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CHEESE MARKET ANALYSIS: More cheese price volatility on the way
The bad news for pizza operators is that cheese prices, though presently low, are likely to shoot up soon. The good news is prices are expected to fall again around Christmastime, and managing your own supply through tight portion control can boost profits and provide peace of mind in the meantime.
August 14, 2005
Were there an amusement park named Dairy World, the Cheese Market Rollercoaster would be its most fearsome ride.
Every excursion along its rails would include frightening ascents, shocking declines, unexpected curves and unexplained stops. No two passes would be the same, and the ride's operators wouldn't be able to explain why — until the ride's over, of course. Only then would they know what happened to create the coaster's crazy path.
If you asked them what to expect the next time around, each would give you his best guess, but even if it were close, it probably wouldn't prepare you fully.
Thus describes the outlook on this year's — every year's, really — cheese market.
"Volatility seems to be the word we say so much this year," said Mike Feeney, a cheese broker with Brighton, Mich.-based Spaulding Associates, a.k.a. The Cheese Guys. "Like right now, this little blip on the downside is kind of wacky because once the heat's reflected in the yields, it'll spike back
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A simple interpretation of Feeney's "cheesespeak":
After the price for 40-pound cheddar blocks held firmly in the mid-$1.40s to low-$1.50s for much of June and July, the price tumbled to $1.35 on Aug. 2 (the lowest for blocks since October of 2004), a time when prices typically strengthen. And despite the news that June milk production was well above expectations, strong demand for cheese nationwide kept analysts thinking prices would remain well above $1.40 for some time. No one, in other words, saw $1.35 coming, except maybe dairy cows.
Throughout the summer, unusually high heat and longer-than-average dry spells have stressed the dairy herd to the point that milk yields have dropped by about a gallon per cow per day. Worsening matters is the fact that the milk produced by those cows is low in solids, the very stuff needed to make cheese. Feeney said he heard a dairy producer say, "We're shipping white water right now."
That "white water" is headed into the processing system now, and analysts predict its poor yield will push prices up quickly. In fact, on Aug. 4, block prices jumped more than 4 cents to $1.40, likely starting an upward trend that may not level off until late September at the earliest.
"I think a run to $1.70 is still within the cards," said Jeff DeGrand, a commodities broker with Downes-O'Neill in Chicago. "In the next four to six weeks in the marketplace, I expect we'll run into a short-term supply crunch."
Still, DeGrand foresees better price news near year's end. "I think we'll ... close out the year in the high $1.20s to mid $1.30s."
What's to blame?
If you listen to multiple dairy analysts, you've learned to expect pretty different opinions from all of them on why cheese prices are so volatile this year. But in their defense, the myriad factors influencing prices — weather, trader psychology, enduser-market demand, the confounding dynamics of the Chicago Mercantile Exchange, dairy product imports and exports, plus the forces of unabashed greed — make predicting where the market's headed practically impossible. To be sure, analysts are good at foretelling the market's general path, but the unforeseen detours can trick even the best.
An example: Crystal Lake, Ill., analyst Alan Levitt expects a price run-up will happen on the
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combined heels of the harsh summer weather, the resumption of the school year and the potential export of millions of pounds of cheese by the Cooperatives Working Together. (* See note at end of story.) When cheese prices approach $1.40, members of the dairy-farmer-funded cooperative can sell cheese stocks to foreign endusers in order to lower excess domestic supplies.
Though not triggered by cheese prices, the CWT occasionally exercises a herd-buyback program in which it funds a reduction of America's milking herd. Fewer cows mean less milk and ultimately, prices move northward.) Levitt also expects block prices to remain between $1.40 and $1.45 for the remainder of the year.
DeGrand, however, believes the impact of CWT's herd reduction won't be significant enough to make a dent in the already strong milk supply, plus he said the school year is a predictable-enough factor in the dairy cycle that no one should be caught off guard when classroom bells start ringing in late August.
"My argument to those people is that school starts every year," DeGrand said. "If we're truly a futures market and a price discovery market, then we shouldn't react like that until a year comes that they decide we're not going to have school in September.
"Even like the CWT announcement, (the school year) arguably should be baked into the (futures market) prices since we've been looking for it for the last three weeks. I rule the schools as a non-factor."
Analyst Jerry Dryer, author of Dairy & Food Market Analyst newsletter, said that many price fluctuations occurring now are simply aftershocks still registering from record cheese prices levied in 2004. Influential endusers expected tight supplies in 2005, so they made sure plenty of cheese was stashed away for expected strong demand.
"Well, they woke up about the same morning that the June milk production report came out saying production was up 5 percent. And they thought, 'Hmm, I think I've got enough cheese,' and they started turning it back out to
— Mike Feeney, |
If someone complains about (cheese) prices, I say, 'Do you portion control?' If it takes more than a few seconds for them to answer me, I've got my answer.
Despite the 2005 block cheese high of $1.75 seen on Jan. 21, Dryer said the view "of my own tea leaves" convinces him this market could exceed even that before leveling off to around $1.40 per pound at year's end. The MCT Compass, a newsletter produced by MCT Dairies, predicts a December price average of $1.42.
What's an operator to do?
Does cheese price volatility mean pizza operators should throw themselves at the mercy of the market? To a small extent, yes, but to a much larger extent, no, said Feeney, who numbers several pizza companies among his clients. No amount of fretting or fussing will change the dynamics of the dairy market, but operators can and should control their cheese usage and, ultimately, their costs. Additionally, managing your own cheese supply tightly can bring some peace of mind with the knowledge that you're doing your part.
"If someone complains about prices, I say, 'Do you portion control?'" Feeney said. "If it takes more than a few seconds for them to answer me, I've got my answer.
"Our approach is to tell operators to worry about their portion control at the make station. If you use exactly 8 ounces when it calls for that — not 10 or 11 ounces — at the end of the year, you've controlled your costs in a great way."
Does he recommend his clients consider milk futures to build a hedge of protection around their profits? Not unless they're a large pizza player.
"They need to be in the 20,000 to 30,000 pounds-per-month usage category to look at that," he said. "If you ride the peaks and valleys over the year, you're probably going to even out in the end. So take the long view and don't get caught up trying to risk too much just to beat the market."
**After the original posting of this article, information on CWT was clarified by analyst Levitt.Related Media
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