- WHITE PAPERS
Two parties meet over the Internet, each has something the other wants. They agree on a price and their identities are revealed. Another match is made.
No, it's not what you think. It is another transaction made on Dairy.com's new Cheese Exchange. The site allows buyers and sellers to trade cheese of any type, grade and/or amount 24 hours a day, seven days a week.
"On the sell side, you have all the major cheese makers," said Chris Renner, executive vice president of Dairy.com, a for-profit, privately held company. "On the buy side, it could be anybody from a pizza company to further processors. We're typically talking about restaurant, retail and foodservice."
The site officially launched Nov. 5 after a month-long trial period. Seven companies took part in the pilot: Kraft Foods, Dairy Farmers of America (DFA), Hilmar Cheese, Land O'Lakes, Leprino Foods, Sargento Foods and Schreiber Foods. Renner says more than 60 companies representing about $19 billion in annual cheese sales are now registered with the site, but he wouldn't say how much cheese has been traded so far.
"We don't typically disclose total volumes like that, but we are doing active trading among current members of the site," Renner said. "We are moving tons of cheese."
John Wilson, corporate vice president of marketing and economic analysis for DFA, said the co-op's investment is a sound one.
"Currently there are lots of folks doing business out there who'd be in need of some spot loads if they're buying, or they need to get rid of some spot loads of they're selling," Wilson said. "The Internet is really a communication device that allows lots of buyers and sellers (to meet) who perhaps wouldn't know each other otherwise."
Renner says the online trading process is simple.
Buyers looking for spot loads of cheese (a spot load also is called a truckload, which weighs 40,000 pounds) can log on to Dairy.com's Cheese Exchange site and review multiple offerings from producers across the country.
Renner said that a buyer makes an offer, and the seller either accepts or counters the bid. Once the sale is confirmed, the parties disclose their identities, and arrange for the cheese shipment.
While moving spot loads of cheese may sound like that done by a broker, Renner said there is a difference. A broker takes title and represents only one party in the transaction. Dairy.com merely facilitates the transaction between buyer and seller.
"This is the first time in the history of the cheese industry where there's a single place to electronically facilitate that breadth of trading," Renner said.
Cheese trading also occurs on the Chicago Mercantile Exchange, but buyers and sellers there deal only in cheddar blocks (40 pounds each) and barrels (500 pounds each). The prices of those increments serve as a barometer for many other cheese prices.
"The (Dairy.com) exchange will allow people to trade in a different manner compared to the CME, because the exchange will not limit the cheese to just cheddar," said Wilson. "You can trade unlimited types of cheeses and you post your load wherever the warehouse is, whereas the CME is in Chicago".
Errol Baxter, director of commodity products for the CME, said the two exchanges complement each other without competing.
"I hope they succeed, because any more transparency as far as pricing in the dairy industry is good," said Baxter. "The more price information you get, the better the market becomes."
While some expect that such price transparency will reduce cheese price volatility the industry has endured over the last year (see related story, "Cheese Price Meltdown"), analysts and market insiders said that's unlikely.
"Volatility is still a function of supply and demand," said Alan Levitt, a dairy market analyst in Crystal Lake, Ill. "The fact that we have this perishable product that comes out every day -- it's just always a struggle to try to manage that. Some days you have more than you need. Some days you have less. The price does stuff because of that."
DFA's Wilson agrees.
"I don't think it's going to change the price," he said. "I think it's going to help some of the buyers and sellers get together. On any given day, there could be trades occurring that are not as good a deal for one side or the other."
Renner, however, believes it could smooth out the price fluctuations as buyers and sellers show their cards, per se, by bidding on the exchange. That, he said, provides a good indication of what buyers believe the price of cheese should be, rather than what is largely dictated by cheddar prices at the CME.
"This is going to provide visibility to all of the offers that are out there (and) help negotiate that pricing," Renner said.
To start Dairy.com, private investors made an initial investment of $20 million earlier this year. According to Renner, since then, several additional rounds of funding have followed, but he wouldn't specify how much was raised.
The site makes money from revenues generated by registration and transaction fees. The annual subscription rate, or fee for a seat on the Cheese Exchange, is $1,000 per company. Additionally, for each transaction completed, both buyer and seller pay $.003 per pound of cheese moved.
How well is it working so far?
Spokespersons for companies registered on the exchange are waiting to weigh in as well.
"Our cheese people haven't used it enough yet to have a comment on how we like it," said Patty Strup with Hilmar Cheese in Hilmar, Calif.
Mike Reidy, senior vice president of procurement, logistics and business development for Leprino Foods, said much the same. "We're still working to expand our involvement with it, but it has been fairly limited at this point."
Dennis Roehrig, vice president of procurement for Blue Line Distributing, the supply arm for Little Caesars, said he is aware of Dairy.com, but added that "it hasn't been very useful to us thus far." The world's fourth-largest pizza company, he said, typically uses package cheese, and doesn't depend as much on spot loads.
Amy Lindsay, a purchasing manager with Papa Murphy's Take 'N' Bake Pizza, said she hadn't heard of the program. And Karen Sherman, vice president of community and public relations at Papa John's International, said it's news to her as well. Additionally, she's not sure the world's number-three pizza company would need it. Papa John's formed its own cheese purchasing company two years ago, and procures its cheese from a single source.
Overall, Renner remains optimistic that as more companies use the site, the more they'll realize its efficiency and word will spread.
"Our mission is to be the place where dairy business gets done and to streamline the way the dairy industry (companies) transact amongst themselves," Renner said.