May 1, 2017 |

The 411 on Cheese Prices

By Daniel P. Smith

How cheese prices are set, why the figure moves so much and strategies to better manage costs

pizza makeline

Gary Cooney certainly knows how the volatility of cheese prices can impact a pizzeria.

The man behind Chicago’s seven-unit Waldo Cooney’s Pizza chain, Cooney has seen cheese prices ebb and flow over his 36 years in the pizzeria business, affecting everything from his printed menus to the bottom line. “Sometimes,” he says, “these prices can make or break you.”

Ditto for Dan Collier, owner of the eight-unit PizzaMan Dan chain in southern California. With Collier using upwards of 6,000 pounds of cheese in a given week, even a modest price jump can dampen profitability.

Like gasoline and many other commodities, cheese prices are constantly shifting — and constantly befuddling operators.

How are cheese prices set?

Cheese prices are set by the open outcry spot market occurring from 10:45 a.m. to 10:55 a.m. each weekday at the Chicago Mercantile Exchange (CME). During the 10-minute trading session, buyers and sellers swap 40-pound blocks of cheddar (aged four to 30 days) and 500-pound barrels of processed cheddar. Prices on the CME trading floor provide the barometer for the U.S. cheese market, informing prices for nearly every other variety of natural cheese in the country.

“Fluctuations at the CME reflect the temperament and supply and demand of cheese in the U.S. market as a whole,” says Dave Kurzawski, a senior broker specializing in dairy at INTL FCStone in Chicago.

And even though cheddar represents but a narrow speck of the diverse and expansive domestic cheese market, it remains the commodity’s pricing standard-bearer, an American economic practice some eight decades old.

“This is just the way the industry has done it since the 1930s,” says Eric Meyer, president of HighGround Dairy, a Chicago-based trading firm.

Most suppliers, then, set their prices according to the CME’s spot market, often with lag time ranging from one day to two weeks.

Why are cheese prices so volatile?

Cheese prices are always bobbing and weaving. Last year, block cheddar prices at the CME were as low at $1.32 in May and as high as $1.88 in November. Go back to 2014, however, and prices have ranged from $1.32 to $2.36.

Not surprisingly, supply and demand –– both domestically as well as internationally given the rising amount of U.S. cheese being exported around the globe –– drive price fluctuations of cheese at retail, foodservice and industrial levels. As many a high school economics teacher has preached, prices rise with heightened demand and fall amid an oversupply.

Yet, cheese price volatility can be traced to a host of other factors as well, including regionality and seasonality, supply-side issues such as weather, production shutdowns, new plants coming on board or a Listeria outbreak, macroeconomic issues such as consumption trends and global trade policy, and the perishability of milk.

Traders like Kurzawski and Meyer also remind that psychology, greed and fear come into play as well. It’s not unheard of, Meyer says, for the market to swing on the movement of a mere 100 loads of cheese.

cheese prices, measuring ingredients, weighing cheeseHow can pizzerias better manage cheese prices?

• Investigate risk-management programs. Pizzeria operators should always start to manage cheese costs by talking with their supplier. Many vendors offer programs that can help pizzerias address marketplace volatility, including hedging programs and quarterly pricing as well as cost-plus or fixed-forward contracts.

“Ask about these programs and see what you can lock in,” Kurzawski says.

• Adopt the long view. While most want to hit an immediate home run with cheese prices, Kurzawski urges operators, particularly those who “lose sleep” over cheese prices, to embrace a long-term outlook. Specifically, he suggests seizing some certainty by purchasing a defined percentage of the pizzeria’s needed cheese inventory at a fixed cost.

“There might be times you pay more [than the going rate] and times you pay less, but this will help reduce price volatility,” he says. “Wrap your head around what a good price is and then decide if you really want cost certainty around this item.”

• Raise prices. Raising menu prices is typically the action of last resort, but might be necessary, particularly if cheese prices skyrocket.

If per-pound cheese prices climbed 50 cents, Rapid Fired Pizza co-founder Ray Wiley estimates that would increase his food costs on a pizza about one percent. While Rapid Fired’s 14 eateries would likely absorb that kind of rise in food costs, a more substantial increase could spur higher menu prices.

“We always hate to go to the menu board, but sometimes that’s on the table when costs escalate,” Wiley says.

• Address kitchen operations. While operators cannot control cheese prices, they can control their kitchen operations.

Rather than purchasing pre-shredded cheese from his suppliers, a commodity more susceptible to price volatility given deeper connections to labor and shipping costs, Collier favors block cheese that his kitchen staff then grinds daily.

On the inventory side, meanwhile, Collier directs kitchen staff to weigh cheese for every pizza to avoid overuse, while he also completes a weekly ideal cost on every line item, especially cheese.

“Each week, then, we know our over and short on cheese and can manage our cheese process better,” he says.

• Order up. When cheese prices reach a favorable level, Cooney doesn’t hesitate to increase his order size –regardless of any supplier resistance.

“We’ve got numbers we have to hit, too,” Cooney says, reminding his fellow operators to consider storage capacity and to rotate inventory whenever they increase the size of their traditional order.

Chicago-based writer Daniel P. Smith  has covered business issues and best practices for a variety of trade publications, newspapers, and magazines.