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United States Department of Agriculture 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 , 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 whole- sale prices. Dairy farmers receive about 48 cents for the 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 indus- try. 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, pack- aging, 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 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 , 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 . 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 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. tion: in 1977. about 12 percent of all cheese plants pro- duced 57 percent of all cheese. Although over half of all The prices for cheese at alternative market levels and the cheese manufactured is by corporations, dairy coopera- price of the milk used to make cheese are determined tives have become more involved in recent years. In 1973. under a highly interrelated set of pricing methods. These an estimated 35 percent of all cheese was produced by price-making processes include a combination of a central cooperaUves (12. p. 38). open market, short-run supply and demand pricing, administrative prices, long-term contracts, negotiated Cheese purchased from manufacturing plants is ultimately prices, and quoted prices. used as either packaged natural cheese or is further manufactured into products. American The National Cheese Exchange and Wisconsin assembling cheese styles are commonly produced in 40-pound and point spot markets are focal points in the cheese pricing 64(>-pound blocks and 500-pound Imrrels. Blocks and bar- system (fig. 1). Cheese production, the support purchase rels accounted for almost 90 percent of American-type price, commercial demand, and other factors combine cheese production in 1973 (9. p. 29). The blocks are com- here to influence price levels and trends. Cheese prices monly cut and sold as natural cheese and the barrel estabhshed on the Exchange are then reflected as the cheese is commonly used for further processing. basis for cheese prices through the rest of the cheese- Table 3—U.S cheese plants and average plant production, selected cheeses and years'

1950 1960 Cheese 1970 1979'

type Average Average Average Average Plants Plants Plants Plants production production production production

1.000 1.000 1,000 1,000 Number pounds Number pounds Number pounds Number pounds

American 1,620 551 1.008 988 636 2.375 486 4.501 Italian 167 369 193 816 194 2,335 185 5,022 Swiss 274 363 164 738 82 1,876 66 3.232 Total 2.158 552 1,419 1,042 920 2.579 754 4,927

The nurober of plants ami average production refer only to the specific cheese types listed in each case. Many cheese plants manufacture more than one type of cheese, so the number of plants is duplicated in some cases and the average plant production of any one cheese type may appear low in relation (o the average production of all plants.

'Preliminary.

Source: (15) marketing system and also indirectly affect imported Minneaota-Wisconsiii Price. The Minnesota- prices. Cheese product prices, in turn, strongly in- (M-W) price reported monthly by the USDA is one of the fluence farm level manufacturing grade milk prices and, most widely used measures of change in milk values. This as a result, fluid milk grade prices. price is an average price for manufacturing grade milk paid by unregulated processors in the two States. It is basically a competitively determined price, except as in- FarmNOIk fluenced by the price support program, depending to a great extent on prices of manufactured products. The first market in the cheese-marketing system is at the However, when wholesale product prices are at, or close farm, where a price is established for the milk between to. Government support purchase prices, the milk price is the seller (the producer or producer bargaining coopera- largely determined administratively. In theory, the M-W tive) and the buyer (the firm that manufactures the price represents national supply and demand conditions cheese). for manufactured dairy products.

The M-W price, being an average price, has a substantial range among reporting plants. About three-fourths of the Milk used for the manufacture of cheese may be either of cheese plants were more than 10 cents higher or lower two grades, manufacturing grade or reserve fluid grade, than the reported M-W price for each of three months in with 19 and 81 percent of the total supply, respectively. 1976(7, p. 22). (Fluid grade is generally produced under higher farm sanitary conditions and may be used to produce dairy Base month M-W prices are determined from reports from products in either fluid or manufactured form. Manufac- about 275 plants representing approximately 60 percent of turing grade farm milk may be used only in the production all manufacturing grade milk sold in the two States. The of manufactured dairy products.) Cheese competes with estimate of change from the base month to the month to other manufactured dairy products such as butter-power which the M-W price estimate relates is based on reports for this milk. (Butter-powder refers to the combined pro- from a sample of 110 plants (14, p. 2). duction of butter and nonfat dry milk, often in the same plant, which together use both the fat and nonfat parts of The M-W price series reflects the value of milk utilized in milk.) Manufacturing grade prices paid to manufacturing the mix of dairy products produced in the two States. It is grade milk producers are determined under generally com- heavily weighted by cheese values with 86 percent of the petitive conditions. The price paid to fluid grade pro- 1978 product weight in Wisconsin assigned to cheese and ducers, the blend price, is determined in many parts of the 62 percent in Minnesota (14. p. 3). For the two States com- country under the Federal milk marketing order system bined, cheese had an estimated weight of about 75 per- (see below) and cooperative bargaining for prices in ex- cent. This compares to less than half of manufacturing cess of Federal order minimum prices. grade milk used for cheese for the total United States. Rgure 1 Cheese Pricing System (Schematic)

Price Production

Production and Support purchase price of other price / nnanufactured dairy products Exchange and ^ Cheese Import level. assembling production ix>int price X Commercial demand Commercial for specialty demand I cheeses Milk prices paid farmers by cheese plants Milk available Milk utilized Mük prices for manufactured by fluid products paid farmers dairy products by other rranufacturing plants Minnesota-Wisconsin manufacturing grade mitk prk:e

Fkiid grade^ Total milk mitk price production level

BlerKl milk prk:e Itffitlatkm* All the levels of the niilk marketing and pric- to achieve an annual average price, which plants pay to ing system are interdependent. Two important areas of farmers for manufacturing milk, equal to the announce interdependency occur through regulation under the support price. Federal milic marketing order program and the Federal price support program.' The primary pricing impact of In determining purchase priera, consideration is given to these regulations falls on milk at the farm level although such factors as average processing and marketing the price support program also directly affects the price margins, market prices, production, stocks, consumption of of cheese. different dairy products, results of recont price support operations, volume of purchase. QOC stocks, aiHi utiliza- As of 1980. 47 Federal milk marketing orders covered 80 tion in available program outlets. Hiese considerations are percent of total U.S. fliiid grade milk. Under Federal used to estimate the level of returns to ciñese plants, as orders, milk is priced based on final use. Fluid grade milk well as to butter-powder plants, that will acccmiplish the used in bottled fluid milk products is called Class 1 milk objectives of the support price. The CCC purchase price and this same milk, when used to produce manufactured for Checklar ch^se is then calculated, using the average dairy products is called Class II or reserve milk.' Class I manufacturing ami marketing margins, to estimate the milk commands a higher price (Class I price) than reserve return to plants. milk (Class II price). The M-W price is the effective price used for pricing reserve milk in all Federal order markets. The calculation of CCC purchase prices for support of The specified minimum difference between the Class I manufacturing milk at $11.49 per hundredweight which price and the Qaas 11 price (the Class I differential) is was announced on April 1. 1980. and effective through fixed at Federal order hearing and has remained essen- September 30. 1980, was as follows: tially unchanged since 1968. Therefore, price movements Target returns to che^e plants per for much of the fluid milk in the United States are based hundredweight $12.36 on M-W price changes. Spread between price of manufacturing Dairy farmers receive a weighted average price, the bleini milk and the market value of chee^ price, for their milk. This is the Gass I price times the pro- and fat per 100 pounds of milk $ 1.37 portion of the market's milk used to produce Class I products, plus the Qass II price times the proportion of Market value of cheese and whey fat the market's milk used to produce Class 11 products. This perlOOpotmdsofmilk $13.73 assumes that Qass I is used for fluid use and Class II for everything else. Aggregating returns from milk used in Value of 0.25 pound of whey fat $ 0.35 Class I and Class n products to arrive at a blend price paid to farmers is called pooling. Value of other whey solids o

The other main area of regulation affecting cheese pricing Value of cheese: is the price support program. The Agriculture Act of 1949 Per 100 pounds of milk $i 3.38 directs the Secretary of Agriculture to support the price of Per pound {rounded, using a yield of milk. Tlie objective of supporting the price of manufac- 10.1 pounds) $ 1.325 turing grade milk at an administratively determined minimum price is achieved by USDA's Commodity Credit ManofactiiriBg and Fhild Grade MIk JMtàmg» Milk sup- Corporation's (GCC) purchasing, at announced prices, all phes for cheese are provided by producers of both the natural , butter, and nonfat dry milk manufacturing grade and reserve ßuid grade milk. that is offered to it for sale. In addition, CCC occasionally Therefore, a description of pricing in the procurement purchases, through competitive bidding, dairy products in market for milk used in cheese must consider supphes consumer size packages. from both sources.

