Analyst: March cheese market crash long overdue

March 17, 2011

By Steve Coomes

The old saying among dairy market watchers — “When the market turns, it turns hard” — proved brutally true in mid-March when the price of block cheddar cheese plummeted from $2.01 per pound to $1.68 in five days. Both analysts and long-time cheese buyers said they couldn’t remember such a free-fall, but most believed a price reduction was long overdue.

“It’s supposed to have crashed for about a month now, but even we expected only a 20-cent drop,” said John Barone, president of Market Vision in Fairfield, N.J. The firm advises restaurant chains on buying strategies. “A lot of what’s been holding prices up is global pricing. When you look at cheese prices in Europe, they’re much higher than ours, and that supported prices here some.”

Barone said the sheer abundance of domestic dairy supplies should have pushed prices down sooner, but he said it took the earthquake and tsunami in Japan to finally trigger the fall.

“Most every commodity is down now because of Japan and the concern over what will happen to the global economy,” he said. Barone added that even if the Japanese economy collapsed, the net effect on the global recovery from the recent recession would be small. “So absolutely (market movements) are psychological right now. And if Japan gets its problems taken care of quickly, you’ll see commodities rebound and the recovery get back on track.”

While the cheese market crash is good news for pizza operators, the positive impact won’t trickle down to independents for at least a couple of weeks.

“I hope to see some benefit soon, but prices don’t move that quickly in my favor,” said John Gutekanst, owner of Avalanche Pizza in Athens, Ohio. The distributor’s “prices go up with the market, but they never come down as fast. They always say they’re selling me cheese based on the price of what they bought a few weeks ago and have in storage.”

When nearby Ohio University’s 35,000 students are on campus, Gutekanst buys 1,800 pounds of mozzarella-provolone cheese blend weekly: a significant amount for a one-unit delivery-carryout operation. But when he suspected several years ago he wasn’t getting a fair price on his cheese, he started talking to other operators, “and it turned out my distributor was totally soaking me.”

Gutekanst gave his business to another distributor while maintaining contact with the former one, and ever since he’s switched his purchases back and forth “to keep them honest. … The fact is I probably won’t notice any savings from this (price decline) unless I say something about it. It’s like I’ve got to be a jerk to get some lower prices.”

In recent years, Toledo, Ohio-based Marco’s Pizza used hedging strategies such as buying milk futures to control cheese prices for its 240 units. But when market prices moderated in 2010, it shifted to a tighter three-week purchase model that allowed the chain to eliminate long-term investments in hedging, and benefit from savings almost immediately when market prices receded.

“We have three different suppliers, and they allow us to buy contracts for truckloads of cheese at the market’s weekly closing price,” said Jack Butorac, president of Marco’s Franchising. “As we need it, they shred and blend it, and we’re paying the same price for three weeks. It’s a kind of hedging.”

Don Vlcek, a Marco’s vice president overseeing procurement, said the cheese market has become so volatile that it’s not profitable for an end-user of Marco’s size to hedge any longer. Plus, when he held the same position years ago at Domino’s Pizza, the risks of hedging were still high enough that the strategy wasn’t always safe.

“If you went too far out with hedging, you could lose a lot,” he said. “And you have a week like this when cheese goes down 33 cents a pound -- you’d be losing now.

“So we’re very happy with what we’re doing now because it’s saved each of our stores almost $3,000 in a six week timeframe. That’s significant.”

But it doesn’t remove Vlcek’s suspicion — shared by many in the pizza business — that the dairy market’s wide-ranging price swings could signal price manipulation. Even a cheese supplier he met recently said he suspects market players worked to inflate prices artificially through late winter, a time when dairy prices usually moderate.

“One told me he’d heard there were a lot of players who just weren’t going to sell anything in order to drive the price up,” he said. “He said to me, ‘This is what gives our industry a bad name.’ And remember, he was a cheese supplier.”


Topics: Business Strategy and Profitability , Cheese , Equipment & Supplies , Food & Beverage , Operations Management

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