Plan for worse cheese prices, analyst says

Plan for worse cheese prices, analyst says
Tags: Food & Beverage, Operations Management
July 19, 2010

By Ed Zimmerman

The roller coaster ride continues. For those who have been around awhile, you remember the “good old days” when cheese traded on the Green Bay Exchange. The cheese market was predictable and controlled by industry players. It is that last part, control, which worried cheese industry participants and the government. Who was setting these prices? Were those “good ol’ boys” gaming the market? Well maybe, but the market was predictable and a pizzeria operator could write a business plan around the expected results.

Today’s cheese market, with all its transparency at the CME, is fraught with unpredictable movements, some from outside speculators, and others -- some would say -- through insider manipulation. Whatever the causes, executing a business plan when the single biggest input cost boomerangs between $1.20 and $2.20, leaves many pizza operators and balance sheets with serious headaches. (Sure, the CME Group has debuted a futures plan – but operators still need to know when to lock in prices.)

So where does the price go through the rest of 2010?

No doubt, we live in an internationally connected world; drought in New Zealand does make the price of cheese in Detroit swell. This week, the U.S. government announced it would add new dairy components to the approved list of items that DEIP (Dairy Export Incentive Program) can export. This adds upward pressure to U.S. dairy prices, as additional milk fat will leave the country. In addition, butter prices are up nearly 20 percent this month. This creates an incentive for butterfat to move to butter production and away from cheese, more pressure. A slow motion economic recovery adds to demand for foodservice cheese, further pressure.

Predictions on the CME favor price increases throughout the rest of the year. The market added a nickel this past week as some proof of this prediction. I conclude prices will be higher at the end of the year than now.

I am sympathetic to the rising cost of cheese to pizza operators but also somewhat confused. Of course, operators would rather pay less, but at this point in our evolution, it is no surprise to see cheese rise to high rates, only to fall back to something more “reasonable.” The question is, what can you do about it? The answer is plan for high prices.

In the olden days discussed above, the balance point for cheese was approximately $1.40. That was the price where all the players along the supply chain complained, from dairy farmers, through cheese producers, distributors and pizza shops; everyone hated the price, which is how you knew it was in balance. When cheese is $2, dairy farmers make money and pizzerias see red. In reserve, cheese at $1.20 makes shop owners smile and farmers cry, this sets up market forces for corrections, which drives the roller coaster.

The new balance point is probably closer to $1.55 given higher costs for labor, insurance, taxes and energy than in the 1990’s. The question is, what can you do about it? The answer is plan for high prices. I know I already said this, it bears repeating. The secret for pizzeria operators is to assume their cost of cheese at $1.90 - $2.00. If the market delivers lower prices, you have a cushion. If the pendulum creates a $2.10 result, it is not a knockout punch. The problem comes when owners think cheese will be $1.40.

The reality of the pizza business is that whatever the price of cheese, you will buy it, and had better put enough on your pie to deliver value to consumers. The more you accept that a high cheese price is the cost of poker, the less you will worry and the better your plans will meet reality.

Wishing you success in pizza -- Ed.

Ed Zimmerman is a pizza industry veteran and president of Pizza.com, a website that connects national pizzerias to consumers. His almost four decades of foodservice experience includes food manufacturing and distribution leadership, food industry marketing services and restaurant and grocery operations management for large brands like Bellissimo Foods.