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The critical issues facing the industry stem from the components of chicken feed. The two key components, corn and soybean meal, increased more than 30% over the past 12-months. In addition, fuel costs rose another 20% or more.

BWLD has clearly been a beneficiary of lower prices as the company has seen a significant decline in chicken wing prices. Additionally, over the past 12-months nearly every major QSR chain has announced new chicken based products. McDonald’s has been very aggressive, adding a southern style chicken sandwich at breakfast and lunch. As a result, demand for fillets has increased, while the value of the by-product of fillet production (trim) has declined, resulting in greater supplier losses.

As we wrote earlier this week on July 29, the poultry operations of the two largest poultry suppliers, Pilgrim's Pride and Tyson, reported significant losses for the first three months of this fiscal year. Not surprisingly, the outlook for the next quarter is for more of the same.

Nearly all chicken suppliers need to significantly reduce production levels in an effort to generate higher prices. A return to profitability is necessary to ensure solvency for some companies. On the TSN conference call, the company alluded to the fact that a lot of its contracts are cost-plus, which means parts of the restaurant industry, will be seeing higher chicken prices in 2H08.

The marketplace for chicken processors remains volatile, which is not good news for the restaurant industry.