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Cheese users are getting milked

Cheese prices have been heading skyward for months. That’s bad news for most restaurant operators, but it’s even worse for entrepreneurs like Jim Fox who run cheese-heavy businesses. Cheese prices have been heading skyward for months. That’s bad news for most restaurant operators, but it’s even worse for entrepreneurs like Jim Fox who run cheese-heavy businesses. The founder of Fox’s Pizza Den, a 265-unit chain based in Murraysville, Pennsylvania, Fox buys about 60,000 pounds of cheese a week; in early summer the price went up 35 cents a pound in just three weeks, he says.

That’s an additional $21,000 in food costs each week, and until now Fox has simply been absorbing it. “Everyone’s waiting to see if prices are going to level off or come down,” he says. “Who knows when the hell it’s going to stop?”

Unfortunately, dairy analysts say there’s no good news coming any time soon. At the Chicago Mercantile Exchange, the price of a block of cheese averaged $1.98 a pound recently, compared to $1.34 a pound at the beginning of the year and $1.20 this time last year. The all-time high price—$2.22 a pound, which was reached in the spring of 2004—is not that far off. “Many in the trade believe that [reaching] it is possible,” according to a recent edition of Dairy Market News, the U.S. Department of Agriculture’s weekly report on the industry.

Why? Simple supply and demand, says Roger Hoskin, an economist with the USDA’s Economic Research Service. Total cheese output in April, the most recent month for which figures are available, was 803.3 million pounds, 1.2 percent above April 2006 but 4.1 percent below March 2007, according to the USDA. “Basically, we need more milk,” Hoskin says.

Like it or not, operators are part of the problem, according to Hoskin. “The restaurant business is doing well and they use a lot of cheese,” he says. “You guys are drivers.”

Other, more complicated factors come into play as well. The market for powder products—nonfat dry milk, whole milk powder and the like—is particularly strong, with much of the demand coming from overseas. That means some milk supplies that ordinarily would have gone to cheese production are being diverted to powder products. “Our markets are becoming more globalized,” Hoskin explains. “That means small changes in availability or demand could have enormous impact on pricing.”

In addition, the classic supply-and-demand curve means that, following the record-high cheese prices in 2004, demand slowed. Milk prices dipped below average, and producers responded by keeping herd sizes steady or, in some cases, going out of business entirely, according to Jerry Dryer, editor of Dairy & Food Market Analyst, a weekly newsletter. “Milk supply has tightened considerably,” he says. “Historically production grows by 2 percent to 3 percent over the previous year. We’re now at 1 percent; they’re just not growing enough to meet demand.”

Dryer feels prices are near their ceiling, though he won’t be surprised if the old high is breached for a short time this year. The USDA’s Hoskin agrees, adding that he expects some tightness in the market through the end of the year and into early 2008. (The time it takes for supply and demand to even out is at least in part due to the realities of milk production, according to Dryer: it takes two years from the time a calf is born until it can be milked, so even if farmers expand their herds it’ll be a while until milk production increases.)

In the meantime, what’s an operator to do? Some pay stricter attention to portion control, using digital scales or portion cups to make supplies go further, and others will look to buy in bulk and freeze their cheeses. But in Hoskin’s experience, most restaurants “take it in the margins. Some of them turn kind of purple, but they just gut it out and hope for better times.”

That sounds about right to Jim Fox. He’s already buying his cheese directly from the manufacturer in order to get the best pricing possible, and he’s pondering temporarily increasing prices by a dollar across the board. That’s what he did back in 2004, and to his surprise the backlash from franchisees and diners was minimal. Even better, his phone rang off the hook with calls from happy franchisees later that year, when cheese prices normalized and Fox’s dropped the dollar surcharge.

But with cheese pricing expected to be somewhat volatile for the foreseeable future, it might be more prudent to keep menu prices elevated and, when the current price hike ends, build a bit of a cushion for the next one.

“The market’s still competitive enough to keep prices from going too far out of line,” says Hoskin. “But it’s going to be a little different way of doing business from here on out.”

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