The support price for manufacturing grade milk is set Milk producers have little bargaining power over the price once a year and adjust^ once a year, and at the same of milk to be used in cheese. This is due to their large time, CCC announces the prices it will pay for dairy number and relatively small size in relation to their buyers products. These purchase prices are set at levels expected and because the milk is undifferentiated except for the distinction between fluki ami manufacturing grade. However, in a region with many manufacturing plants, avérai Statt» ñtao regúlalo milk pricing but this report discusses only tho producers may have relatively more bargaining power due Podornl orders. to their increased choice of alternative market outiets for "Some Federal ordort diffuronHeto products into more tlmn (wo classos. their milk. A8 members of a bargaining cooperative, they would have their milk as the cheese plants, with resultant lower considerably more marketing pov^er. However, only a returns, or they can lower their price and compete on non- small share of manufacturing grade producers are price factors. If the product price imbalance persists, represented by tmrgaining cooperatives, in contrast to butter-powder plants would be forced to reduce their fluid grade milk producers. In 1973, marketing cooperative price. The milk would then shift to cheese plants resulting sales were 35 percent of total cheese production (12). In in more cheese production and an eventual readjustment summary, the managements of both cooperative and non- in product prices due to supply and demand in the market. cooperative cheese manufacturers operate in the role of Cheese assemblers have sometimes used quotas to restrict price-makers and the individual producers as price-takers. plant production. Then, most of the surplus milk moved through butter-powder plants. Cheese plants compete for manufacturing grade milk through both price and nonprice practices, with a general Cheese manufactured from reserve fluid grade milk com- emphasis on nonprice practices. The most commonly used petes with cheese from manufactured grade milk. nonprice practices are hauling subsidies, selling farm sup- However, plants in an unregulated market are not re- plies at a reduced cost, and advancing money against quired to pay the same minimum price for milk as are future milk deliveries. Other nonprice practices used are plants subject to Federal orders. All cheese plants under providing group insurance plans, providing aid on quality Federal orders are required to pay the same price for problems through haulers and fieldmen, cosigning notes reserve fluid grade milk for manufacturing use. Although for patrons, providing limited market information through unregulated handlers are not required to pay that price, newsletters, and providing community services (21, p. 87). competition usually sets the Class II price at the M-W price level. The two prices are usually about the same. Manufacturers consider two factors in determining Farmers producing milk for fluid markets respond to the monthly prices for manufacturing grade milk: prices paid blend or average price they receive rather than to the by competing buyers (this is especially true of smaller separate prices for the fluid and reserve classes. plants) and gross receipts less cost, since the pay price of milk is usually determined after the milk product has been The cost of the reserve Grade A milk is essentially the manufactured and sold. The latter method is generally same for all plants regardless of supply and demand in- used by larger buyers who take the lead in establishing teractions among products. Milk will cost a butter-powder price changes in a market (18. pp. 86-87), Therefore, for a plant the same as a mozzarella cheese plant, even though few plants, the pay price for milk is directly determined the butter-powder plant is selling to the CCC and the moz- by changing cheese prices for that month. These changes zarella plant has a private market. then enter the system as comtïeting prices considered by other plants. Since the blend price is paid to fluid grade producers and the manufacturing price to manufactured grade pro- The price setting of milk that goes into cheese is a com- ducers, the two prices do not compete in the short run. bination of supply and demand and administered pricing. However, if the blend price is sufficiently higher, pro- As discussed above, prices for manufacturing grade milk ducers will be induced to switch to fluid grade production are arrived at more or less competitively, but influenced if the price difference more than covers the cost of pro- by support prices. ducing the higher grade. Because of zone differentials, the farther the producer is from the fluid market, the lower is Even so, manufacturing grade milk prices are not com- the blend price and the closer it is to the price for manu- pletely uniform in a given producing area. Producers often facturing grade milk increasing the chance for price com- operate with incomplete price knowledge and often use petition. In some past periods of rapidly increasing cheese factors other than price in their choice of market outlets. prices, there have been instances in the Upper Midwest Prices paid by individual plants vary because of product when cheese has been able to outbid milk for Class I use quality (especially with cheese), efficiency, product trans- because the Class I price with the 2-month lag could not portation costs (which vary with plant location), and com- keep up. petition, A competing plant may pay more because it is producing a product that currently yields a greater return The Class II price in a Federal milk order may at times (5, p. 17). be at a level that enables efficient plants making cheese to obtain a greater margin on milk used for cheese than the Competition in the long run should force all plants produc- handling charge they receive on milk sold for Class I use. ing manufactured dairy products to pay similar prices for In such circumstances, cheese plant operators may be milk. In the short run, when net returns from cheese pro- reluctant to make milk available for Class 1 use, once per- duction are higher than from butter-powder production, formance standards for participating in the markelwide butter-powder plants can either pay the same price for pool are met and, in addition, because it reduces the volume of milk available for processing and adversely af- Trading on the Exchange is interpreted as follows. The fects unit processing costs. The term "give up costs" is last sale is considered to represent the market for the often used to describe the compensation required to offset coming week except- that a subsequent bid higher than the losses realized, or profits not realized, by a cheese plant last sale, or a subsequent offer lower than the last sale, is when milk is made available for Class I use. considered indicative of the market. In the absence of sales, the last bid higher than the previous week's market, Cheese Plant Sales or the last offer lower than the previous week's market is considered indicative of the market. In the absence of any The price at this level represents the cheese that first sales, offers, or bids, the market is considered to be un- leaves the manufacturing plant in wholesale sizes. Any changed. These prices are reported weekly by USDA (13). general description of the price-making process at either the cheese plant or first handler levels must recognize the The primary purpose of the Exchange is as a source of diversity of cheese-marketing practices at these levels. supply and a place to dispose of surplus. It is an alter- Here exists a wide array of ownership types, degrees of native market since most trading in cheese is done through vertical integration, and levels of service performed by the regular commercial channels. The Exchange serves as a buyers and sellers. For example, cooperatives are becom- national index of the value of cheese and is used by the ing increasingly important at both of these market levels. cheese industry as the best reflection of supply and de- A high degree of vertical integration is often present at mand conditions. The prices arrived at on the Exchange on these market levels, extending from plant ownership Friday provide the basis for nearly all transactions in through the retail sales outlet. The services performed in American and Swiss cheeses, and some ItaHan, blue, and assembling the cheese may be by either the buyer or pther specialty cheeses, for the following week. On the seller. For example, cheese manufacturers vary in their other hand, some varieties such as swiss and mozzarella, ability to ship truckloads versus less than truckload quan- in which a greater proportion of the butterfat is separated tities of cheese from their plants. As a result, there is out, are also more sensitive to butter prices than others. often not a clear distinction between buyer and seller at Higher butter prices may lower the prices of these these market levels. However, a manufacturing plant price varieties of cheese. for the cheese exists, if only as an imputed value for inter- nal firm use. Assembling Point Prices. Assembling point prices repre- sent spot trading at points where the first handler may ob- Price transactions at the cheese plant are either through tain alternative supplies resulting from a short run supply spot sales or contract sales. Spot sales include a very and demand imbalance. The premiums, which are negoti- small part of the total cheese volume traded and are ated for each shipment separately, tend to fluctuate more reflected in National Cheese Exchange and assembling than premiums under a long-term contract. point prices. They involve transactions between large first handlers of cheese or sales from manufacturing plants not Changes in these premiums are often the first indication of contracted to a first handler. Long-term contract sales be- a changing cheese market, as Leathers notes: tween a cheese plant and first handler represent the bulk of cheese trading at this marketing level. The distinction between contract sales and spot shipments helps to explain how changes in the supply-demand situation are reflected in product price. The total price, competitively National Cheese Exchange. The National Cheese Ex- determined, must reflect supply-demand change, located in Green Bay, Wis., is the only central conditions. But in which component of the spot market for cheese in the country. It meets every Fri- price—Exchange or premiums—are changes day and provides a place for members and owners of in supply-demand reflected? The answer to licensed cheese factories to buy or sell 40-pound block this question can be found in a description of Cheddar, barrel American, and Swiss block cheese. In normal procurement and disposition pro- 1978, the Exchange had about 44 members who handled cedures. If a buyer finds himself a little short an estimated 80 to 90 percent of all the cheese marketed of cheese in blocks or barrels, he does not im- in the United States [2, p. 14). However, the volume bought mediately run to the Exchange and bid up the or sold on the Exchange represents only a small proportion price; such an action would increase the price of those members' supplies and has never exceeded 1 per- he paid for all products. Before going to the Ex- cent of U.S. production (3. p. 68). Sales of Cheddar on the change, the buyer will try to purchase spot Exchange in 1978 included 9.9 million pounds of barrel shipments either from small unattached plants and 1.9 million pounds of 40-pound block, 0.78 percent of or from other large sellers. The buyer may bid U.S. production. up the premium he is veiling to pay in order to attract these extra shipments. When there are cheese (block, longhorn daisy, mammoth, etc.), indications that tight supplies are not peculiar the type of wrap, the moisture discount to a particular buyer but are more general, the schedule, and a prenegotiated penalty for not Exchange price is bid up. [&). meeting the buyer's specifications. In addition, the contract, whether oral or written, gener- Thus, small price movements at Wisconsin assembling ally specifies: whether the container is to be points may give an early indication of cheese market price furnished by the supplier or the buyer; directions. In a tight supply and demand situation, the mid- whether grading, testing, and assembling is to point of the range in assembling point prices may be be done by the buyer or the supplier; the length several cents per pound over the Exchange price plus the of storage required; and the assignment of assembling charge, whereas in a **flat*' market there may responsibility for freight charges and handling be no price difference. This may increase the Exchange costs. All of these factors are ouilt into the price sometime in the following weeks, after which the negotiated premium which typically is applied assembling point price will also further increase. to the quoted price on the National Cheese Ex- change for 40-pound block Cheddar cheese if Assembling point prices are currently published for the the cheese is to be cut and packaged, or the Cheddar cheese style 40-pound block and American quoted price for 500-pound barrels if the cheese (Cheddar or stirred curd) in barrels [13]. These cheese is to be used for processing. Typically, prices cover open market transactions for 15 to 20 of the the date that the cheese is made by the cheese major cheese assemblers and national cheese firms in plant is considered the pricing date, and the Wisconsin. As with the Exchange, the volume of open National Cheese Exchange on the prior Friday market transactions covered by these prices represents is then the effective base price. only a small part of total sales. However, a much larger portion of the open market transactions in barrel and The volumes specified in the formula price 40-pound block cheese moves in the market covered by contracts are often all the plant can produce, assembling point prices as compared with sales on the Ex- or a specified portion of the plant's production, change. as long as the suppliers meet the buyer's qual- ity specifications which are especially critical Qmtract Sales. Cheese plants sell to first handlers, which for their branded, cutting-type cheese. Several are typically national cheese-marketing firms (9. pp. of the largest cheese marketing firms prefer 31-33). National cheese firms originally bought much of long term arrangements to insure consistent their cheese on the o];)en market but now assemble most of quality and quantity: consequently, they nego- it directly from cheese plants through a variety of ar- tiate premiums that remain stable throughout rangements. There are few independent assemblers per- the year, during both periods of surplus and forming only assembly functions left in the industry. Ap- shortage. proximately 20 percent of U.S. cheese is manufactured by national marketing firms from their own plants with the While some contracts allow very little flexi- rest coming from either independent or cooperative cheese bility for a three month period at the pre- plants or imports.' Cheese purchased from these plants is negotiated premium, they do make the used as packaged natural cheese, processed cheese prod- premium renegotiable upon 90 days notice if ucts, industrial, or institutional products. market conditions change. However, the premium structures under these arrangements Long-term contracts are generally used between cheese tend to remain quite stable relative to many plants and national cheese marketing firms. In these, all or others. The prenegotiated premiums for a sj>ecific proportion of a plant's production is included several large buyers are stable for shorter with the price based on the reported price from the Na- lime periods; renegotiations occur three to tional Cheese Exchange plus a prenegotiated premium. four times a year, on the average, as costs of materials change, labor contracts change, or In a survey of the pricing system of six leading cheese either the supplier or the buyer get a better of- processing and marketing corporations, Hayenga reported: fer from someone else (6. pp. 10-12).

