Twenty years ago, a pizza operator could take a chart of the cheese market and overlay year after year in order to predict the cost for the next few months. Fast forward to cheese trades at the Chicago Mercantile Exchange (CME) plus an expansion to a world dairy market and predictions are a difficult science.
In the past, Americans consumed all of the cheese produced domestically. The world had no interest in our product and cheese producers had a ready local market so they never looked beyond our borders. With the rise of dairy as a food source in Asia, the world now comes to the U.S. dairy industry for our output. As incomes rise in China, milk and cheese use has increased. It will take decades for China to produce enough dairy to satisfy its domestic needs. Traditional, New Zealand & Australia filled the gap. Persistent drought in that region (combined the fourth largest milk shed in the world) forces Asian buyers to seek U.S. producers.
The top 5 milk processing countries in 2011 were: 1. USA, 2. Germany, 3. China, 4. France and 5. India. In addition, the U.S. has an extensive and sophisticated dairy industry that is highly efficient at producing and processing dairy at the lowest cost in the world.
Cow Milk Production by Country -2012 (Production volume in million metric tons)
United States: 90.00
The volatility of the CME has resulted in huge fluctuations of cheese prices. In the past three years, the pizza industry has seen a CME high of $2.20 and a low of $1.10 — the floor that the U.S. government puts under the market. The biggest cheese users among us are price takers, meaning they have to buy at whatever cost the market issues. Very large buyers can "hedge" by buying Class III milk futures but that only reduces the pain, it does not eliminate it. Mozzarella is a fresh cheese that must be consumed within 60 days or the performance characteristics change, it will not melt and stretch properly.
Why bring all this up?
Most pizza operators recall the "old days" of the simple prediction of cheese costs. As a result, many pizza operators "believe" that cheese prices are temporarily crazy and will settle down "soon." This is not true. The world has found the U.S. industry and American dairy producers, like any other business, will sell to the highest bidder. The years of low stable cheese cost are over. Pizza operators need to accept this reality and price their pizza to account for permanently higher costs. If market forces create some temporary low price, promote, promote, promote, but now is an era to raise quality, improve service and raise prices.
Wishing you success in pizza – Ed
Ed Zimmerman is a pizza industry veteran and President of The Food Connector. His almost four decades of foodservice experience includes food manufacturing and distribution leadership, food industry technology, marketing services and restaurant and grocery operations management.