7/10/2007 | Business Trends: Soaring cheese prices could flirt with record territory

Soaring milk costs have cheese prices on a bull run, and that’s leading industry watchers to predict a possible return to record highs logged in 2004. When block prices hit $1.75 on May 23, it was a high-water mark last reached in January of 2005.

The high prices are a result of multiple factors including strong worldwide demand for milk products, high cattle feed costs and lofty energy costs. And while observers believe the herd on hand is large enough to meet demand, farmers plagued by low prices in the past two years likely will do little to put more cows into the supply chain and ease the burden.

“They saw very low prices for a couple of years, which triggered a big resurgence in demand,” said dairy analyst and consultant Jerry Dryer. “Simultaneously, when you see low prices at the farm level, you see less production that (struggles to meet) increased demand across the board.”

Dryer said the weak dollar has international customers scrambling to buy American, particularly products made from milk powder and whey. And while the sales of such products might not appear to tax the cheese supply, any milk shifted from cheese vats to the evaporator tightens overall supplies.

An ongoing drought in Australia has its corner of the world turning to U.S. suppliers for help, and strengthening demand among European Union nations that lack large-scale dairy producers will pinch supplies for months to come.

Every link in the dairy production chain, not just end-users like pizza operators, is stretched right now, Dryer stressed.

“Feed prices are way higher than a year ago, and manufacturers are getting squeezed on the energy side of the business,” he said. “It’s costing them a lot more to make, transport and refrigerate the product, and they’re screaming about it. One thing’s for sure, nobody’s getting rich here along the line.”

Treat it like gold

Jim Catalfino has seen cheese prices rise and fall, but he said changing the amount he uses on his pizzas or the price he charges for them won’t happen.

“You can’t really change because customers don’t understand how cheese prices affect you,” said Catalfino, owner of Catalfino’s Pizza & Pub in Canal Winchester, Ohio. “They want their pizza, and they come to get what they want regardless of what it’s costing me.”

High cheese and energy prices have put a double whammy on pizza operators’ wallets, Catalfino said. Not only do customer counts drop when gas prices go up, fewer transactions mean margins are choked.

So what to do in the face of such challenges? Mike Feeney, a cheese broker with The Spaulding Group, a.k.a. “The Cheese Guys,” said he tells his clients to batten down the hatches and run their ships as tightly as possible.

Feeney said too often operators don’t manage their cheese inventory well when prices are lower, and they suffer from those bad habits when costs skyrocket. Proper portion controls, he said, are essential to any operation hoping to stay profitable during a price storm.

Catalfino said his crew always uses portion control cups on cheese, so during tough times, he works harder to grow his business and tightens the business’s belt where possible.

“We may lower our payroll a little bit and keep the hours worked less than usual,” he said. “But we really work on increasing our catering, which has been going up every month. I look at it as an opportunity to create new revenue streams more than cutting costs.”

Just how high is high?

For nearly a year, market watchers warned of an inevitable price increase. Conservative analysts saw $1.70 as the peak, while Peter Ullrich, who studies commodities buying trends, predicted market fundamentals could push block prices to $2.20, a level last seen in March 2004.

Dryer numbered himself among the cautious speculators until late May, when prices touched $1.80 per pound for 500-pound blocks, units used by large cheese packers. Now he’s having second thoughts.

“I didn’t think $2 cheese would come until I saw what happened (in May),” Dryer said. “(Cheese buyers) are willing to take it at those prices, which shows there’s a ferocious appetite for it. So $2.20 is not out of the realm of possibility based on what we’re seeing so early in the season.”

Dryer called the market upheaval the product of a capitalistic system.

“This is a pure supply-and-demand situation, no hanky panky going on here,” he said, referring to past concerns about market manipulation. “This is going to be with us for some time, you can bet on that.”