United States. (8) Disease outbreaks affecting te production performance and/or marketability of te Company s poultry products. (9) Canges in te availability and cost of labor and growers. Readers are cautioned not to place undue reliance on forward-looking statements made by or on bealf of Sanderson Farms. Eac suc statement speaks only as of te day it was made. Te Company undertakes no obligation to update or to revise any forward-looking statements. Te factors described above cannot be controlled by te Company. Wen used in tis Annual Report, te words believes, estimates, plans, expects, sould, outlook and anticipates and similar expressions, as tey relate to te Company or its management, are intended to identify forward-looking statements. GENERAL Te Company s poultry operations are integrated troug its control of all functions relative to te production of its cicken products, including atcing egg production, atcing, feed manufacturing, raising cickens to marketable age ( grow-out ), processing and marketing. Consistent wit te poultry industry, te Company s profitability is substantially impacted by te market price for its finised products and feed grains, bot of wic may fluctuate substantially and exibit cyclical caracteristics typically associated wit commodity markets. Oter costs, excluding feed grains, related to te profitability of te Company s poultry operations, including atcing egg production, atcing, growing, and processing cost, are responsive to efficient cost containment programs and management practices. Over te past tree fiscal years, tese oter production costs ave averaged approximately 62.5% of te Company s total production costs. 18

21 MANAGEMENT S DISCUSSION AND ANALYSIS Te Company believes tat value-added products are subject to less price volatility and generate iger, more consistent profit margin tan wole cickens ice packed and sipped in bulk form. To reduce its exposure to market cyclicality tat as istorically caracterized commodity cicken market prices, te Company as increasingly concentrated on te production and marketing of value-added product lines wit empasis on product quality, customer service, and brand recognition. Te Company adds value to its poultry products by performing one or more processing steps beyond te stage were te wole cicken is first saleable as a finised product, suc as cutting, deep cilling, packaging and labeling te product. Te Company believes tat one of its major strengts is its ability to cange its product mix to meet customer demands. Te Company s processed and prepared foods product line includes approximately 100 institutional and consumer packaged food items tat it sells nationally, primarily to distributors, food service establisments and retailers. A majority of te prepared food items are made to te specifications of food service users. Poultry prices per pound, as measured by te Georgia dock price, fluctuated during te tree years ended October 31, 2004, 2003 and 2002 as follows: 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER Fiscal 2004 Hig $.7000 $.7500 $.8100 * $.8075 Low $.6825 * $.7050 $.7525 $.7575 Fiscal 2003 Hig $.6250 $.6400 $.6775 $.6925* Low $.6125 * $.6250 $.6350 $.6800 Fiscal 2002 Hig $.6500 * $.6300 $.6425 $.6425 Low $.6275 $.6250* $.6250 * $.6275 *Year Hig/Low On January 29, 2004, te Company announced a tree-for-two stock split to be effected as a 50% stock dividend. Te new sares were distributed on February 26, 2004, to stockolders of record as of close of business on February 10, Per sare information in tis Annual Report reflects te stock split. Cas was paid in lieu of fractional sares. EXECUTIVE OVERVIEW OF RESULTS Results for te fiscal year ended October 31, 2004, were driven by record ig cicken market prices, altoug feed ingredient costs were also iger tan te fiscal year ended October 31, Higer cicken prices also more tan offset iger advertising costs incurred as part of te Company s fiscal 2004 advertising and marketing program and a reduction in settlement proceeds from vitamin and metionine suppliers. Te Company believes te outlook for fiscal 2005 looks promising for continued strong consumer demand for cicken, altoug it does not expect cicken market prices to reac levels experienced during fiscal In addition, te Company believes it will realize a significant reduction in operating costs wit materially lower prices projected for corn and soybean meal. Te Company contracted for a portion of its feed grain needs for fiscal 2005, and based on te pricing of tose purcases and given current conditions, expects to realize savings of between $60 and $65 million during fiscal 2005 as compared to fiscal RESULTS OF OPERATIONS Fiscal 2004 Compared to Fiscal 2003 For fiscal 2004 te Company s net sales were a record $1.1 billion, an increase of $180.1 million, or 20.6%, over te previous fiscal year s record net sales of $872.2 million. Te increase in te Company s net sales was due to favorable market prices of te Company s poultry products and an increase in te pounds of poultry products sold of 6.1%. As measured by a simple average of te Georgia dock price for wole cickens, prices increased 15.0% during fiscal 2004 as compared to fiscal Also, average 19