This type of formula price contract is typically Fint-Handler Sales based on a specification of the type of cheese to be manufactured, the particular process The price at this level represents the transaction between which is to be used (including the enzymes or the first buyer (first-handler) of the cheese from the plant other ingredients to be used), shape of the and the final commercial market. The final commercial markets before consumption are retail, institutional (food Retail chain pricing is commonly made through weekly service), and industrial (processed foods). The retail price Usts with either a target market goal or a percent of market utilizes well over half of all cheese marketed while gross margin goal. However, a competitive pricing the institutional market utilizes most of the rest, leaving strategy, using an optimal product mix with the goal of less than 10 percent of the cheese for the industrial balancing the total gross margin for a department or store. markets. is increasingly employed rather than a strict percentage markup. Cheese is frequently used in retail chains* spe- Retail stores are primarily serviced through brokers who cials and promotions, which are also determined by a take orders in an area, sometimes in combination with competitive pricing strategy. The specials are commonly regional company representatives. A few companies have on the relatively inexpensive styles of cheese to attract im- representatives checking with individual stores and some pulse buyers to the cheeses with higher profit margins. companies employ broker-distributors who have ware- houses and trucks and service individual stores in an area. High sales and retail margins of cheese products make them highly profitable dairy items for retailers, who First-handler sales to these commercial markets are often usually give cheese a gross margin that is as high as or made under slightly different pricing systems than are em- higher than the average of all items handled in the store. ployed at the plant sales level. Hayenga reported that most However, cheese types vary considerably in their profit manufacturers' brand cheese is sold to retail markets on margin contribution. Process cheeses typically have low the basis of a weekly price list and that the price Usts for margins and large turnover while specialty cheeses nonspecialty cheeses often follow price changes on the Ex- generally have higher margins. The dairy departments of change. However» firms with major brand name cheeses large supermarkets in 1978 had 13.3 percent of total store also consider other factors such as changes in other costs sales. After fluid milk products, cheese was the best sell- and changes in target profit margins. Some sales of pri- ing dairy product with 17 percent of dairy department vate label cheese to large retail customers are also based sales. Also, cheese had the highest gross margin of the ma- on a price list (less advertising and promotion costs), but jor dairy products, more than 27 percent, and contributed most are on a formula using the Exchange price plus a more than 20 percent of total dairy department gross prof- cost premium (6, p. 17-18). its (1. pp. 63-66).

