- WHITE PAPERS
The up again, down again saga of the U.S. cheese market continues.
After falling 17 cents from $1.39 on Jan. 24 to $1.22 on Jan. 30, prices ended the month at a $1.23 a pound, based on sales of 40-pound blocks of cheddar on the Chicago Mercantile Exchange.
According to Jerry Dryer, a Chicago-based dairy market analyst, and editor of the Dairy & Food Market Analyst, two main factors deflated prices: dairy co-op support of an artificially high cost; and this winter's unusually warm weather.
"The co-ops have been trying to support prices as long as they could, but they couldn't any longer," said Dryer.
Warm days in the 50s and 60s -- when temperatures should be in the 20s and 30s -- also have triggered a false "spring flush," a term describing the seasonally triggered high milk output of dairy cattle.
"This is supposed to be an April and May phenomenon, but when you have warmer weather, everyone's in a better mood, including cows," Dryer added. "Right now we've got a bit more milk than we're used to seeing."
Retail sales also helped nudge cheese market prices about a dime higher than common in January. Holidays and nationally televised sporting events also fell closely together on this year's calendar, leading many retailers to build inventories early on to meet demand.
"There was some legitimacy to these prices," said Dryer. "You have the Super Bowl and the Olympics fueling demand, and retailers have anticipated some improved cheese sales because of those."
Passover and Easter also are early this year, falling in the last week of March.
"You have a lot of Catholics who aren't eating meat during Lent that month, so some will choose cheese as an alternative protein," Dryer said. "There are a lot of components out there to support the market that first quarter that have always been there, but not on each other's tails like this year."
The Effect on Pizza
Given the dynamic nature of the cheese market, predicting how prices will track is difficult. What is clear, however, is how price drops can fatten the profits of operators who purchase cheese wisely.
For example, if an average shop purchases 800 pounds of cheese each week, at the January high of a $1.39 a pound, that operator would spend $1,112 weekly and $57,824 yearly.
But at a $1.23 per pound, that weekly cost drops to $984, and the annual cost slides to $51,168. The difference adds $6,656 to the bottom line at year's end.
Clearly, no such utopia exists, but it proves, analysts say, that operators should watch the market closely in order to equip themselves to negotiate cheese prices with purveyors.
"This market has a real tendency to overreact. It got a little too high at $1.39, and more than likely it'll go a little too low before it settles down."
Some, like Dave Deal, a procurement and distribution consultant with Food Source, recommends owners of chains of 15 stores or more consider cheese price hedging. When done correctly, Deal said hedging makes costs and profits more predictable.
"You don't want to be an operator who makes a risk-management decision that says, 'I'm going to subject myself to whatever the market does,' " said Deal. "When you get your head handed to you like so many (operators) have in the past few years, it's easy to rationalize that it was happening to everyone else. But that's not always necessary" if you are educated on advance purchasing.
Dryer agreed that hedging is great for stabilizing costs in the long term, but so is applying common sense, he added.
"(Operators) need to buy cheese at a price where they know they can make a reasonable profit," said Dryer. "So often guys will buy at something like $1.20, and when the market goes down, they think they've lost money. Well, of course, they haven't, really, but then the next time they'll wait too long to buy, it goes up and it costs them more. They get too greedy, try to squeeze the last nickel out of it and then lose whole thing."
How Low Will It Go?
Alan Levitt, a dairy analyst based in Crystal Lake, Ill, believes the market likely has bottomed out for the present.
"Since November, the block price has traded in a range of $1.20 to $1.40, and has risen above $1.25 -- and fallen below it again three times," said Levitt. "Each time, when the price gets in the low $1.20s, buyers step in and support it. I expect that to happen again."
Dryer said that if it's not at the bottom, it's close -- if buyers keep their cool.
"This market has a real tendency to overreact," said Dryer of the U.S. cheese market. "It got a little too high at $1.39, and more than likely it'll go a little too low before it settles down.
"It was at, what ($1.06) this time last year? It may go all the way there again. Who knows where the bottom is? The low $1.20s, however, that's quite sustainable."