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Cheese prices were undoubtedly volatile during 2003 and thus far in 2004, but that's not necessarily a surprising development, for a couple of reasons.
First,
cheese prices have shown
extreme volatility almost every year since 1996. Simply put, the odds
greatly
favor volatile rather than flat or relatively flat prices. Second, and
perhaps
more important, cheese prices, over extended periods of time, have
averaged
right around $1.35 per pound, so after periods of prolonged low
prices—such as
in 2002 when prices were around $1.18 per pound—it can be expected that
prices
will be higher than the long-term average.
In
fact, based on that observation,
it's not a complete surprise that cheese prices have already reached
record
highs this year. That's because not only were cheese prices well below
average
during 2002, they also ended up slightly below average last year at
just under
$1.32 per pound. Two consecutive years under the average pretty much
guaranteed
that cheese prices in 2004 would be well above average. If you add in
the year
2000, odds really favored high cheese prices this year. The block price
averaged under $1.15 per pound in 2000, meaning that in three out of
the last
four years block prices have been under the long-term average, and in
two of
those years they were 15 cents or more below that long-term average.
Unfortunately,
all of this information doesn't help cheese buyers deal with
month-to-month or
week-to-week cheese price fluctuations. And this year, there isn't even
much
predictability in the seasonality of cheese prices. Historically,
cheese prices
have generally reached their seasonal lows during late spring and early
summer
and peak in late summer and early fall. This pattern has tended to
occur
whether prices are lower or higher than "average."
For
example, the Chicago Mercantile
Exchange 40-pound Cheddar block market hit an all-time high of $1.9725
in
August of 1999 after a spring time low of $1.1925. The prices then
declined to
$1.1000 by November 10. For the year, the block market averaged just
over
$1.42-within 10 cents of the long-term average price, despite a range
of nearly
90 cents from the low to the high price for the year.
At
least somewhat similar patterns
were seen in two other recent years in which cheese prices averaged
well above
“normal.” In 1998, the block market reached a spring low of $1.1800 in
early
May, then climbed slowly starting in May and continuing until hitting a
then-record $1.9000 in early December. For the year, block prices
averaged
almost $1.57 per pound. In 2001, blocks
bottomed out at $1.0675 in mid-January, rose fairly steadily to $1.7800
by late
August and then declined to $1.1600 by late October. The block market
average
that year was just under $1.44 per pound.
This
pattern holds when prices are
below average as well. In 2000, for example, when blocks averaged under
$1.15
for the entire year, prices were below that level from early January
through
mid-June, then above that price through late September with a high of
just
$1.3300 in mid-September. Last year, blocks were under $1.20 per pound
until
mid-June, reached $1.60 at the end of July, held at that price until
late
October and then declined to about $1.30 by the end of the year.
Reasons
for this seasonal variation
can be summed up rather simply as follows: supply and demand. More
specifically, milk and cheese production tend to peak in the spring
(March
through May) and bottom out in mid- to late summer (July through
September).
And component levels in milk (protein and fat), which are key to making
cheese,
tend to peak in the fall, winter and early spring and decline as the
weather
warms up.
Demand,
meanwhile, tends to peak in
the period of August through October. This period includes such factors
as
schools reopening in the fall, which increases demand for fluid milk
(making
less milk available for cheese production) and companies lining up
cheese
supplies for the major selling season of roughly Thanksgiving through
the Super
Bowl.
So
how long will these record-high
cheese prices last? As of early April, it looks like prices might be
near their
peak, but a number of factors could keep prices well above average for
the rest
of the year. These reasons again boil down to supply and demand. On the
supply
side, milk cow numbers have been declining for almost a year now,
weather and
other factors have been hampering gains in production per cow, and
recently
Monsanto announced that it would be reducing by 50 percent the
availability of
its Posilac BST product that increases milk production. These factors,
coupled
with the impact of two straight years of below-average milk prices for
farmers
(in 2002 and 2003), point to less milk being produced in 2004 than in
2003.
On
the demand side, a variety of
factors are at work, but the main one is the economy. Dairy product
demand,
particularly demand for higher-fat products, tends to increase when the
economy
is strong. So if economic recovery continues this year, there should
also be an
increase in dairy product demand.
Is
there anything pizza restaurant
operators can do about these rising cheese prices? I would recommend
two
things. First, always remember the law of averages. What happens to
cheese prices
during 2004 might be unusual in the context of 2002 and 2000, but not
in the
context of the last 10 years. Cheese prices are economically
unsustainable at
their 2002 average of about $1.18 per pound. Neither dairy producers
nor cheese
makers can survive long-term with those depressed prices. So higher
prices
aren't just likely, they're necessary.
Second,
the dairy industry has spent
more than a decade now attempting to create better ways of dealing with
price
volatility. Many companies now hedge their milk prices by using dairy
futures
and options contracts on the Chicago Mercantile Exchange. A number of
other
companies also use forward contracts that extend up to a year or more.
I would
advise talking to your cheese supplier about locking in cheese prices
over a
long-term period of time.
Of
course, there's probably no way,
at this time, of locking in cheese prices anywhere near the 2002 price
average,
and given expectations for the remainder of 2004, it might be difficult
to lock
in prices even at the 2001 or 1999 average. But this could be a
long-term
strategy worth considering, given the expectations for continued price
volatility in the future.