Feb. 16, 2009
What goes up must come down.
Although pizzeria operators may not have believed that old saying a few months ago, its wisdom couldn't be any clearer, at least when it comes to cheese prices.
While cheese prices may have been high last spring, they've fallen considerably over the past few months. Plummeting cheese prices, several operators said, are helping to lessen the impact of the recession.
"Our sales in January usually drop off, so this is a great time to kind of ease that pain," said Jeff Rosati, chief financial officer of Chicago-based Rosati's Pizza. "If prices were still over $2 and we had a dropoff in sales it would really be tough for us."
Rosati's suffered last year when cheese costs spiked. Although the chain did raise menu prices, it wasn't enough to offset the impact, Rosati said.
"We raised prices figuring in a block price of around $1.65, hoping that it would come down to that," Rosati said. "It didn't for a long time and that hurt pretty bad. We ended up taking it out of profits."
This time, though, it's the dairy farmers who are hurting. Dairy industry observers fear the low prices may force many farmers out of business, which could end up hurting pizzeria operators by creating shortages of cheese.
Source: University of Wisconsin, Madison
"Unfortunately, 2009 is starting out with dairy product prices and milk prices at levels not experienced since the depressed period of 2000 to 2003," wrote Bob Cropp, University of Wisconsin-Madison professor emeritus, in a dairy industry outlook report in January.
"Prices were forecasted to be lower in 2009, but no one forecasted prices this low," Cropp wrote. "If prices no higher than this materialize, there will be considerable financial stress in the dairy industry."
A slice of relief
According to Chicago-based research firm Technomic, pizza accounts for 25 percent of cheese consumption in the United States. And since the two industries are so intertwined, problems in one industry are bound to affect the other.
"Pizza sales directly affect overall cheese sales," said Paul Rovey, chairman of Dairy Management Inc. and an Arizona dairy producer.
Because of that interconnection, many in the dairy industry are looking to the pizza industry to help head off disaster for farmers.
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As part of an effort to boost cheese consumption, DMI partnered with Domino's to develop the company's new line of "American Legends" specialty pizzas, which feature 40 percent more cheese than a typical Domino's pizza.
DMI also is exploring similar opportunities with other pizza chains.
"Pizza sales account for more than $32 billion annually, so we know that increasing pizza sales benefits dairy producers and the dairy industry," said Tom Gallagher, chief executive officer, DMI. "This partnership with Domino's is one step in our effort to increase sales of pizza products containing more cheese."
Pizzeria operators often buy cheese in a "block plus" arrangement, meaning they agree to pay a certain amount over the CME block price.
Block cheese prices on the Chicago Mercantile Exchange rose to as high as $2.30 per pound last May. They spent the rest of 2008 fluctuating between $1.60 a $2 per pound.
Prices were driven by growth in the worldwide demand for cheese and by a significant increase in input and production costs. High fuel prices, for example, led to increased demand for ethanol, which drove up demand for corn, leading to a rise in cattle feed prices.
From the beginning of December to mid-January, cheese prices plummeted from around $1.80 per pound to as low as $1.04. The global recession has slowed overseas demand for milk and other dairy products, causing cheese prices to fall.