- WHITE PAPERS
Pizzeria operators surely cheered aloud this year as cheese prices tumbled steadily downward from their lofty heights of 2001.
But dairy market analysts are wondering whether those operators are at least partly to blame for those price declines.
Some analysts, like Jerry Dryer, editor of the newsletter Dairy & Food Market Analyst, are examining the sales of large cheese consumers, such as the pizza industry, to see whether consumption by its end users is up or down.
"What I'm basing my opinion on is same-store sales at companies like Pizza Hut and Papa John's, and those aren't looking too good," said Dryer, whose office is in Chicago. "Still, even I'm not totally convinced that's what's causing it. ... So many other factors have to be considered with dairy. It's never one thing."
Nor ever an obvious thing. Dryer and other dairy analysts view the dairy market, as a whole, as uncannily cunning, confusing and capricious. Subject to fluctuations in demand, climate and price, dairy producers lack the luxury of, say, corn producers, who grow, harvest and store their products at the same time each year. They also enjoy abundant futures contracts to help gauge expectations.
Dairy producers, on the other hand, manage their herds' production year round, and receive a comparatively miniscule amount of forward contracts for their business.
"The dairy industry is weird, in that a very tiny percentage of production -- usually just 1 percent to 2 percent -- determines the price for the entire 100 percent," said Alan Levitt, a dairy market analyst in Crystal Lake, Ill. "A 2-percent surplus can send the market into a dramatic tailspin, and a 2-percent shortage can send the market into record-high prices."
And Levitt is largely talking about cheddar cheese, whose use is minimal in the pizza industry.
Mozzarella cheese accounts for 2.66 billion pounds -- nearly 33 percent -- of the entire 8.1 billion-pound annual U.S. cheese production. Yet mozzarella's price is determined almost entirely by the amount of cheddar in the pipeline.
Mozzarella production from 1980 to 2002 (projected). Source, Alan Levitt
Mozzarella also is made mostly on demand, not stored like cheddar and American cheeses, and thus not accounted for when the National Agricultural Statistics Service (NASS) conducts its monthly Cold Storage Reports. In short, it can be challenging to track the amount of mozzarella the market has on hand.
"What's in cold storage is cheese for longer-term use or aging," said George Koerner, the USDA's central reporter in Madison, Wis.
Koerner said since mozzarella is rarely stored -- and if it is, it's frozen -- it's considered "current" cheese, meaning cheese that's one to 30 days old. Oddly enough, he said cheese prices are based on demand for current cheese, not cheese in storage (reported in NASS Cold Storage Reports, though the documents have had a bearish influence on prices this year). Therefore, if the supply of current cheese is low, even a small order can send prices upward.
"If someone wants one load (40,000 pounds) of current, that's all it takes to push things," Koerner said. "You could have all the 60-day, 90-day, 120-day-old cheddar you want in cold storage, but it doesn't help you. It's that one load of current that'll make it move."
Mozzarella production is down
What Levitt and Dryer do know is that mozzarella production for 2002 is on pace to decline for the first time since 1993. Levitt's calculations project a drop of 1.2 percent or 32 million pounds. That figure seems small observed in the shadow of 2.66 billion pounds of annual production, Levitt said, but he believes it's noteworthy.
"That's significant because it shows a decline after a string of years where production went up," said Levitt, who added that the years 2001, 2000 and 1999, production rose 1.4 percent, 4.2 percent and 6.6 percent respectively.
Levitt said market tracking would be much simpler if cheese production stayed tied to consumption, but it doesn't.
"The truth is the dairy market is depressed at times when pizza is not," Levitt said. "In 2000, we had very low prices for cheese, and pizza did fine."
How much of the 2.66 billion pounds of mozzarella produced annually is used by the pizza industry is a great unknown. No one interviewed was entirely confident in guessing, though Levitt did estimate that as much as half to two-thirds of the total production may be used for pizza.
Pizza Hut claims it uses 300 million pounds of mozzarella annually (about 11 percent of the total production). And if compared to its 2002 U.S. same-store sales declines, currently running about 3 percent below last year, the result may equate to a 9 million-pound reduction in its cheese usage -- 28 percent of Levitt's 32 million-pound figure.