22 MANAGEMENT S DISCUSSION AND ANALYSIS market prices for boneless breast, leg quarters and wings all sowed considerable strengt during fiscal 2004 as compared to fiscal 2003 and increased 22.0%, 41.0% and 65.2%, respectively. Altoug tese same market prices were iger during te fourt quarter of fiscal 2004 as compared to te fourt quarter of fiscal 2003, tey were less favorable during te fourt quarter of fiscal 2004 tan te Company experienced for te first tree quarters of fiscal Te increase in te pounds of poultry products sold resulted primarily from an increase in te average live weigt of cickens sold during fiscal 2004 as compared to fiscal Net sales of prepared food products decreased $6.2 million, or 5.5%, as a result of a decrease in te pounds of prepared food products sold of 6.3%. Te Company s cost of sales were $842.3 million during fiscal 2004 as compared to $741.4 million during fiscal Cost of sales of te Company s poultry products during fiscal 2004 were $734.2 million as compared to $638.9 million during te previous fiscal year, an increase of $95.3 million, or 14.2%. Te increase in te Company s cost of sales of poultry products resulted from an increase in te cost of feed grains, and to a lesser extent, an increase in te pounds of poultry products sold of 6.1% during fiscal 2004 as compared to fiscal In addition, during fiscal 2004 and fiscal 2003 te Company s cost of sales were reduced by $0.3 million and $12.4 million, respectively, from proceeds related to lawsuits against vitamin and metionine suppliers. Te Company s cost of corn and soybean meal, te Company s primary feed ingredients, increased approximately 6.8% and 52.1% for te fiscal year ended October 31, 2004, as compared to te fiscal year ended October 31, Cost of sales of prepared food products increased $5.6 million, or 5.5%, due to an increase in poultry prices. Te prepared foods operation purcases most of its cicken from te Company s poultry operations, and suc cicken is a major component of its raw materials. Selling, general and administrative expenses for fiscal 2004 were $59.8 million as compared to $40.3 million, an increase of $19.5 million. Tis increase is primarily due to te cost of te Company s advertising program and increased contributions to te Employee Stock Ownersip Plan ( ESOP ). Te Company s fiscal 2004 advertising program began in January 2004 and cost te Company approximately $14.0 million during fiscal Te Company plans to continue and expand tis program wit new ads and in new markets during fiscal Te Company expects te 2005 advertising campaign to cost approximately $16.0 million. During fiscal 2004 te Company contributed $7.0 million to te ESOP, an increase of $3.0 million as compared to te contribution te Company made during fiscal 2003 of $4.0 million. Te Company s operating income for te fiscal year ended October 31, 2004, was a record $150.1 million as compared to $90.5 million during te fiscal year ended October 31, Tis increase in te Company s operating income of $59.6 million resulted from te favorable market for poultry products and continued strong operating performance. Tese factors enabled te Company to more tan offset increased feed costs and te benefit received from additional settlement proceeds received during fiscal 2003 as compared to fiscal During fiscal 2004, interest expense was $1.6 million as compared to $2.5 million during fiscal Tis decrease reflects lower outstanding debt during fiscal 2004 as compared to fiscal Te Company s total debt at October 31, 2004, was $15.3 as compared to $26.0 million as of October 31, Te Company s effective tax rate during fiscal 2004 and fiscal 2003 was 38.75% and 38.68%, respectively. Net income for te fiscal year ended October 31, 2004, was $91.4 million, or $4.57 per diluted sare, compared wit net income of $54.1 million, or $2.75 per diluted sare for te fiscal year ended October 31, During fiscal 2004, te Company recognized $177,000, net of income taxes, for Sanderson Farms sare in te partial settlement of lawsuits against vitamin and metionine suppliers for overcarges, compared wit total similar recoveries of $7.6 million, net of income taxes, or $.38 per diluted sare, during fiscal EXECUTIVE OVERVIEW RESULTS During fiscal 2003 grain prices were substantially iger for te full year ended October 31, 2003, as compared to te full year ended October 31, However, te Company benefited from favorable market prices for its poultry products during te second alf of fiscal 2003 and from proceeds received during te year related to te vitamin and metionine lawsuits. All in all, fiscal 2003 was a record setting year in sales and net income for Sanderson Farms. 20