Imports Sales not requiring special formula cheeses to full line in- stitutional customers (which in turn service several ac- Prices for imported cheese are usually established be- counts) commonly use weekly or monthly price lists. These tween the importing coimtry and the importing firm in the are based on the Exchange price plus a premium, which United States at the time of transaction and are for may remain unchanged for up to a year if there is little delivery at a specific point. New York, for example. Some change in marketing costs or the quantities of cheese re- countries allow individual exporters to establish their own quired during the year. Sales to large volume food service prices while other countries operate with a central dairy customers (major food service chains) who require special marketing board or an export association which governs formula cheeses often use a long-term formula price. This all prices of cheese exports, hi both cases, price lists are is based on the average Exchange price for the preceding published periodically, effective on a given day. The month plus a premium. Most first handler sales to indus- degree of price negotiation between importers and ex- trial markets use formula pricing based on the Exchange porters varies depending on the cheese types and vari- price on the date of cheese production plus a premium (6. eties, the number and size of importing and exporting p. 18-21). firms for each cheese, and whether the exporting country tias an exporting association. There is often little price negotiation, with the price lists taken as given. The export- Retail Store Sales ing firms or associations do follow price trends in the U.S. cheese industry, such as National Cheese Exchange price Retail grocery stores today display an average of 100 dif- movements and future expected support price develop- ferent cheese items, almost 150 in the larger stores.com- ments, when establishing their prices. pared with only 40 items displayed for all dairy products 50 years ago (11). Over 70 percent of the natural cheeses Importers in turn add their costs to the delivered cheese to and 85 percent of the process cheeses sold in retail stores arrive at a sale price. Those costs include duties, in- in 1972 were either a major brand or a chain store's surance, costs of clearance, transportation of containers private label. Over half of the natural cheeses and Ihree- to wiirehouso. and the warehousing charges, which in- fourlhs of the process cheeses sold were major manufac- clude unloading of containers, storage, and in-oul charges. lurers* brands (9. pp. 38-41). Also included is a profit margin which takes into con- siiii^ralion ilonu^slii' iluvso priiv Iriuuis. If Iht; fiiuil the priiHî of milk cligibhï for fluid use [fluid oli^iible milk iltislinatUm is ullior than llui pt)rt iif arrival, aildiliimal pricj;—iin approximation of a IJIIMUI price). The fluid eligi- lrt'i>iht rhar>¡tís an^ aisi» iiuiiultîd. ble milk price and the price paid for milk by manufactur- ing plants were ctdculated for Minnesota and Wisconsin IntiírnaliDiuil tradi' ajirtumuMUs. vvhit:li U)ok cUcci on to lîompare with the M-W manufacturing grade price. The lanuarv I. 19Ö0, miHÜfiíítl nuw iniporl restrictions un fluid eligible prices were weighted by the monthly fluid ti>rtñ>;n iheeso. l'hostí a^nuînuuits involved two primary milk production in the two States. The moiiifiiations in the rhooso import proj^ram. First. Iho plant prices paid were weighted by American cheese pro I'nittHt States pUued all ehooso imports unilor tiuota o\- thuition and the butter plant prices paid were weighted by tvpt sheep and kîoat milk cheeses. Brynd/.a. Gammelust. nonfat dry milk prwluction. Also, all prices were con- Nolkelosl. anil soft-ripened cheeses. Second, exporting verted to equivalent prices for 3.5 percent fat content milk countries that subsidi/.e their I'heese industry are subject as a standard for comparison. both to the quota and a commitment not to undercut U.S. domestic cheese prices. First, a comparison was made between prices paid for milk used in American cheese production and butter- Price Treads powder production. Greater demand for cheese in recent years has made cheese more profitable than other manu- Trends of farm milk prices and cheese prices at the factured dairy products. Cheese manufacturers, therefore, Viirious levels includinji spot, wholesale, retail, and im- have been more willing to pay more for milk to increase ported prices result from the price-making? processes sum- their output. Although both American cheese and butter- marized earlier. Prices in all of these markets often fluc- powder prices increased and followed similar fluctuations, tuate widely. cheese returned a higher price than butter in 242 of the 384 months during 1947-78 (fig. 2a). Starting in November Almost all cheese and milk prices at all market levels at 1968. American cheese plants in Minnesota and Wisconsin least doubled between 1969 and 1978 (table 4). The prices paid higher prices than butter-powder plants for milk in of other cheese types, with the exception of blue, in- all but five months (fig. 2b). The average price paid during creased faster than the prices of American types. The 1947-78 was $4.38 per hundredweight by cheese plants kîreatest percentage price increases were by domestic and and $4.32 per hundredweight by butter plants. imported Parmesan. In ¿jeneral. the prices at Chicago ap- peared to increase slijjhtly more than prices at each of the Further. American cheese prices have been consistently other two areas. higher than the M-W manufacturing grade price and the butter prices have been consistently lower. American Regression analysis indicates that long-term price trends cheese prices averaged 2.5 cents per hundredweight accounted for at least 90 percent of the variation in prices above the M-W price between 1955 and 1978 and butter about the mean for 1969-78 (85 percent for imported Par- plant prices averaged 3.3 cents per hundredweight below mesan). The average monthly trend increase in plant level the M-W price (fig. 3). (spot) cheese prices was around one-half cent per pound. Wholesale prices for most of the American-type cheeses The M-W manufacturing grade milk price averaged 34 increased 0.6 cent per pound while the prices for other cents per hundredweight above the support price between types increased more, with an average monthly trend in- 1955 and 1978 (fig. 4). The support price was above the crease in retail prices of about 1 cent per pound. In com- M-W for only 19 months and these instances closely parison, the average monthly price increase for each of followed support price increases in 1971, 1974, 1975. and the milk prices was 5 cents per hundredweight. 1977. Fluid eligible prices in Minnesota and Wisconsin averaged 47 cents per hundredweight over the M-W dur- The monthly price seasonalities for selected cheese types ing 1955-78. and milk used to make cheese were also compared at dif- ferent market levels for 1969-78 (table 5). Each of the milk The price trends for 40-pound block and barrel cheese of prices and the American and prices were the National Cheese Exchange (and its predecessors) and. lowest from May through |uly. Each of the wholesale to a lesser extent, Wisconsin assembHng points are the Swiss and Parmesan cheese prices and the retail cheese most important indicators of market value for the cheese prices were lowest from fune through August. industry and are some of the most important for all dairy products (figs. 5 and 6). Market Prices Barrel and 40-pound block price trends often follow each Several different milk price trends were examined in- other closely although there have been periods when the cluding the M-W manufacturing price, the prices paid for price differences have been substantial when either may milk by American cheese and butter-powder plants, and be in short supply. Forty-pound block prices had an 10 Table 4—Comparison of cheese price trends at alternative market levels, monthly, 1969-78

Statistical relationship between Average price prices and time (monthly)

Effect on price Coeffi- 1978 1 of a 1-month cient Cheese and milk prices 1969-78 Constant change of deter- Price Index In Standard effect error mination

Dollars 1969= —per cwt— 100 —Dollars per cwt— Percent Farm level (milk): Minnesota-Wisconsin manufacturing grade 6.66 9.57 216.5 3.58 0.051 0.002 91.2 Milk eligible for fluid use. Minnesota and Wisconsin 7.14 10.08 204.4 4.04 .051 .002 91.0 Milk used for American cheese, Minnesota and Wisconsin 6.72 9.62 213.8 3.66 .051 .002 90.6 —Cents per Jb.— —Cents per Ib.~ Plant level: National Cheese Exchange— 40-pound block 72.9 103.6 210.7 40.36 .54 .01 91.9 Barrel 69.9 100.6 215.0 38.26 .52 .01 91.2 Wisconsin assembling points— 40-pound block 76.2 107.1 206.0 43.20 .55 .02 90.5 Barrel 72.5 102.2 204.9 41.58 .51 .02 90.2 Wholesale level. American types: 40-pound block— Chicago 86.9 123.9 217.5 46.26 .67 .02 93.7 Eastern area 85.5 124.6 202.7 44.60 .67 .02 93.7 West Coast 92.3 125.7 202.7 54.11 .63 .02 91.7 5-pound process— Chicago 85.4 121.1 211.0 47.57 ,63 .02 93.7 Eastern area 82.2 116.8 214.5 45.25 .61 .01 94.0 West Coast 91.0 122.9 198.4 55.04 .59 .02 92.6 Brick and Muenster, Chicago 88.9 127.1 209.9 49.56 .65 .02 93.1 Wholesale level, other types: Swiss, Grade A— Chicago (block) 104.2 154.0 229.3 53.11 .84 .02 94.7 New York (cuts) 111.1 161.3 227.0 57.84 .88 .02 93.2 San Francisco (block) 106.4 153.0 227.0 53.65 .87 .02 93.0 Parmesan— 143.2 217.3 256.1 58.93 1.39 ,03 94.1 Chicago 93.9 New York 137.3 199.1 233.1 65.06 1.19 .03 139.7 200.6 230.0 71.40 1.13 .02 96.1 San Francisco .02 95.1 Blue, (Chicago) 106.7 147.4 199.3 63.35 .72 Retail level:' .02 94.5 American sliced process 133.3 180.0 191.5 80.16 .93 Imports, New York— 259.7 446.1 330.8 103.37 2.58 .10 85.2 Parmesan 91.1 125.6 181.8 197.0 77.71 .79 .02 Swiss wheels 68.57 .95 .02 95.6 Blue 125.8 177.3 208.1

-Retail price series ended June 107B. The average price for 1978 reported here is July 1977 through iune 1978.

Sources: (15. 18. 19).

11 Table 5—Seasonal variations in cheese index numbers at alternative market levels. 1969-78'

Cheese and milk prices )an. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

AnnuaJ average ' = 100 Farm level (milk): Minnesota*Wisconsin manufacturinK {jrade 102.2 100.9 100.3 99.8 97.8 97.1 97.9 98.5 100.6 100.7 101.9 102. Milk eligible for fluid use Minnesota and Wisconsin 102.2 101.1 100.4 99.4 97.8 95.9 97.7 98.5 100.7 101.9 102.1 102. Milk usoii for American cheese Minnesota and Wisconsin 102.2 101.0 100.4 99.5 98.0 97.0 97.4 98.4 100.5 101.5 102.4 101.

Plant level: National Cheese Exchan^je— 40-pound block 101.3 100.5 100.3 99.6 97.9 97.5 97.7 98.8 101.3 101.9 101.6 101. Bi\TTc\ 100.5 100.4 100.6 99.9 98.0 97.0 97.7 99.6 100.7 102.1 101.8 101. Wisconsin assembling points— 40-pound block 100.5 100.8 100.4 100.1 98.2 97.8 96.4 98.9 100.9 101.9 101.5 101. Biirn^l 100.9 100.5 100.5 100.1 98.1 97.1 97.6 99.4 100.9 101.7 101.9 101.

Wholesale level. American types: 40-pound block Chicago 101.2 100.3 100.3 100.3 98.6 98.1 98.7 99.0 100.3 101.0 101.4 100. Eastern area 101.3 100.7 100.5 99.7 98.5 97.8 98.1 99.3 100.8 101.5 100.7 101. West Coast 101.5 101.2 100.6 100.9 99.0 98.6 97.8 98.7 99.9 100.4 100.5 100. 5-pound process- Chicago 101.1 100.4 100.8 100.6 98.7 97.9 96.8 99.2 100.6 101.8 101.4 100. Eastern area 101.3 100.5 100.5 99.7 98.3 97.8 98.1 99.0 100.4 101.3 101.6 101. West Coast 100.5 100.2 100.6 100.8 98.7 98.1 97.8 99.2 100.5 101.5 101.3 100. Brick and Muenster. Chicago 101.4 100.8 100.3 100.7 98.6 98.0 97.7 99.0 100.2 101.6 101.2 100.

