Don’t Let Cheese Squeeze You Dry

Last spring, in Madison, Wisconsin, I presented a little seminar to about 30 pizzeria owners. They were the guests of the Wisconsin Milk Marketing Board.   

We had the opportunity to really learn everything about mozzarella and Italian style cheeses in four full days of information. We toured dairy farms, cheese factories and the Center for Dairy Research at the University of Wisconsin. This time last year the block price for cheese was $ 1.12 a pound...up a staggering .04 cents from the first of the year.

I gave a seminar to the guests and made this statement: “Cheese is so cheap right now, you should be making money hand over fist. If you’re not, you’re in trouble. The dairy farmers we spoke to this week are going broke at the current price of milk. You had better be putting some money away to pay them in the future, because when the price goes up, and it will, they will come back with a vengeance.”  Big Dave Ostrander,  Madison, WI – April, 2004.

I had absolutely no idea it would go up over a dollar a pound. No one did. I thought there would be a market correction of around fifty cents. I was right and I was wrong. The following unprecedented chain of events precipitated the crisis.  

It’s All About the . . . Milk Supply

• A 1 percent to 2 percent change in the Fluid Milk Pipeline affects pricing dramatically.
• Cheese producers pay more for milk when the demand for other items, (ice cream, butter, nonfat dry milk) is high.
• It’s a supply-and-demand issue.
• In the top 20 dairy farming states, the herd size is down 90,000 head. This is the lowest in five years.
• It takes 27 months to freshen a heifer.
• Posilac production from Monsanto is being reduced by 50 percent. This growth hormone injection increases daily milk production by several pounds per cow, per day.

Conditions that Drive Cheese Costs:

Milk Supply

• Cow slaughter: If you can’t afford to feed them, they go to hamburger heaven.
• No cows are being allowed from Canada to replenish the U.S. herd size.

Energy Price Increases

• Cheese production is a very high-energy business. It takes a lot of gas to evaporate 10 pounds of milk to one pound of cheese, plus pasteurization.
• Fuel and electricity are at an all time high.
• Some analysts are predicting gasoline to move well over $2 a gallon if OPEC doesn’t open the spigot a little more.

Demand for Butter

• The demand for butter is up. We may see $3 a pound.
• This will divert Class III milk to products heavy in cream:

• Ice Cream
• Sour Cream

International Events

• When Mad Cow was discovered in Canada in May, and an imported cow in Washington checked positive in December, the border was sealed to prevent a global disaster. Normally, 50,000 Canadian dairy cows cross the border each year.
•  World demand for dry milk is high.
• OPEC oil cutbacks.

Weather

• Forage and grazing conditions were especially poor last winter.
• Feed and grain prices are very high, especially soybeans. This results in short rationing the cows and contributes to lower milk  production.

National Milk Producers Federation

• Created a voluntary program, Cooperatives Working Together. The program paid farmers to:

• This program was a desperation move to turn around the two year price depression and finally give small family farms desperately needed capital.

How Mozzarella is Priced

The Chicago Mercantile Exchange – CME
The wholesale price of mozzarella is the same as the Cheddar Block price posted everyday on the web at www.cheesereporter.com/prices.htm.  Most suppliers buy cheese off the CME’s weekly average.             They pay the Block price, plus a little more. Your distributor has now purchased finished product. They need to pick it up at the backdoor of the plant and truck it to their distribution center. They will then rotate it into their cooler inventory, pull the order, load into a route refrigerated truck and deliver it to your back door. Your distributor will need to cover all transportation, warehouse, administration, sales commission and company margin on this transaction. The majority of distributors make very slim profits on mozzarella. They make just pennies a pound. They are aware that mozzarella is usually a commodity ingredient and the competition for your order is fierce. 

The Best Way to Buy Cheese
After sampling available cheeses in your area, narrow your choices. In order to call a cheese mozzarella the USDA has developed Federal Standards of Identity.  These are a set of minimum and maximum percentages of ingredients in the cheese with a heavy emphasis on the Moisture and Milkfat in Solids. When a cheese has too much water or not enough milkfat in it, it can’t be called mozzarella. It can be called Pizza Cheese or Cheese for Pizza. More than a few of the large chains use this cheese because it’s cheaper to make that the real thing. Check out a few menus and you’ll see.  The proof is in the dumpster.