23 MANAGEMENT S DISCUSSION AND ANALYSIS Fiscal 2003 Compared to Fiscal 2002 During fiscal 2003 net sales were $872.2 million, an increase of 17.3% wen compared to net sales of $743.7 million for fiscal Net sales of poultry products increased $105.8 million, or 16.2%, and net sales of prepared food products increased $22.7 million, or 25.3%. Te increase in net sales of poultry products resulted from favorable market prices for poultry products and an increase in te pounds of poultry products sold of 9.6%. Te additional volume of poultry products resulted from an increase in te live weigt of cickens processed of 5.3%, an increase in te number of cickens processed of 2.4% and an improved processing yield. Overall market prices during fiscal 2003 for te Company s poultry products were iger wen compared to fiscal Te Company s average sale price of poultry products increased 6.1% during fiscal 2003 as compared to fiscal A simple average of te Georgia dock wole bird prices was 2.4% iger for te year ended October 31, 2003, as compared to te year ended October 31, In addition, market prices for boneless breast, breast tenders and bulk leg quarters were 17.2%, 17.9% and 12.8% iger, respectively. Net sales of prepared food products increased $22.7 million, or 25.3%, primarily from an increase in pounds of prepared food products sold of 26.0%. Te Company s cost of sales for fiscal 2003 increased $78.3 million, or 11.8%, as compared to cost of sales for fiscal Tis increase is primarily due to increases in te pounds of poultry and prepared food products sold and increases in te cost of feed grains. Cost of sales of poultry products increased $53.2 million, or 9.1%. However, te average cost of sales of poultry products per pound decreased.4% as te Company benefited from proceeds from lawsuits against vitamin and metionine suppliers and improved performance from te Company s poultry operations. A simple average of corn and soy meal cas market prices for te year ended October 31, 2003, as compared to te year ended October 31, 2002, reflected increases of 6.9% and 11.2%, respectively. During fiscal 2003 and fiscal 2002 te Company s cost of sales were reduced by $12.4 million and $5.0 million, respectively, from proceeds related to lawsuits against vitamin and metionine suppliers. Cost of sales of prepared food products increased $25.1 million, or 32.4%, due to an increase in te volume of prepared food products sold and increased cost of cicken products. Selling, general and administrative expenses for fiscal 2003 were $40.3 million, an increase of $9.8 million, or 32.0%, as compared to selling, general and administrative expenses during fiscal 2002 of $30.5 million. Te increase during fiscal 2003 resulted from increased expenses related to te Company s pantom stock options, bonus award program, employee stock ownersip plan, bad debt reserves and certain marketing and administrative costs. During fiscal 2003 te Company s operating income was $ 90.5 million, an increase of $40.5 million as compared to $50.0 million for fiscal During fiscal 2003 as compared to fiscal 2002, te Company benefitted from iger market prices for poultry products, improvements in te operating performance and marketing execution of bot te Company s poultry and prepared foods operations and proceeds from vitamin and metionine litigation. Tese factors more tan offset increases in average cost of feed grains during fiscal 2003 as compared to fiscal Overall market prices for poultry products were lower during te first alf of fiscal 2003 as compared to te same period during fiscal During te tird and fourt quarters of fiscal 2003 as compared to te same quarters in fiscal 2002 market prices for te Company s poultry products improved significantly, and were reflected in te increase in te Company s average sale price of poultry products during fiscal 2003 as compared to fiscal 2002 of 6.1%. Te Company s average sales price of its poultry products during te tird and fourt quarter of fiscal 2003 were 7.5% and 21.0% iger tan te tird and fourt quarter of fiscal Tis improved market environment during te second alf of te Company s fiscal year was in part a result of te stabilization of te export market for poultry products, including te Russian market. Higer market prices for competing meats suc as beef and pork also contributed to improved market conditions. During fiscal 2003 and fiscal 2002, te Company s operating income included $12.4 million and $5.0 million, respectively, from vitamin and metionine litigation. Interest expense during te fiscal year ended October 31, 2003, was approximately $2.5 million as compared to $3.7 million for te year ended October 31, Tis reduction in interest expense during fiscal 2003 as compared to fiscal 2002 resulted from less debt outstanding. Te Company s effective tax rate for te fiscal year ended October 31, 2003, and October 31, 2002, was 38.7% and 38.0%, respectively. Te increase pertains to lower state tax credits available as a percentage of taxable income. Net income for fiscal 2003 was $54.1 million as compared to $28.8 million during fiscal Included in te Company s net income are proceeds from vitamin and metionine litigation of $7.6 million, or $.38 per diluted sare, during fiscal 2003 and $3.1 million, or $.15 per diluted sare, during fiscal

24 MANAGEMENT S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES Te Company s working capital at October 31, 2004, was $150.6 million and its current ratio was 3.3 to 1. Tis compares to working capital of $82.2 million and a current ratio of 2.3 to 1 as of October 31, During fiscal 2004 te Company spent approximately $27.5 million on planned capital projects, wic include $9.5 million on te new complex in sout Georgia. In addition, te Company invested $1.6 million in an existing company wit oter poultry producers for te processing and marketing of spent ens. Te Company s ownersip interest is less tan 10%, and te Company will account for tis investment on a cost basis. On January 29, 2004, te Company announced a tree-for-two stock split to be effected as a 50% stock dividend. Te new sares were distributed on February 26, 