Wholesale level other types: Swiss, Grade A Chicago (block) 100.7 100.3 100.7 101.2 100.3 99.1 98.9 98.9 99.8 100.2 99.8 100. New York (cuts) 100.6 100.4 100.4 100.5 99.8 99.0 98.9 99.3 99.8 100.5 100.6 100. San Francisco (block) 100.4 100.7 100.9 100.3 99.5 99.0 99.1 99.4 99.9 100.4 100.5 99. Parmesan Chicago 101.1 100.3 100.0 100.3 99,6 98.9 97.5 99.0 100.4 100.8 100.8 101. New York 100.8 99.9 100.4 100.4 99.6 98.9 98.1 99.6 100.3 100.0 101.3 100. San Francisco 99.6 98.8 99.9 100.1 99.6 98.6 100.1 100.9 101.0 100.7 100.2 100. Blue, Chicago 101.0 100.7 100.7 100.1 98.5 98.6 98.7 99.4 100.5 100.9 100.6 100.

Retail level- American sliced process 100.4 100.8 100.4 100.2 100.2 99.8 99.3 99.3 99.3 99.7 100.2 100. Imports. New York: Parmesan 100.6 99.2 99.6 100.4 99.8 98.0 98.7 99.1 99.8 100.1 102.7 102. Swiss wheels 100.0 100.0 100.9 101.2 100.7 100.1 99.5 99.5 98.9 99.0 99.7 100. Blue 100.1 100.1 99.9 99.5 99.5 99.9 100.3 100.1 99.9 100.6 101.1 100.

Averaxi* of ratios to 12 months movinji averajítí centered. 'Retail price series ended june 197B. Sources: (15. 38. 19). average price advantage over barrel prices for 1969-78 of The retail price of American process cheese was very 3 cents per pound at the Exchange and 3.7 cents per steady in the early sixties, after which the price gradually pound at Wisconsin assembly points. Prices of 40-pounci increased (fig. 12). As with wholesale prices, a large price block on the Exchange during this time increased from 46 jump occurred in 1973, after which the retail price fluc- cents per pound to $1.13 per pound while prices at the tuated more but continued to rise. assembUng points increased from 49 cents per pound to $1.19 per pound. There were 35 prices reported weekly for imported cheeses in 1978 [13], These were all for other than There were 72 different wholesale domestic cheese prices American cheese types at the sellers' docks or warehouses reported weekly for the Midwest (31 prices), Eastern Area at New York, Chicago, or San Francisco. They were (29 prices), and West Coast (12 prices) in 1978 (13). Thirty- reported as price spreads. Imported cheese prices are four of the reported prices were for American type comparable in degree to either the cheese plant or first cheeses and 38 were for other cheeses. These prices are handler sales level domestic prices depending on the use intended to reflect representative cheeses since it is im- of the imported cheeses. However, due to differences in possible to report all of the numerous cheese prices at the types, varieties, and package sizes, direct price com- wholesale level. These reported wholesale prices, which parisons with domestic wholesale cheeses are generally may be subject to volume discounts, are thought to reflect not possible. most closely first handler sales to the institutional sector. Monthly import cheese prices from 1962-78 (price spread The reported domestic wholesale cheese prices reflect dif- average] are shown for Parmesan, swiss, and blue cheeses ferent cheese types and varieties, package sizes, and coming into New York (fig. 13). Parmesan's price fluc- delivery points (sellers' dock versus dehvered to retail tuated more and increased more than that of the other two point). The American-type wholesale cheese prices were cheeses. reported as point prices, while the other cheese-type wholesale prices were reported as price spreads. Price Interrelatioiiships

Historic price trends of cheese and the milk used to make Selected monthly wholesale cheese prices are shown for cheese at alternative market levels reflect the highly inters 1962-78 in figures 7 to 11 (the average price was used for related cheese marketing system shown in figure 1, those prices reported as price spreads). These include resulting in similar price movements for different American-type 40-pound block and 5-pound process, swiss, marketing levels. These interactions can be seen from the and Parmesan at Chicago, New York, and San Francisco. monthly price trends (figs. 2-6) and from the relationship Also shown are domestic wholesale prices for brick and between the Exchange price and the support purchase Muenster combined and blue cheese at Chicago. No direct price (table 6). Cheese and milk prices are affected by the comparison of cheese price levels can be made regionally commercial demand for cheese, milk production, the sup- or with imported cheeses due to regional definition dif- port price level, and other manufactured dairy product ferences in the wholesale cheeses chosen for price repxjrt- prices. ing and the frequent use of average prices when price spreads were reported. However, price trends and fluctua- The support purchase price usually provides a price floor tions can be compared. All wholesale cheese prices in- for the cheese at the plant level. The support purchase creased gradually until 1973, after which prices increased price has had the most effect during cyclically high more steeply and fluctuated more. The prices for com- periods of milk production and during May and June, the parable cheeses appeared to follow similar patterns when seasonally high period of milk production. A summary of compared among regions. support and purchase price decisions since 1955 is given in appendix tables 1 and 2.

The only retail price series on cheese was monthly for The amount by which the National Cheese Exchange American process packaged cheese. This series of actual 40-pound block Cheddar price exceeded the support pur- prices was discontinued in July 1978 and replaced with an chase price is shown in table 4. This table reveals the index. The average retail price reported until that time strong cheese market which developed during 1973, the represented prices that consumers paid for cheese in half- generally lower price difference between the Exchange pound packages. Since packaging cheese represents a ser- and the support program in May and June, and the effect vice to consumers, it also adds to the margin and makes of support price decisions on commercial cheese prices. Ihe price of cheese in half-pound packages somewhat less responsive to changes in price at the farm level than the The level of milk production indirectly affects cheese pro- price of butter. duction, both through long-term milk cycles and seasonally.

13 FIGURE 2 a Milk Prices Paid to Farmers by American Cheese and Butter Plants, U.S. Monthly Average, 1947-78 DOLLARS PER CVVn"

10

8

6 ~

^-^^^ BUTTER PLANTS 4-4^ \i Î A AA AMERICAN CHEESE PLANTS A'

I 1 1 1 I I 1 I I i 1 1 1 1 1 I I I I I I I I I I I I I I i 1 1947 50 55 60 65 70 75 1978 FIGURE 2 b. Milk Prices Paid to Farmers by American Cheese and Butter Plants, Min.- Wis., Monthly Average, 1947-78 DOLLARS PER CWT ~~~

10

8

6

AMERICAN CHEESE PLANTS ¡u ^,^ •••' BUTTER PLANTS V fA ^ „H^ft»««% w I I i I I I 1 I I I I I 1 1 I I I I I I I 1 1 I I 1 I 1 1 1 1 1947 50 55 60 65 70 75 1978 » FIGURE 3. Milk Prices Paid To Farmers By American Cheese and Butter Plants. Min. - Wise. 1955-78 DOLLARS PER CWT

AMERICAN 0.20 CHEESE PLANTS

0.15

0.10

0.05 h

• • • • S ■ "^ if

Sa ■ ■• •■» ^m

U • 'S' • w

-0.25 J-J \ L J 1 L I I I I I J I L 1955 60 65 70 75 1978 FIGURE 4 Prices Of Milk Eligible For Fluid Use, Min. Wis. Manufacturing Grade, And Support Price, Monthly. 1955-78 $ PER CWT"""

10 -

/;• ii !»n* •• ■ ■• 8 r /

6

FLUID ELIGIBLE

^^J MINNESOTA-WISCONSIN

^.^.»«^.ai^-«^^..,»...,«^^».,». SUPPORT PRICE i i I I i I I 1 1 1 I i L_J I 1 I I lili—L 1955 60 65 70 75 1978 s FIGURES American Cheese Prices, National Cheese Exchange, Monthly, 1968-/» CENTS PER POUND

1.1

1.0

0.9

0.8

BARREL 0.7

0.6

^>—fxA ^r'\y

1968 69 70 71 72 73 74 75 76 77 1978 FIGURE 6 American Cheese Prices. Wisconsin Assembling Points, Monthly. 1968-78 CENTS PER POUND

1.2 -

BLOCK

1968 69 70 71 72 73 74 75 76 77 1978 8 FIGURE 7 Forty Pound Block Prices, Wholesale, Monthly, 1962-78 CENT8 PER POUND

1.4

1.2

1.0 -

0.8

0.6

NEW YORK P^;^ 0.4 V...-'

0.2 1 1 1962 65 70 75 1978 FIGURE 8 Process Cheese Prices, Wholesale, Monthly, 1962-78 CENTS PER POUND —

