If you haven't yet taken action to protect yourself against rising cheese prices, now would be the time to do so.
Although pizzeria operators enjoyed record-low cheese prices this summer, those prices are soon going to be a fond memory. Recent actions by the U.S. Department of Agriculture and the U.S. Senate are expected to boost the price of cheese over the next several months.
As a result, cheese prices have been rising steadily in recent weeks. Prices closed at just about $1.36 per pound on Aug. 14, up 25 percent from a summer average of less than $1.15 per pound.
"I think we will get to $1.40, and our futures and options are telling us that the market is expecting even higher than that," said David Zaslavsky, a market analyst with St. Louis-based commodity broker F.C. Stone. "The first half of 2010 is already pricing at an average of $1.59."
Pizzeria operators often buy cheese in a "cents plus" arrangement, negotiating prices based on the CME block price. As such, operators are keeping a close eye on developments in the cheese market.
"Because cheese is our primary ingredient, rising cheese costs pose the biggest earnings risk for our business," said Andrew Gamm, director of brand development with Pizza Patron. "Our franchise partners rely on us to deliver a viable economic model, so stabilizing cheese prices is always among our highest priorities."
Dairy industry struggling
For many operators, the summer's low prices were a welcome respite from the record highs last year.
Block cheese on the Chicago Mercantile Exchange fell to as low as $1.09 per pound at the beginning of 2009 after rising to as high as $2.30 per pound in 2008. Industry experts attribute the dramatic price drop to oversupply and decreasing global demand.
Prices have hovered between $1.10 and $1.15 for most of the summer, offering at least a small amount of relief for those struggling in the current economy.
Dairy farmers, though, say those prices are below their operating costs and that many farmers are bleeding red ink. Agriculture Secretary Tom Vilsack has called the current situation with daily prices "one of the worst dairy crises in decades."
The USDA operates the Dairy Products Price Support Program, which works to maintain a minimal price to dairy farmers by buying up excess nonfat dry milk, butter, and cheese. At the beginning of August, the U.S. Senate added an amendment to an agriculture bill that will add an additional $350 million to the program. The move is expected to further boost cheese prices.
Some pizzeria operators blamed the USDA and dairy farmers for the current situation.
"The USDA pays farmers to produce more than we would ever need," said David Bailey, co-owner of Pies and Pints Pizzeria in Fayetteville, W.Va. "When it comes time to sell and the market is saturated or demand is down, our lovely government steps in to assist farmers with subsidies."
Seek advice on market strategies
The mega-chains, of course, have the ability to negotiate long-term contracts in order to insulate themselves from fluctuating cheese prices. Smaller players have fewer options at their disposal.
Independent shops can often negotiate prices with vendors in exchange for a commitment to keep all of their business with that vendor. And of course, it's a good time to re-evaluate menu prices and emphasize portion control with staff.
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Operators with 10-100 units or more have a few more choices.
"The best thing to do is to deal directly with the cheese manufacturer and lock in a price, Zaslavsky said. "At least that way they have mitigated any upside."
If they don't have the opportunity to lock in a price with the manufacturer, operators can look to the commodities markets for protection from price swings, Zaslavsky said. However, such a move shouldn't be undertaken without the advice of an experienced broker.
"Anybody can call us and we are more than happy to help them," he said. "Even if they decide not to work with us, we encourage them to do the due diligence, because this is not an easy endeavor to jump into."