2004, to stockolders of record as of close of business on February 10, Sare and per sare data ave been adjusted to reflect tis stock split. Te Company s capital budget for fiscal 2005 is approximately $125.0 million, and will be funded by cas on and, internally generated working capital and cas flows from operations. If needed, te Company as a $100.0 million revolving line of credit available. Te $125 million fiscal 2005 capital budget includes approximately $7.2 million in operating leases, $13.0 million for construction of a new corporate office building, and $88.3 million on te new poultry complex in sout Georgia. Witout operating leases, te new office building and te Georgia complex, te Company s capital budget for fiscal 2005 would be a maintenance level budget of approximately $16.5 million. On May 18, 2004, te Company entered into an amendment to its revolving credit facility. Te amendment, among oter tings, increased allowed capital expenditures to allow for te construction of te Georgia complex, canged te net wort covenant to reflect te Company s new dividend rate, extended te committed revolver by five years rater tan te usual tree year extension, reduced te interest rate carged on amounts outstanding, and removed a letter of credit commitment related to certain industrial development bonds. On April 26, 2004, te Company gave notice to U.S. Bank National Association, as trustee under te Indenture of Trust dated as of November 1, 1995, related to te Robinson County Industrial Development Corporation Variable Rate Demand Industrial Development Revenue Bonds (Sanderson Farms, Inc. Project) Series 1995 ( Bonds ), of te Company s intent to exercise its rigt to call all of te Bonds for optional redemption on June 1, 2004 (te Redemption Date ) at a redemption price of 100% of te principal amount of te Bonds plus accrued interest to te Redemption Date. Te Trustee redeemed te Bonds on June 1, Te Company regularly evaluates bot internal and external growt opportunities, including acquisition opportunities and te possible construction of new production assets, and conducts due diligence activities in connection wit suc opportunities. Te cost and terms of any financing to be raised in conjunction wit any growt opportunity, including te Company s ability to raise debt or equity capital on terms and at costs satisfactory to te Company, and te effect of suc opportunities on te Company s balance seet, are critical considerations in any suc evaluation. CONTRACTUAL OBLIGATIONS Obligations under long-term debt, long-term capital leases, non-cancelable operating leases, purcase obligations relating to feed grains, oter feed ingredients and packaging supplies and claims payable relating to te Company s workers compensation insurance policy at October 31, 2004, were as follows (in tousands): PAYMENTS DUE BY PERIOD LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS Long-term debt 12,723 4,125 8, Capital lease obligations 2, ,110 Operating leases 15,497 4,265 7,398 2, Purcase obligations 33,568 33, Claims payable 6,084 3,484 2, Total 70,452 45,702 18,837 3,869 2,044 22

25 MANAGEMENT S DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING POLICIES AND ESTIMATES Te preparation of financial statements in accordance wit accounting standards generally accepted in te United States requires management to make estimates and assumptions tat affect te reported amounts of assets and liabilities at te date of te financial statements and te reported amounts of revenues and expenses during te reporting period. Actual results could differ from tese estimates and assumptions, and te differences could be material. ALLOWANCE FOR DOUBTFUL ACCOUNTS In te normal course of business, te Company extends credit to its customers on a sort-term basis. Altoug credit risks associated wit our customers are considered minimal, te Company routinely reviews its accounts receivable balances and makes provisions for probable doubtful accounts based on an individual assessment of a customer s credit quality as well as subjective factors and trends, including te aging of receivable balances. In circumstances were management is aware of a specific customer s inability to meet its financial obligations to te Company, a specific reserve is recorded to reduce te receivable to te amount expected to be collected. If circumstances cange (i.e., iger tan expected defaults or an unexpected material adverse cange in a major customer s ability to meet its financial obligations to us), our estimates of te recoverability of amounts due us could be reduced by a material amount, and te allowance for doubtful accounts and related bad debt expense would increase by te same amount. INVENTORIES Processed food and poultry inventories and inventories of feed, eggs, medication and packaging supplies are stated at te lower of cost (first-in, first-out metod) or market. If market prices for poultry or feed grains move substantially lower, te Company would record adjustments to write down te carrying values of processed poultry and feed inventories to fair market value, wic would increase te Company s costs of sales. Live poultry inventories of broilers are stated at te lower of cost or market and breeders at cost less accumulated amortization. Te cost associated wit broiler inventories, consisting principally of cicks, feed, medicine