1.4 -

1.2

1.0 -

0.8 NEWYORK

0.6

0.4 \'*»»,y*'v

0.2 J I L 1962 65 70 75 1978 K9 to FIGURE 9 Swiss Cheese Prices, Wholesale, Monthly, 1962-78 CENTS PER POUND

CHICAGO

0.4 - SAN FRANCISCO

0.2 -

0.0 1_J L J L 1962 65 70 75 1978 FIGURE 10 Parmesan Cheese Prices, Wholesale, Monthly, 1962-78 CENTS PER POUND

2.4 -

CHICAGO

2.0 -

1.6 - SAN FRANCISCO

1.2

0.8

>*w^Ml ■*■■■■*■■'

NEW YORK 0.4 -

0.0 I i I I \ I L J I I \ \ I \ \ 1962 65 70 75 1978 FIGURE n Blue and Prices, Chicago Wholesale, Monthly, 1962-78 CENTS PER POUND

1.4

1.2

1.0 BLUE ÍV V 0.8 -

>^ «■•■ ,»•"•..-••^./V*—' ,-v«^" BRICK MUENSTER CHEESE

^...^-••—•

0.2 -

0.0 J L J L 1962 6S 70 7S 1978 FIGURE 12 Retail American Process Cheese Price, 1960-78 CENTS PER POUND

180

165 -

150 -

135

120

105

90 -

75

60 J \ I L I I I I J l_L Ï L 1960 65 70 75 1978 s FIGURE 13 Imported Cheese Prices, New York, Monthly, 1960-78 CENTS PER POUND

5.5

5.0

4.5

4.0

3.5

3.0 PARMESAN CHEESE 2.5

2.0 .«••;- 1.5 ^*.•"•"•••• SWISS CHEESE ,.u«a^ ¿V*í*^ 1.0 b^

0.5 BLUE CHEESE 0.0 J L 1 J I 1962 65 70 75 1978 Table 6—Amount by which National Cheese Exchange 40-pouncl block price exceeds support purchase price, monthly, 1968-78'

Year Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

1 Cents per pound

1968 1.63 1.25 1.00 -0.19* -0.20 -0.62 -1.00 -0.50 -0.20 0.50 0.50 1.06

1969 .35 .81 1.94 1.88* 2.40 2.75 2.50 2.50 3.56 4.75 5.50 6.08

1970 6.85 5.12 5.00 .12* .20 .25 .25 .25 .81 3.20 3.50 3.50

1971 2.00 3.50 4.44 .65* -.19 -.25 -.25 -.25 -.25 -.06 2.13

1972 2.25 2.63 2.95 1.63 1.50 1.90 3.31 3.87 3.80 5.25 6.83 7.50

1973 7.50 7.50 5.58 2.25* 2.38 3.70 4.50 8.80* 13.50 16.50 18.12 20.31

1974 21.12 21.56 21.75* 12.75* 3.55 -.50 -.50 1.40 5.25 6.12 4.70 .12

1975 -1.66* -1.12 -.75 -.75* .60 1.75 4.81 9.40 15.19 12.05* 12.31 15.88

1976 11.55 2.25 8.56 4.10* 2.63 3.25 8.95 11.94 5.44 -.65* -1.00 -1.00

1977 -1.00 -1.00 .63 -1.25* -1.25 -1.25 -1.25 -1.25 .05 -.25 .75 1.75 9.25 1978 1.63 2.75 3.25 -1.00* -1.00 -1.00 -.25 5.62 7.15 9.19* 9.25

'An assembly charge was added to the National Cheese Exchange 40-pound block price. It was 1.5 cents per pound until April 19. 1974 when it became 2.25 cents per pound. * Indicates months with an increase in the support purchase price. Where increases were made during the month, interpolation was used.

Source: (13). Cyclically low levels of milk production have resulted in with lower-than-normal commercial cheese stocks. Much less milk available for cheese production, as well as for of the low production and stocks was due to the strong production of other manufactured dairy products, given a 1973 cheese market and the market's subsequent weaken- relatively constant demand for milk needed for fluid prod- ing in price due to strong industry and Government reac- ucts. This places upward pressure on spot cheese prices. tion. Cheese prices also tend to decline seasonally during May and June, usually the months of highest milk production. National Cheese Exchange Supplies of milk in excess of commercial demand from Base Price Analysis 1952-65 generally kept dairy product prices closely in line with support prices, except in periods of seasonally low The influence of the National Cheese Exchange as an in- production. Several times, an increased volimie of milk dicator of prices for all cheese markets makes Exchange available for manufactured dairy products lowered the prices an important area of study. Further interest is manufacturing grade and blend prices. Support prices focused on Exchange prices because of the relatively small declined twice during this period, in 1958 and 1962, which volume of cheese traded on the Exchange, and because were fully reflected in declines in manufacturing grade cheese prices have substantial economic significance milk prices. throughout the dairy industry.

Since then, declines in milk production in 1966, 1973, and Two earlier studies, using correlation analysis, found very 1975 combined with other market conditions during these high relationships between Exchange prices and prices at years to create tight supply-demand situations. There were the Chicago and New York wholesale markets (table 7, 4, three, two. and three support price increases in those 10). Higher correlations generally existed between Ex- years, respectively. These factors combined to increase change prices and wholesale prices for the week following wholesale product prices and milk prices sharply. In a change in Exchange prices than for the same week as a general, dairy product and manufacturing milk price in- change in Exchange prices. Thus, both studies concluded creases at other times since 1966 closely followed in- that changes in Exchange prices were generally reflected creases in the support price. in changes in market prices.

Periodic jumps in cheese demand relative to production Graf also examined the number of times a price change on over the years caused shifts in milk prices and utilization. the Exchange either preceded or followed a price change These shifts occurred in late 1960. late 1963. late 1965-66. at Wisconsin assembUng points and the Chicago and New 1969-early 1971, and 1972-73. Cheese plants became ac- York wholesale markets in 1964-65. For four styles of tive bidders for milk relative to butter-powder plants and cheese (Cheddar. 40-pound blocks, single daisies, and paid higher prices for the milk. Increased manufacturing longhorn), the total number of price changes on the grade milk prices, and increased prices for all dairy prod- Exchange preceded Wisconsin assembling point price ucts, were largely a result of the strong cheese markets changes 85 percent of the time, they followed 4 percent of during these periods. Milk supplies also shifted from use the time, and there were no resultant price changes at in butter-powder plants to use in cheese plants and from Wisconsin assembling points 11 percent of the time. The butter to cheese in diversified plants. Of course, there 40-pound block price changes on the Exchange during this were also periods of strong butter markets, but with less time led Chicago wholesale price changes 76 percent of frequency, size, or lasting shifts in milk utilization. the time, they followed 4 percent of the time, and there were no resultant price changes at Chicago 20 percent of The strong cheese market in 1973 (causing prices to in- the time. For the New York wholesale market. Exchange crease by 36 percent) made possible a support purchase 40-pound block price changes led 56 percent of the lime, price increase of 7.25 cents per pound for cheese and a they followed 12 percent of the time, and there were no decrease of 6.75 cents per pound for butter to increase New York wholesale price changes associated with cheese production and butter consumption (an additional Exchange price changes 32 percent of the time. He 100 million pounds of cheese imports was also allowed). concluded that the Exchange appeared to have a dominant The result of the price increases was a sharp increase in influence on cheese prices in other markets throughout the cheese production along with a substantial increase in country. cheese-manufacturing capacity. In this study. I followed the pattern of those earlier Cheese prices made another major jump (35 percent) late reports in examining the association between National in 1975. This increase was primarily because of tight milk Cheese Exchange prices and prices at both Wisconsin supplies (milk production had not yet recovered from the assembling points and wholesale markets to determine if sharp drop in 1973) and lagging cheese production combined the same price relationships still hold.

