Cheese Pricing

3h 9 ûoa/sTfi Tlc^W >i»««rv^ United States Department of Agriculture Cheese Economics and Statistics Service Pricing Agricultural Economic Report No. 462 Harold W. Lough :x3S 73 Ci. ni'-c: —n .—Í 'p- ' r or) — ir,S> Cbeese Mdng by Harold W. Lough. National Economics Division, Economics and Statistics Service; U.S. Department of Agriculture. Agricultural Economic Report No. 462 Abstract Cheese prices, key market indicators for the entire dairy industry, rose rapidly in the seventies because of rising demand for cheese. Cheese prices nationwide follow those on the National Cheese Exchange, which itself handles less than 1 percent of total U.S. cheese production. Retailers usually give cheese the highest profit margin of all dairy products; since 1973, retail cheese prices have risen more rapidly than wholesale prices. Dairy farmers receive about 48 cents for the milk used in $1 worth of cheese at the retail level; processing, packaging, and marketing take the other 52 cents. Keywords: Cheese, marketing, price making, milk, National Cheese Exchange, dairy. Washington, D.C. 20250 December 1980 Contents Page Summary i" Introduction 1 Pricing Methods 2 Farm Milk 3 Cheese Plant Sales 7 FirstHandler Sales 8 Retail Store Sales 9 Imports 9 Price Trends 10 Market Prices 10 Price Interrelationships 13 National Cheese Exchange Base Price Analysis 28 Price Spreads 31 Literature Cited 38 Appendix Tables 40 Summary Cheese prices are key indicators of changing market values for the entire dairy industry. Cheese doubled in price in the seventies and became the prime manufactured dairy product, utilizing 25 percent of all milk. The price paid by cheese manufac- turers for milk is a major determinant, along with Federal marketing orders and sup- port prices, of the fluid milk price. Increased prices for all dairy products were largely a result of the rising demand for cheese, whose per capita consumption more than doubled between 1950 and 1979. Cheese prices throughout most of the Nation and at all marketing levels are based on the prices established at the National Cheese Exchange in Green Bay, Wis. Since the volume of cheese handled on the Exchange has never been more than 1 percent of total U.S. cheese production, national cheese prices are based on a thin market—one with few transactions. Weekly prices on the Exchange between 1975 and 1979 cor- related very strongly (at least 99 percent statistical correlation) with wholesale prices in Chicago and New York and just a little less strongly with wholesale prices in San Francisco. Price changes between 1975 and 1979 on the Exchange in one week were usually followed the next week by similar price changes at Wisconsin assembling points and wholesale markets across the country. The farm-retail price spread for cheese increased slowly from 1950 through 1973, after which it sharply widened, as retail prices rose more rapidly than wholesale prices. The total price spread, in constant dollars, increased only a little and the total spread as a percentage of retail price remained fairly constant. Processing, packaging, and transportation account for more than half of the retail cheese price, so for every dollar spent on cheese at the retail level, the dairy farmer receives about 48 cents for the milk. Most retailers give cheese the highest profit margin of all their dairy products. Cheese Pricing American cheese, nearly three-fourths of which is Ched- dar, accounted for almost 60 percent of 1979 total cheese Harold W. Lough production. Italian-type cheeses include the varieties mozr Agricultural Economist zarella, ricotta, provolone, Parmesan, and Romano. Italian cheese, over two-thirds of which is mozzarella, accounted for 25 percent of total U.S. cheese production in 1979. Swiss cheese production was 6 percent of the total. The primary other varieties are cream, Neufchatel. blue, brick, Limburger, and Muenster (15). Introductioii Natural cheese production tripled from 1950 through 1979 Cheese is the most important manufactured dairy product with the sharpest rate of increase in the seventies (table in the dairy industry in terms of product value and market 1). The rate of increase varied among different cheese influence. It is the leading manufactured milk product in types. American production more than doubled the 1950 the utilization of milk. As a result, cheese prices heavily level of production while Italian increased over 13 times. influence manufacturing grade farm milk prices in Nflin- nesota and Wisconsin. These manufacturing grade milk Natural cheese production is somewhat seasonal since prices, in turn, largely determine fluid milk price changes. cheese, along with other manufactured dairy products, The influence of cheese prices was further strengthened utilizes reserve supplies of milk after the demand for the by recent international trade agreements that changed the higher valued fluid milk is