and payments to te growers wo raise te cicks for us, are accumulated during te growing period. Te cost associated wit breeder inventories, consisting principally of breeder cicks, feed, medicine and grower payments are accumulated during te growing period. Capitalized breeder costs are ten amortized over nine monts using te straigt-line metod. Mortality of broilers and breeders is carged to cost of sales as incurred. If market prices for cicks, feed or medicine or if grower payments increase (or decrease) during te period, te Company could ave an increase (or decrease) in te market value of its inventory as well as an increase (or decrease) in costs of sales. Sould te Company decide tat te nine mont amortization period used to amortize te breeder costs is no longer appropriate as a result of operational canges, a sorter (or longer) amortization period could increase (or decrease) te costs of sales recorded in future periods. Hig mortality from disease or extreme temperatures would result in abnormal carges to cost of sales to writedown live poultry inventories. LONG-LIVED ASSETS Depreciable long-lived assets are primarily comprised of buildings and macinery and equipment. Depreciation is provided by te straigt-line metod over te estimated useful lives, wic are 15 to 39 years for buildings and 3 to 12 years for macinery and equipment. An increase or decrease in te estimated useful lives would result in canges to depreciation expense. Te Company continually reevaluates te carrying value of its long-lived assets for events or canges in circumstances tat indicate tat te carrying value may not be recoverable. As part of tis reevaluation, te Company estimates te future cas flows expected to result from te use of te asset and its eventual disposal. If te sum of te expected future cas flows (undiscounted and witout interest carges) is less tan te carrying amount of te asset, an impairment loss is recognized to reduce te carrying value of te long-lived asset to te estimated fair value of te asset. If te Company s assumptions wit respect to te future expected cas flows associated wit te use of long-lived assets currently recorded cange, ten te Company s determination tat no impairment carges are necessary may cange and result in te Company recording an impairment carge in a future period. 23

26 MANAGEMENT S DISCUSSION AND ANALYSIS ACCRUED SELF INSURANCE Insurance expense for workers compensation benefits and employee-related ealt care benefits is estimated using istorical experience and actuarial estimates. Stop-loss coverage is maintained wit tird party insurers to limit te Company s total exposure. Management regularly reviews te assumptions used to recognize periodic expenses. If istorical experience proves not to be a good indicator of future expenses, if management were to use different actuarial assumptions, or if tere is a negative trend in te Company s claims istory, tere could be a significant increase (or decrease) in cost of sales depending on weter tese expenses increased or decreased, respectively. INCOME TAXES Te Company determines its effective tax rate by estimating its permanent differences resulting from differing treatment of items for financial and income tax purposes. Te Company is periodically audited by taxing autorities and considers any adjustments made as a result of te audits in computing te Company s income tax expense. Any audit adjustments affecting permanent differences could ave an impact on te Company s effective tax rate. Te recently passed American Jobs Creation Act of 2004 represents far-reacing legislation tat will ave a significant impact on many U.S. taxpayers. Among oter tings, te Act will provide a deduction wit respect to income of certain U.S. manufacturing activities and allow for favorable taxing on repatriation of offsore earnings. Altoug te provisions of te Act do not impact te fiscal year 2004 financial statements under current accounting rules, te Act will likely impact te Company s financial statements in future periods. We are currently evaluating te financial impact of tis Act. CONTINGENCIES Te Company is a party to a number of legal proceedings and recognizes te costs of legal defense in te periods incurred. A determination of te amount of reserves required, if any, for tese matters is made after considerable analysis of eac individual case. At tis time, te Company as not accrued any reserve for any of tese matters. Furter reserves may be required due to canges in te Company s assumptions, te effectiveness of legal strategies, or oter factors beyond te Company s control. Future results of operations may be materially affected by te creation of or canges to reserves. