• Block cheese tops $1.40, may reach $1.70 by August

    Tags: Cheese

The price of 40-pound blocks of cheddar cheese soared to $1.41 per pound during July 1 trading on the Chicago Mercantile Exchange. At least one analyst expects prices could climb to $1.70 by late August.

In only five trading days since June 24, when blocks sold for $1.23, prices have risen 18 cents -- half of that coming on July 1. The day's price marked the highest block fee fetched since Oct. 10, 2001, when it traded for $1.35.

Jerry Dryer, the Chicago-based editor of Dairy & Food Market Analyst, predicted in his June PizzaMarketplace column (see Cheese market prices are on the way up) block prices would hit today's heights in July, "but not this soon in the month."

Though July 1's nine-cent jump surprised him, Dryer said his own crystal ball tells him the price roller coaster has only begun to climb.

"I think $1.70 is a distinct possibility by August or maybe sooner," said Dryer. "If these guys didn't use futures and options to lock in their cheese price, then they're in deep s---."

Why the cheese market is finally firming up since its protracted meltdown began in the fall of 2001 can be attributed to falling supply and rising demand. Throughout the spring, USDA milk production estimates showed dairy farms were trimming production, while at the same time, U.S. economic indicators pointed to a gradual turnaround in the economy.

Cheese sales at the retail level have risen as well. After enduring narrow margins when cheese prices were high in 2001, grocers were happy to make strong profits when prices were low in 2002 and the first half of 2003. Now, however, Dryer said grocers are promoting cheese heavily and inventory is moving.

"Demand on the retail side is off to the races, up 5 to 6 percent," said Dryer. "Sales are also reflective of the economy, which appears to be turning around."

Dryer said dairy traders are only now getting a clear picture of the nation's milk supply, and it appears supplies are tighter than once thought. The late June release of the USDA's May milk production report included a downward revision of about 1 percent compared to a year ago. However, Dryer added, dairy watchers know that USDA estimates not only are somewhat higher than actual supplies, USDA's actual figures lag behind as much as a few months behind estimates.

"So if (USDA) said production was below a year ago in May, it probably was below a year ago in March, too," Dryer said. "That signals the beginning of a trend that tells me to expect milk production to be low for rest of this year."

To understand why the price rose nearly a dime on July 1, Dryer said, one only need look at the activity on the CME. While 23 bids were placed for block cheese, only two were filled.

Bidders are people who want to buy cheese, Dryer said, and too few sellers were available on July 1. "So they bid it higher again and still no one had it to sell. The bottom line is that more are people looking for cheese than are willing to sell cheese."

Dryer said a sale as small as July 1's two truckloads -- 80,000 pounds -- on the CME will raise traders' eyebrows if they sense supplies are tight. "After being that low for that long, when the market turns, it turns hard."

Safety in futures

According to Dave Deal, a procurement and distribution consultant with the Food Source in Detroit, only a small movement in market supplies can send prices tumbling or soaring. "That's the crazy thing about this market. There's a very, very fine line between excess and surplus."

That volatility is all the more reason pizza operators with 10 or more stores should buy milk futures contracts, Deal said. Since milk prices drive cheese prices, operators can protect themselves from cheese price spikes by buying milk contracts at low prices and selling them at high prices. (For a detailed discussion of milk futures, see related stories Cheese price meltdown and Hedging on price.)

Deal, the former president of Little Caesars, now consults with other pizza companies on futures buying strategies he called essential to profitability when cheese prices skyrocket.

But to date, he said, too few operators are taking advantage of the futures market.

"While we had some clients that did (buy futures), unfortunately we had other clients who have continued to study and reflect on it," Deal said. "And as a result, they have probably missed the boat this time."

Asked how much predicted expected price increases will hurt, Deal said some of his clients -- whose names he declined to share -- will spend "millions of dollars" keeping pace.

Dryer agrees that as soon as inexpensive inventories of cheese begin to disappear from pizza operations' walk-ins, operators who didn't buy futures will feel the pinch come time to buy. The sad thing, he said, is that it didn't have to happen.

"They could have bought cheese for less than $1.20 through November 2004 on a milk futures contract," he said. "A milk futures contract that sold for $11 (per hundred pounds of milk), which translates into a price of about $1.20 for cheese, could later be sold for $15. That guy would take the money he made and use it to reduce the price he will pay for his cheese. ... It's so simple if they'd only do it."

Related Content

User Comments – Give us your opinion!
Products & Services

Features

http://global.networldalliance.com/new/images/products/4541.png

4541/Features

Dual Core Menu Board Media Player - $99

http://global.networldalliance.com/new/images/products/6677.png

6677/Dual-Core-Menu-Board-Media-Player-99

Put your menu in your customers' pocket

http://global.networldalliance.com/new/images/products/1293.png

1293/Put-your-menu-in-your-customers-pocket

FireFly Point-of-Sale

http://global.networldalliance.com/new/images/products/4282.png

4282/FireFly-Point-of-Sale

Group Purchasing Services

http://global.networldalliance.com/new/images/products/6403.png

6403/Group-Purchasing-Services

Online Ordering

http://global.networldalliance.com/new/images/products/4285.png

4285/Online-Ordering

Pepperoni

http://global.networldalliance.com/new/images/products/6787.png

6787/Pepperoni

DriverSafe

http://global.networldalliance.com/new/images/products/keyboard_iix.gif

1424/DriverSafe

HAND-PINCHED STYLE® Sausage and Beef Toppings

http://global.networldalliance.com/new/images/products/6785.png

6785/HAND-PINCHED-STYLE-Sausage-and-Beef-Toppings

Remote Service | Content Management Service

http://global.networldalliance.com/new/images/products/6685.png

6685/Remote-Service-Content-Management-Service

Request Information From Suppliers
Save time looking for suppliers. Complete this form to submit a Request for Information to our entire network of partners.