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Pricey Poultry: Why Chicken Has Gotten Expensive

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Chicken prices have almost doubled in the last two years, leading higher costs for restaurants and chicken lovers alike, and prices don’t seem to be dropping any time soon.

Drought conditions pushed grain prices higher in 2010. And last year's drought-- the worst since the Dust Bowl which decimated farms in the 1930s--made matters worse.

Poultry producers increased prices to offset higher grain costs. For instance, boneless chicken breast prices grew to $3.52 per pound last month compared with about $3.20 in June of 2012, according to government data. That's more than a 10 percent increase. And bone-in chicken leg prices rose 2.5 percent to $1.65 per pound during that same time period.

Generally, restaurants in the United States try to avoid passing on higher costs to consumers, instead promoting lower-cost non-chicken menu items, according to Sri Raman, senior research analyst at Thomson Reuters.

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But earlier this year, chicken wing prices hit profit margins at Buffalo Wild Wings (BWLD), for instance. The company paid about $2.10 per pound in the first quarter of this year compared with $1.92 in the year-ago period as the overall cost to sell those wings rose, according to a company report.

In response, the company changed its menu and pricing strategy, aiming to market its chicken wings as a "premium product," according to Nation's Restaurant News, a trade publication.

Chipotle Mexican Grill (CMG) restaurants have also felt the impact of higher poultry costs, but have benefited from lower avocado and dairy prices, according to a company report.

And the cost of a meal at KFC for instance may not have doubled along with wholesale chicken prices, but KFC's parent company, Yum! Brands (YUM) has added boneless chicken to its menu, charging a premium for that convenience, Raman notes.

Meanwhile, grain prices have come down tremendously and chicken prices continued to increase, according to Raman.

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“Producers can’t increase the amount of chicken they sell overnight, so it takes some lag time to increase that amount of chicken, so there’s a very restricted supply and with that restricted supply, they’re able to command a premium for their chicken,” Raman said.

Many restaurant chains have long-term contracts with producers for chicken at a set price, however, according to Raman.

At the same time, higher feed prices from earlier this year hurt chicken producer Tyson Foods (TSN), which spent an extra $165 million in feed costs in the second quarter of 2013 vs. the year-ago period. However Tyson expects a stronger second half of the year and it's optimistic about its full-year results, according to company reports.

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And analysts' consensus estimates for poultry producer Pilgrim’s Pride (PPC) call for earnings of 54 cents a share for the second quarter. That’s 20 cents above the 35-cent consensus from 90 days ago, Raman said.

Thomson Reuters uses “Smart Estimates,” an average of estimates that places greater weight on the most recent estimates from top analysts.

Raman said the Smart Estimate is 57 cents a share for Pilgrim’s Pride.

-- Additional reporting by Althea Chang.

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