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, te Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Researc Bulletin No. 51. Interpretation No. 46 requires consolidation of entities wen an enterprise absorbs a majority of te entity s expected losses, receives a majority of te entity s expected residual returns, or bot, as a result of ownersip, contractual or oter financial interests in te entity. Currently, entities are generally consolidated by an enterprise wen it as a controlling financial interest troug ownersip of a majority voting interest in te entity. Te consolidation requirements of tis pronouncement were effective for te first reporting period ending after Marc 31, Te Company does not absorb losses or enjoy returns from any entity oter tan its subsidiaries, all of wic are wolly owned and consolidated wit te Company, except for te Company s less tan 10% interest in a Company tat processes and markets spent ens. Te investment in tis Company is $1.6 million and it is not considered to be a variable interest entity. Terefore te adoption of FIN 46 ad no impact on te Company. In December of 2003, te Medicare Prescription Drug, Improvements, and Modernization Act of 2003 ( Act ) was signed into law. In addition to including numerous oter provisions tat ave potential effects on an employer s retiree ealt plan, te Medicare law included a special subsidy for employers tat sponsor retiree ealt plans wit prescription drug benefits tat are at least as favorable as te new Medicare Part D benefit. In May of 2004, te Financial Accounting Standards Board ( FASB ) issued FASB Staff Position ( FSP ) 106-2, Accounting and Disclosure Requirements Related to te Medicare Prescription Drug, Improvements and Modernization Act of 2003, tat provides guidance on te accounting for te effects of te Act for employers tat sponsor postretirement ealt care plans tat provide drug benefits. We adopted te provisions of te FSP in te fourt quarter of fiscal year Te adoption of FSP No did not ave a material impact on te Company s results of operations, financial position or cas flows. 24

27 MANAGEMENT S DISCUSSION AND ANALYSIS In November 2004, te FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Capter 4. SFAS No. 151 amends Accounting Researc Bulletin ( ARB ) No. 43, Capter 4, to clarify tat abnormal amounts of idle facility expense, freigt andling costs and wasted materials (spoilage) sould be recognized as current-period carges. In addition, SFAS No. 151 requires tat allocation of fixed production overead to inventory during fiscal years beginning after June 15, Te Company is currently assessing te impact tat SFAS No. 151 will ave on te results of operations, financial position or cas flows. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Te Company is a purcaser of certain commodities, primarily corn and soybean meal, for use in manufacturing feed for its cickens. As a result, te Company s earnings are affected by canges in te price and availability of suc feed ingredients. Feed grains are subject to volatile price canges caused by factors described below tat include weater, size of arvest, transportation and storage costs and te agricultural policies of te United States and foreign governments. Te price fluctuations of feed grains ave a direct and material effect on te Company s profitability. Generally, te Company purcases its corn, soybean meal and oter feed ingredients for prompt delivery to its feed mills at market prices at te time of suc purcases. Te Company sometimes will purcase feed ingredients for deferred delivery tat typically ranges from one mont to six monts after te time of purcase. Te grain purcases are made directly wit our usual grain suppliers, wic are companies in te regular business of supplying grain to end users, and do not involve options to purcase. Suc purcases occur wen senior management concludes tat market factors indicate tat prices at te time te grain is needed are likely to be iger tan current prices, or were, based on current and expected market prices for te Company s poultry products, management believes it can purcase feed ingredients at prices tat will allow te Company to earn a reasonable return for its sareolders. Market factors considered by management in determining weter or not and to wat extent to buy grain for deferred delivery include: Current market prices; Current and predicted weater patterns in te United States, Sout America, Cina and oter grain producing areas, as suc weater patterns migt affect te planting, growing, arvesting and yield of feed grains; Te expected size of te arvest of feed grains in te United States and oter grain producing areas of te world as reported by governmental and private sources; Current and expected canges to te agricultural policies of te United States and foreign governments; Te relative strengt of United States currency and expected canges terein as it migt impact te ability of foreign countries to buy United States feed grain commodities; Te current and expected volumes of export of feed grain commodities as reported by governmental and private sources; Te current and expected use of available feed grains for uses oter tan as livestock feed grains (suc as te use of corn for te production of etanol, wic use is impacted by te price of crude oil); and Current and expected market prices for te Company s poultry products. Te Company purcases pysical grain, not financial instruments suc as puts, calls or straddles tat derive teir value from te value of pysical grain. Tus, te Company does not use derivative financial instruments as defined by SFAS 133, Accounting for Derivatives for Instruments and Hedging Activities. Te Company does not enter into any derivative transactions or purcase any grain-related contracts oter tan te pysical grain contracts described above. Te cost of feed grains is recognized in cost of sales, on a first-in-first-out basis, at te same time tat te sales of te cickens tat consume te feed grains are recognized. 25