28 Table 7—Coefficients of correlation between cheese In addition, during 1975-79. 10 price changes at the exchange prices and (1) Wisconsin assembling point prices Wisconsin assembling points did not follow the Exchange and (2) wholesale prices. American cheese, weekly, 1948 price changes of the previous week. 3 at the Wisconsin and 1964-^5 wholesale level, 16 at the Chicago wholesale level, 19 at the Eastern area wholesale level, and 24 at the West Coefficients of correlation Coast wholesale level. There did not appear to be any pat- Prices correlated with tern to these price changes in relation to the Exchange. exchange prices' 1948 [iO] 1964-65 (4) Some preceded Exchange price changes and some followed 2 weeks later. Rather, it appeared that although some regional price adjustments were sometimes made in- 40-pound block: dependently at the other markets, they usually readjusted Wisconsin assembling point price— rather quickly back to the original price relationship with Current week 0.953 the Exchange, either on their own or in conjunction with Following week .972 the Exchange price change. In fact, a majority of the cases Chicago wholesale prices— where the other market price changes were not of the .960 Current week same magnitude as the Exchange price change the Following week .989 previous week occurred as a result of those markets being New York wholesale prices— Current week .867 slightly out of line in their prices. This required more ad- Following week .888 justing in comparison with changes in the Exchange price to bring them back into line. Single daisies: Wisconsin assembling point prices- Second, two statistical measures, the coefficient of cor- Following week .882 relation and the elasticity of price transmission, were used Chicago wholesale prices- to determine the relationship between weekly National Current week 0.953 Cheese Exchange prices and selected wholesale market Following week .991 prices for 1975-79. The Exchange prices examined for New York wholesale prices- price comparison were the 40-pound blocks, barrels, and Current week .937 Following week .981 Swiss Grade A. A very close relationship existed between 40-pound block, barrel, and swiss Grade A prices on the Exchange and prices for like cheeses at the other market — s Not available. levels (tables 9, 10. and 11). All coefficients of correlation were over 0.94 and were significant at the 1-percent level. These correlations were for the same styles of cheese, for example. Exchange 40-pound block to other pricin;^ points 40-pound blocks, etc. The wholesale current week markel quotations of the 1948 study were from the Of interest is that the Chicago and Eastern area 40-pound same Friday as the Exchange and the following week quotation were from block prices were at least as highly correlated as were the the next Friday after the Exchange. The assembling point and wholesale prices in the 1964-65 study used the weekly average of the high price for Wisconsin assembling point prices to Exchange 40-pound the current and following week. Since the Exchange price was established block prices. This reflects the importance of the Exchange on Friday of each week, current week assembling point and wholesale price as a market price indicator, even after the cheese prices actually preceded the Exchange price. leaves the manufacturing plant. West Coast prices were Sources: (10. 4). generally less correlated with Exchange prices than were Chicago and Eastern area prices. First. 1975-79 weekly price changes on the Exchange were compared with price changes in those other markets for A higher correlation existed between Exchange prices and 40-pound blocks. There were 27 weekly price decreases at other market prices for the following week than for the current week. This, together with the information from the the Exchange during this time period and 67 price in- creases. Price changes on the Exchange one week were price change analysis, suggests that Exchange prices on commonly followed the next week by similar price changes Friday morning are generally reflected in Wisconsin assembling point and wholesale markets the following in each of the other markets (table 8). Price changes of the same sign as the Exchange were found in at least 95 per- week. cent of the cases in the following week for the Wisconsin The high correlation between swiss Grade A prices on the assembling point. Wisconsin wholesale, Chicago wholesale, National Cheese Exchange and prices at the wholesale and Eastern area wholesale markets. West Coast whole- markets shows the close relationship of swiss cheese sale price changes of the same sign occurred in about 85 prices nationwide. However, since all cheese prices ex- percent of the cases. Price decreases on the Exchange ap- amined were highly correlated, including a correlation of peared to be followed slightly closer by the other cheese 0.9776 between Exchange 40-pound block prices and Ex- markets than did price increases.

29 TaUe 8—Comparison of weekly National Cheese Exchange 40-poiiiid block price changes with price changes at other cheese markets the following week. 1975-70

Type of price change in other cheese markets the week following a Exchange price change at the price National Cheese Exchange changes

Price change in other markets following National Cheese Exchange price decrease: Price decrease, same magnitude 40.7 9 33.3 Price decrease, different magnitude 48.2 13 48.2 No price change 7.4 4 14.8 Price increase Price change in other markets following National Cheese Exchange price increase: Price increase, same magnitude Price increase, different magnitude No price change Price decrease Price change in other markets following National Cheese Exchange price changes: Price change, same direction, same magnitude 45.7 Price change, same direction, different magnitude 4B.g No price change Price change, opposite direction change swiss Grade A prices, Swiss prices in the market- market prices of cheese of the same type. However, the place may. in practice, follow 40-pound block price lowest coefficient was at the 0.94 level, still indicating a changes as a general indicator of market value. close relationship.

The elasticity of price transmission was measured be- tween Exchange prices and prices in other markets the Price Spreads following week as a result of the closer relationship than exists with prices in other markets during the current The price spread for American process cheese was com- week. All elasticities for 40-pound block, barrel, and swiss puted from annual retail and wholesale product prices and Grade A were in excess of 0.0 with higher elasticities for the farm value equivalent of milk going into the cheese for the Wisconsin assembling points. Therefore, weekly Ex- 1950-78. All three price levels followed the same general change price changes of 1 percent were associated with trend (fig. 14 and appendix table 3), with each price level average changes in the same direction in other market over 99 percent correlated with others. Following a price prices of at least 0.8 percent. bubble in the early fifties, each price series remained relatively unchanged imtil 1966 when prices began rising Forty-pound block Exchange prices were also statisticaUy moderately through 1972. and sharply thereafter. Retail compared with prices of other cheese types at several prices, wholesale prices, and the farm value each increased alternative wholesale levels (table 12). This was to test the by about 8 percentage points annually during 1950-78. general impression that 40-pound block prices are impor- tant industry indicators of market value for cheese other Table 10—Statistical relationship between National than American types. The correlation coefficients were Cheese Exchange barrel prices and selected other barrel generally lower than those between Exchange and other and process cheese pricing points, weekly. 1975-79

Table 9—Relationship between National Cheese Exchange Pricing point' Coefficient Elasticity of price 40-pound block prices and selected other 40-pound block of correlation' transmission^ pricing points, weekly. 1975-79 Percent Coefficient Elasticity of price Wisconsin assembling points, Pricing point' of correlation' transmission^ barrel: Current week 0.9933 Percent Follovdng week .9991 0.94 Wisconsin assembling points: Current week 0.9935 Chicago wholesale, Following week .9974 1.03 process 5-lb. loaf: Current week .9861 Chicago wholesale: Following week .9916 .93 Current week .9944 Following week .9983 .93 Eastern area wholesale, process 5-lb. loaf: Eastern area wholesale: Current week .9855 Current week .9948 Following week .9910 .92 Following week .9981 .98 West Coast wholesale, West Coast wholesale: process 5-lb. loaf: Current week .9665 Current week .9851 Following week .9688 .82 Following week .9891 .85

'Since the National Cheese Exchange price was established on Friday of 'Since the National Cheese Exchange price was established on Friduy uf each week, the current week assembling point and wholesale prices ac- each week, the current week assembling point and wholesalo prices ac- tually preceded the Exchange price. The coefficient of correlation is a tually preceded the Exchange prices. The coefficient of cumilHtiun is H measure of the degree of association between the National Cheese Ex- measure of the degree of association between the National Cheese Ex- change price and either the assembling point or wholesale price, that is, change price and either the assembling point or wholesale prtcui) Ihat is. the larger the coefficient, the closer the relationship between the prices. the larger the coefficient, the closer the relationship between (he prices The elasticity of price transmission (Ep) indicates the effect of National The elasticity of price transmission (Ep) indicates the effect of National Cheese Exchange prices one week on the assembling point and wholesale Cheese Exchange prices one week on the assembling point and wholesale prices the following week. A 1 percent increase in the Exchange price was prices the following week. A 1 percent increase in the Exchange price was associated with the reported tabular value increase, that is, 1.03 percent associated with the reported tabular value increase, that is. 0.94 percent increase in the Wisconsin assembling point price. increase in the Wisconsin assembling point price. dPo PE_ where Pp = National Cheese Exchange price E = -i^ ^ where Pp = National Cheese Exchange price dP^ P dP. P = Other pricing point P = Other pricing point