Julie Hildebrand, spokesperson for Dallas-based Pizza Hut said her company is "doing our share to use cheese," and pointed to its recent Summer of Cheese promotion. Cheese-laden pies such as the Insider and its Stuffed Crust Pizza got heavy airplay and print exposure.
"We hear it all the time in focus groups that people want more cheese," said Hildebrand, adding that the company just launched its cheese-heavy Chicago Dish Pizza. "We understand that, so we definitely make cheese a big part of our promotions."
Dryer criticized pizza companies and retailers alike for not promoting cheese while prices were low this year. Outside of Pizza Hut, Tulsa, Okla.-based Mazzio's "Hot and Heavy" cheese pizza was the only large-scale, cheese-centered promotion he could recall. Grocers, he added, kept cheese prices high and enjoyed wide margins instead of running specials to move product.
"On the retail side of the equation, 30 to 40 percent of the cheese gets sold on promos, and when (grocers) don't do that, they've got to take a hit in sales," said Dryer. "On the foodservice side of business, there's zippo new ideas. ... They're not putting any energy into new pizza products."
But the blame doesn't lie just with pizzerias, he added. Cheese manufacturers haven't offered promotinal ideas either.
"They have a responsibility in this too," he said. "If you want to sell more cheese, you've got to give the end user some new ideas on how to use it."
But not everyone's down
Calls placed by PizzaMarketplace throughout 2002 to independent pizzeria operators have revealed few complaints about the pace of business. Customers still want pizza, and they're selling lots of it.
Many of Dryer's cheese industry contacts who sell to independents told him business is strong.
Gordon Food Service's customer segment manager for pizza, Paul Nyland, said his sales to independents rose this year.
"I'm showing several areas where they're up, some as high as 10 percent," said Nyland, whose company is based in Grand Rapids, Mich. "The only places where they're low, they're usually just flat. I still see the independent operators growing."
"A 2 percent surplus can send the market into a dramatic tailspin, and a 2 percent shortage can send the market into record-high prices."
One reason Nyland believes independent operations are doing well is that many of their operations truly are casual-dining outlets -- the lone restaurant segment reporting strong sales increases since the onset of the recession, according to the National Restaurant Association.
Grocery store sales of frozen pizza, deli-prepared take-and-bake pizzas and pizza kits (categorized as refrigerated pizza) also continue to rise. According to Chicago-based Information Resources, Inc. (IR), while frozen pizza accounted for $2.6 billion in sales in all of 2001, IR's most recent 52-week measurement (from Aug. 11, 2001 to Aug. 11, 2002), frozen sales are nearly $2.8 billion.
Already at nearly $144 million in August, refrigerated pizza sales are predicted to surpass 2001's $155 million mark by 12 percent.
According to Kevin Bender, public relations manager for IR, said these numbers are somewhat understated, as they don't include grocery pizza sales at Wal-Mart Superstores.
"It's just a best-guess, but I think it's fair to say that that could amount to 10 to 20 percent more (pizza) sales if Wal-Mart's numbers were in there," Bender said. He added that shredded and grated natural cheese sales (much of this is mozzarella), which aren't broken out, account for another $4.6 billion.
Interestingly, in America's dairy heartland, mozzarella supplies are low. Koerner's Sept. 18 USDA report on Midwestern mozzarella supplies also indicates strengthening demand.
"Fresh mozzarella supplies within the region are tight," the report began. "Interest in specialty products is generally the best and a few plant operators still have problems filling orders."
Koerner said the upturn in demand is expected in the fall, when "kids going back to college -- and you know what they eat. And with the weather cooling down, people don't mind warming up the house to cook a frozen pizza."
Dryer said his Midwest contacts also have told him supplies are tightening, but he added that "there's plenty of mozzarella on the West coast and other places."
Still, Dryer doesn't know how much of that's being used on pizza, but he did point out a lesser factor possibly influencing mozzarella declines: an increase in the use of cheese blends.
"Think about how often you see four-cheese pizzas now," Dryer said. "The complexion of the pizza industry is changing, and you see more Muenster and cheddar and blue cheese being used.
"So if you add that to things like new (non-pizza) menu items, you've got a lot things influencing mozzarella use."