Buckle up, pizza operators. The cheese price roller coaster is screaming toward record-breaking ride.

The cost of 40-pound blocks of cheddar, the benchmark cheese traded on the Chicago Mercantile Exchange, catapulted 16 cents on March 12 to $1.81. Over the prior eight trading days, prices increased a combined 16 cents.

According to the University of Wisconsin's Dairy Marketing and Risk Management Web site, since at least 1986, which is as far back as the site's records go, the increase was the largest single-day rise in the history of the cash cheese market.

The bad news for pizza operators, industry analysts say, is the price climb is nowhere near over.

"I used to think $2 would be the ceiling, but now I believe that may be low," said Jerry Dryer, a dairy industry consultant and editor of Dairy & Food Market Analyst newsletter. "(Cheese manufacturers) are putting some of their customers on allocation, saying, 'Yeah, I know we had a deal to send you 100 loads a month, but I can only send you 80.' Rationing is clearly underway."

Though Dryer was surprised the price shot up so quickly, he said the handwriting on the wall long ago signaled a costly increase was imminent.

"Milk production per cow has been declining, cow numbers are declining and there's a shortage of replacement heifers," he said. "Forage quality is poor and feed prices are through the ceiling. It costs more to feed these cows."

If Dryer is right and producers were aware of those challenges, then would that justify a 16-cent increase?

"I don't know that it can," said dairy analyst Alan Levitt, adding that he doesn't believe manufacturers are hoarding their cheese in order to drive prices higher. "The reality is somebody needs cheese. When you have 22 bids on blocks in one day and you have no sales, that shows there's some genuine tightness in the supply."

Levitt said such huge price swings are accelerated by negative market psychology. "I'm sure there's some speculative nature to this whole thing; some are buying more now anticipating that cheese is going to cost even more tomorrow. That buying mentality promotes kind of a panicked feeding frenzy."

Don't waste any!

John Smith, vice president of operations for 480-store Hungry Howie's Pizza, said the company has weathered many a cheese price storm, but they never get any easier. This week he warned Hungry Howie's franchisees to batten down the hatches yet again.

"It's going to make things tense, so we have to make good decisions on how we use our cheese, as well as our marketing decisions," said Smith, whose company is based in Madison Heights, Mich. "We'll continue stressing to our operators to use the right utensils," such as measuring cups and scales.

Though Hungry Howie's has its own distribution company which works to control cheese prices, nothing can stop price increases from rippling through the system eventually, he said.

"We're probably a couple weeks out from feeling those prices, but it'll get here soon enough," he said.

Dryer sees little hope for a price reversal in the next several months, meaning pizza operators' profits will take a pounding. If block prices remained at $1.81, an operator used to buying 1,000 pounds a week on a block price of $1.50 will lose $310 a week or $1,240 a month. Should prices linger in that range for as long as a year--and if demand and supply remain as widely separated as they are now, they well could--that operator would lose more than $16,000.

Smith knows such losses will tempt operators to put less cheese on their pizzas, but he hopes they'll put customers first and stick to specs.

"We don't skimp when this happens, we keep to our product standards," Smith said. "We've just got to focus that much more on our cheese usage."

Futures shock

According to Dryer, had pizza operators used the futures market months ago to offset cheese price changes, they'd not be trembling with sticker shock today. Those who want to get in now are probably too late, as futures prices are above $17 per hundredweight (which yields a cheese price of roughly $2).

"That would have helped hugely," he said. "There are a lot of people out there who are buying cheese for $1.35 a pound today because they used futures and options six months ago."

Hungry Howie's Distributing experimented with futures in the past, Smith said, but the company got mixed results.

"We traded a couple times and had a variable response: a couple that were great and one that wasn't so favorable," he said. Since he doesn't oversee the chain's distribution arm, Smith wasn't sure whether it had hedged any of its cheese purchases this year. Regardless of the outcome, he said the company won't Monday morning quarterback its decision.

"You always wish you could have done something different six months ago to correct what what's going on now," he said. "That's not to say we won't change (strategies) if we need to, but we feel fairly confident that the decisions we make as a company overall will work out."

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