Cheese, this is confusing!

 
Nov. 4, 2004

Cheese is serious business to pizza operators, so we do our share to stay abreast of price changes and market cycles relative to this most precious commodity.

History shows that, by and large, the dairy market is fairly predictable. But prices this year have made even the smartest dairy minds say more than once, "Beats me what's going on." Analyst Alan Levitt told me that 2004 is perhaps the craziest year he's ever seen in the industry.

Even sages thought the cheese market would correct itself far sooner than it did when block cheese prices soared to $2.20 — 23 cents higher than the previous record set in 1998 — and then dropped from $1.80, where it held for nearly six weeks, to around $1.50.

Not long ago, Dave Deal, a former Little Caesars executive who now advises pizza companies on dairy purchasing strategies, told me that the sale of as little as one load (40,000 pounds) of cheese on the Chicago Mercantile Exchange can send market prices soaring or tumbling.

Not worth figuring out

You can spend an enormous amount of time wondering why prices rise and fall seemingly without reason, or you can prepare yourself to deal with it when it happens. Let the Levitts and Deals of the world watch the details, and then listen closely when they warn of market moves.

What operators can do is pretty simple:

Control portions strictly. If there was a lesson to be learned in this most recent price crisis, it was this one. From what I'm hearing, it appears many operators have finally knuckled down and started weighing and/or cupping their cheese.

Consider it this way:

Prepare for cheese prices

· Strictly control portions.
· Negotiate a percentage-over-block price with supplier.
· Consider hedging strategies such as investing in milk futures.

Another price-comparable commodity is gasoline. Recent price spikes aside, shredded mozzarella typically is more expensive than petrol.

Negotiate a percentage-over-block price with your supplier. Not only does it demonstrate a firm commitment to your supplier, it allows him to commit to his supplier who then contacts a broker to buy fluid milk futures. That in turn tells dairy farmers how much milk they need to produce for their customers, which makes market demand more predictable, and predictability equals price stability.

Consider hedging strategies. Unless you're a commodities whiz, you'll likely need the help of a broker to invest safely in the milk futures market. Deal believes pizza companies with as few as 10 stores should consider this strategy, not for the purpose of getting rich, but to smooth out the price highs and lows.

The goal is to offset high cheese prices by buying milk futures contracts at low prices and selling at high prices (all of which the broker does for you).

The end result for a pizza operator is price predictability. To grossly oversimplify this idea: A conservative player would position himself to pay $1.50 (CME block rate) for his cheese throughout the year. He'd budget that cost into his food cost, profit margin and menu prices.

If the price goes above that, he's making out well, but if it goes lower, then he's paying more than his competitors. The bottom line is that he's paying the same price all year round. Knowing what to expect, Deal says, gives the operator peace of mind.


Topics: Cheese , Commentary


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