You will now start to buy your cheese on a Block Plus program. The supplier will quote you a weekly price for your cheese based on the CME weekly Block average, plus an agreed upon cents over Block up-charge.  This up-charge will cover their freight, warehousing, shipping to you, plus profit margin and commissions to DSR’s.  Most supplier sales reps will need to contact their dairy buyer to arrange for your invoice cost to be ‘locked in’ for a one to three, or six month, period. 

For over 15 years, I never asked my DSR the price of cheese. The pricing was completely out of his hands.  I simply went to the web, checked the weekly average, added my 13 cents over block price and saw it reflected on the invoice. I bought a good quality, packer label mozzarella in loaf form. If I wanted to buy shredded or diced, I’d expect to pay and additional 12 to 15 cents a pound to cover this cost. If you choose to use a high end, name branded, premium cheese you should expect to pay an additional 50 to 70 cents a pound. These dairies pay a premium for the extra high quality milk they must use in their cheese. They also generally run tighter specifications.  When you enter into a Block Plus program you’ll commit 100 percent of your cheese to one distributor. They commit the lowest possible price. If you start falling for lowball pricing and start shopping around they will end the program. Mozzarella is a perishable product. If the buyers have commitments for X tons a week and the cheese isn’t purchased, it may cause an over-inventory problem that could lead to throwing cheese in the dumpster that is out of date. In the long term, this is the most cost-effective way to purchase cheese. It eliminates the adversarial weekly dance with the rep. Remember: If you’re everybody’s date...you’re nobody’s steady. Now that you’re buying right, the next interventions are completely under your control. To this point, you’ve been reacting to situations out of your control. 

In Every Crisis Comes an Opportunity
I really don’t have crystal ball, but I’ve got a software program that spits out the cost of making pizza to the penny. FoodCost Pro shows that it costs over 50 cents more in cheese to make a 14-inch pizza than it did a few months ago. At Big Dave’s Pizza, my average weekly cheese usage was over 1,000 pounds a week. In the height of tourist season, we consistently used over a ton a week. It doesn’t take a math major to compute a $1 a pound increase times 1,000 pounds. I don’t know of any clients who can afford this kind of weekly loss in profitability. I had a chat with a friend of mine from Ohio who uses 4,800 pounds a week. This crisis is not going away in the near future. I believe the CME Block price will be above $ 1.70 mark till late summer. You’ll be dancing in the streets if cheese ever hits $1.50 again. Plan on over $ 2 a pound for a long time. This said, what are your options? 

It’s Informed Decision Time
f you’ve never gotten around to buying that scale or pre-portioning out cheese cups on your make line, do it now. If you’ve been putting off doing a real food cost analysis on every entrée on your menu, do it now. If you’ve been thinking of marketing and positioning your pizza as the best rather than the cheapest, do it now. If you’ve been thinking about creating pizza portion control guideline ‘cheat sheets’ for you pizza makers, do it now.  If you’ve been thinking about advertising the fact that you use ‘real mozzarella,’ now’s the time. If you’ve been thinking about reducing the ounces of cheese on your pizzas, call me and I’ll convince you your customers will notice and take offense. I’ll talk you through it until you get your wits about you. If you make great pizza and have been thinking that if you raise your prices 50 cents, all of your customers will leave you for the competition, think again. I guarantee you they won’t. If you’ve been thinking about entering into a win-win relationship with your cheese supplier, do it now. If you’ve been thinking about how many pizza places will go out of business, like I have, if they don’t get proactive and do something, make sure it’s not you. If you think you have to hold on to last month’s prices because you have a few thousand flyers to get rid of, think again.

You Owe It To Yourself
The decisions you make in the near future will determine if this year will be profitable or not. Every other expense category is going to go up, compounding this year’s financial outcomes. You and your crew work too hard to just get by. I know you’ll make the right decisions after you’ve been given solid, timely honest information. If you are still struggling with making the right choices for your restaurant after this article, feel free to e-mail me or call.

– PMQ –

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