satisfied. Cheese production is method of pricing imported cheese, placing more emphasis greatest during flush milk production months of spring and on domestic cheese prices. early summer. May and June cheese output in 1979 ac- coimted for over 18 percent of the annual total while Several different methods of pricing cheese are used as January and February accounted for 15 percent (15). ii^ilk ÍB manufactured into cheese and as the cheese moves through the various market levels from wholesale to All dairy products—including fluid milk, cheese, butter, retail. These mechanisms have made cheese prices highly ice cream, and others—compete for raw milk supplies. interrelated among cheese types and regions. An under- Cheese production accounts for an increasing proportion standing of the cheese pricing methods is crucial to of milk in relation to all other major manufactured dairy government policymakers and industry personnel in- products. About half of total milk supplies went to manu- terested in overaU dairy industry pricing. The objective of factured dairy products from 1950 through 1979 (table 2). this study was to describe and analyze cheese pricing During this period, the proportion going to cheese from the farm through the retail markets. increased from less than 10 percent to 25 percent of total milk supplies and from 20 percent to 45 percent of manu- Cheese prices are established in an environment of ex- factured use. panding production and consumption, increasing industry domination by fewer firms, and substantial governmental regulation. Cheese consumption has steadily increased over time, from IJ pounds per capita in 1950 to 17.3 Table 1—U.S. cheese production, pounds per capita in 1978. One-third of the cheese con- selected types and years sumed in 1978 was in processed form (16, pp. 20-24).^ Over half of final cheese sales are through retail grocery Production stores. The other final outlets for cheese are institutional Cheese increase (food service) and industrial (food manufacturing). type 1950 1960 1970 1979 (1950 to 1979) Natural cheese production in the United States in 1979 totaled 3.7 billion pounds. (Natural cheese includes all -Million pounds- Percent hard cheese which has not been further processed. This 145 excludes cottage cheese, which is not covered in this American 893 996 1.423 2,188 62 158 394 929 1.398 report.) The principal type of cheese produced is Italian 99 121 144 213 115 American which includes the varieties Cheddar, Colby, Swiss Other natural 137 203 240 385 181 granular, stirred curd, washed curd, and Monterey Jack. Total 1,191 1.478 2,201 3,715 212 > lUlksiMd iiumbsn In paranthsMt refer to •ourcee Ueted in "Utereture Cittid ' at the end of this report: Source: (15). Table 2—Utilization of total milk supply in selected manufactured dairy products, selected years Item Unit 1950 1960 1970 1979' Total milk supply MÜ. lb. 120.628 123,102 117,538 123.871 UtilizaUan: Butter MÜ. lb. 27.285 29,374 23,934 19.400 Percent 22.6 23.9 20.4 15.7 Cheese Mil. lb. 11.122 13.364 19,541 31,578 Percent 9.2 10.9 16.6 25.5 American MÜ. lb. 8.776 9.686 14.240 21.844 Percent 7.3 7.9 12.1 17.6 Other MU. lb. 2.346 3.678 5,301 9,734 Percent 1.9 3.0 4.5 7.9 Total manufactured products' MÜ. lb. 55.145 59,751 60.013 67.401 Percent 45.7 48.5 51.1 54.4 •Prelifflixiary- 'In addition to butter and cheese, includes evaporated milk, condensed milk, dry whole milk,, Ice crenm. creamed cottage cheese, and other manufactured dairy products. Source: (17). Although cheese production is heavily concentrated in For a more complete description of the cheese industry Minnesota and Wisconsin, aU but a few States produce at refer to (9). least some. The leading States of production in 1979 were: Wisconsin with 38 percent of the U.S. total; Minnesota. 13 Pricing Methods percent; New York, 8 percent; Iowa, 5 percent; and California, 4 percent. The price of cheese is established in a market that is national in scope. Cheese is less perishable than fluid m\]k The number of plants manufacturing natural cheese is products and has a low transportation cost relative to its declining and the average production per plant is increas- product value. There is little product differentiation ing (table 3]. The numlier of all cheese plants declined through branding for the major types of cheese at the from 2.158 in 1950 to 754 in 1979. The exception was for manufacturing level. These product characteristics facili- ItaUan-type cheeses in which the number of plants in- tate interrelationships of cheese supply and price among creased. Average plant production for all cheeses during regions. The price movements tend to be reflected through this period increased almost ninefold. Larger plants are the one central market for cheese, the National Cheese Ex- producing an increasing proportion of total cheese produc- change in Green Bay, Wis.

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