31 American cheese sold at retail during 1978 for an average Several factors were examined to determine further the price of 93.5 cents for a half pound and at wholesale for nature of the price spread for American process cheese. 60.5 cents for a half pound. The farmer received about 45 Deflated price spreads for American process cheese have cents per half pound of cheese for the milk used by the shown a slight upward trend (fig. 16). Such a trend is con- cheese plant. Stated in a different way. in 1978 the trary to expectations if price spreads are determined farmer received 48 cents out of every dolieras worth of primarily by costs outside the cheese marketing system cheese bought by the consumer, and 52 cents went to pay and if index numbers of wholesale prices of all com- for the services and supplies to procure, manufacture, and modities reflect these costs. Deflated price spreads market the cheese. averaged 19.6 cents during the 1950's, 23 cents during the sixties, and 24.2 cents during the seventies. A general up- The farm-retail price spread averaged 24.5 cents from ward trend was apparent through 1971, when the price 1950-78. 28 percent of which was the farm-wholesale spread reached 26.2 cents; after that the spread declined price spread and 72 percent of which was the wholesale- to about 23 cents in the late seventies. This suggests either retail price spread (fig. 15). About 55 percent of the retail that the index of wholesale prices of all commodities used cost of American process cheese over the entire time period represented a marketing charge, with a high of Table 12—Statistical relationship between National about 59 percent in the early sixties. The farm-retail price Cheese Exchange 40-pound block prices and selected other spread increased slowly through 1973. after which it cheese pricing points, weekly. 1975-79 sharply increased. The rapid increases in recent years were due mainly to rapidly rising retail prices. Pricing point* Coefficient Elasticity of price of correlation' transmission^ Based on past studies of price spreads for other Percent agricultural coounodities. the price spread is assumed to Chicago wholesale. Blue: include parts of both (1) fixed charges that represent pro- Current week 0.9848 curement, manufacturing, and distribution charges, and (2) Following week .9886 0.89 a constant percentage spread where the price spread is a percent of the farm or retail price [20]. Chicago wholesale. Gorgonzola: Table 11—Statistical relationship between National Current week .9811 Cheese Exchange Swiss Grade A prices and selected other Following week .9846 .90 Swiss Grade A pricing points, weekly, 1975-79 Chicago wholesale, Parmesan: Current week .9368 Pricing point' Coefficient Elasticity of price of correlation^ transmission' Following week .9410 .77 Percent Chicago wholesale, Provolone: Chicago wholesale, block': Current week .9410 Current week .9964 Following week .9460 .79 Following week .9984 1.00 Wisconsin wholesale. Eastern area wholesale, cuts: Mozzarella: Current week .9681 Current week .9900 Following week .9993 .93 Following week .9942 .94

West Coast wholesale, block: East Coast wholesale. Edam: Current week .9416 Current week .9702 Following week .9349 .84 Following week .9702 .87

'Since the National Cheese Exchange price was estabhshed on Friday of 'Since the National Cheese Exchange price was established on Friday of each week, the current week assembling point and wholesale prices ac- each week, the current week wholesale prices actually preceded the Ex- tually preceded the Exchange prices. The coefficient of correlation is H change prices. The coefficient of correlation is H mensure ni Ihe deKfPR »f measure of the degree of association between the National Cheese Ex- association between the National Cheese Exchange price and ihe change price and the wholesale prices. That is. the larger the coefficient, wholesale prices. That is. the larger the coefficient. Ihe closer the rdalion- the closer the relationship tietween the prices. The elasticity of price ship between the prices. The elasticity of price transmission (Ep) indicnles transmission (Ep) indicates the effect of National Cheese Exchange prices the effect of National Cheese Exchange prices one week on ihe wholesale one week on the wholesale prices the following week. A 1 percent increase prices the following week. A 1 percent increase in the Exchange price was in the Exchange price was associated with the reported tabular value in- associated with the reported tabular value increase, that is. 0.94 percent crease, that is, 1 percent increase in the Chicago wholesale point price. increase in the Wisconsin wholesale Mozarclla price. fiPo Pp E_ =s —2 _^ . where P,. = National Cheese Exchange price E^ = ^ . where P^ = National Cheese Exchange pnce dPp P dP^ E o P = Other pricing point P = Other pricing point

32 FIGURE 14 Price Levels of American Cheese, Annual, 1950-78

CENTS PER POUND

90 -

80 -

70

60

50

RETAIL PRICE 40 h-

> 30 / WHOLESALE PRICE 20

FARM PRICE 10

J I L ■ ■ I L J I L I I J I L J I L...-L 1 I 1950 55 60 65 70 75 1978 FIGURE 15 Price Spreads of American Process Cheese, Annual, 1950-78

CENTS PER POUND

1950 1978 FIGURE 16 Deflated Price Spreads of American Process Cheese, Annual, 1950-78

CENTS PER POUND

FARM-RETAIL 25 -

WHOLESALE-RETAIL X/' ••...

\ ^«•■■«■■a■■■■■* 15

10 FARM-WHOLESALE -2^-

/■

I I I L J I I L J I I L _l I I I L I I I I I J L 1950 55 60 65 70 75 1978 as the deflator may not have increased as much as some Given the above mixture of results suggesting both costs of dairy marketing or that some portion of the price percentage and absolute markup factors, an equation was spread is related to the rapidly increasing retail prices. estimated of the total price spread from 1950-78. The average price spread was equal to about 5 cents plus Second, the variability of actual price spreads was com- almost 0.4 cent monthly and 0.7 times the farm value of pared with the variability of deflated price spreads: the milk going into the cheese. The monthly variable represents those factors not explained by the constant markup and proportional markup of farm value. Much of Coefflcient of the 0.4 cent may explain monthly adjustments in the con- Price spread variability (percent) stant markup due to increasing marketing costs. Actual Deflated The following equation was used to explain the average monthly farm-retail price spread of American process cheese from 1950-78: Farm-retail 37.3 10.6 Wholesale-retail 34.2 8.9 Farm-wholesale 46.8 20.6 Given: PS a + b(EP) + c(M) Where: PS Farm—retail price spread of The coefficients of variability (the standard deviation American process cheese. divided by the average price spread) were reduced con- FP Farm price of milk equivalent, siderably when the price spread was deflated by index M Months, where January 1950 numbers of the wholesale price of all commodities. This = 1, etc.. suggests that prices of factors used in cheese marketing, Marketing costs when a con- transportation, labor, and equipment costs, for example, stant markup is used. are largely determined outside the cheese market system. b = The percentage markup, and Other factors explaining Finally, the constancy of the price spread as a percentage changes in the price spread. of total retail costs was examined. Constant values over time would imply the use of constant percentage markups The resulting equation was: by the system or costs of marketing that parallel retail prices over time. Again, the coefficient of variabihty was PS = 5.14 + 0.70 FP + 0.36M R^ = 984 a low 5.4 percent, which indicates a close relationship of ( .58) ( .04) ( .05) total price spreads with retail prices.

Table 13—Actual price spread for 40-pound block cheese between National Cheese Exchange and other market levels'

Price spread with National Cheese Exchange Market All 1975 1976 1977 1978 1979 years

Cents per pound

Wisconsin assembling points 3.0 4.1 2.8 2.9 6.0 3.8 Wisconsin wholesale 7.4 7,5 8.3 8.2 11.4 8.7 Chicago wholesale 17.9 14.7 19.1 19.7 22.8 19.8 Eastern Area wholesale 15.7 17.6 18.6 20.4 22.7 19.1 West Coast wholesale 25.3 24.1 20.4 21.5 24.0 23.1

'Calculated by subtracting the National Cheese Exchange price from each of Ihe wholesale prices. The Exchange 40-poijnd block prices (cents per pound) were: 1975 = 83.4; 1976 = 92.2; 1977 = 94.1; 1978 = 104.2: 1979 = 118; and all years = 98.2

Source: (13].

36 Price spreads were also examined between the National Table 14—Regression price spread relationships for Cheese Exchange price and prices at selected other selected 40-pound block markets as a function of the market levels for 40-pound block Cheddar cheese. The ac- National Cheese Exchange 40-pound block price, weekly. tual price spreads for 1975-79, using the Exchange price 1975-79' as a base, increased slightly through 1978 for Wisconsin wholesale. Chicago wholesale, and Eastern area wholesale Intercept Slope Markets markets (table 13). They remained about the same for (a) (b) Wisconsin assembling points and declined for the West Coast wholesale market. The actual price spreads for all Cents/lb. -Percent- markets increased greatly in 1979. with the West Coast re- maining below the 1975 spread. These findings are Wisconsin assembling points -2.5 6.6 99.5 tempered. )iowever. because regional cheese prices cannot Wisconsin wholesale - .7 9.8 98.7 be compared directly as a result of definitional differences Chicago wholesale 8.7 11.5 99.7 in the wholesale cheeses chosen for price reports. Eastern Area wholesale 2.4 17.1 99.6 West Coast wholesale 22.5 0.8 93.8 Regression analyses were made on these same markets where changes in the price spreads were examined as a 'Price spread = a + b (National Cheese Exchange 40-pound block price result of a change in the Exchange price the previous per pound for the previous week). The significance level w^as at least 99 percent in all cases. week (table 14). The price spread increased appreciably with increases in the Exchange prices for all markets but Source: (13). the West Coast. For example, a 1-cent per pound increase in the Exchange price the previous week was associated with an average 10-percent increase in the Exchange- Wisconsin wholesale price spread.

37 Literature Cited

1. Chain Store Age/Supermarkets, **Dairy Products." luly 1979.

2. Gould. R. J. '*The National Cheese Exchange." Pricing Problems in the Food Indus- try (with Emphasis on Thin Markets), Univ. of Wis,-Madison, Marvin Hayenga [ed.). N. Cent. Reg. Res. Prog. 117. Monograph 7. pp. 79-82. Feb. 2979.

3. Graf, Truman F. "Thin Market Case Study—National Cheese Exchange." Pricing Problems in the Food Industry (with Emphasis on Thin MarkeisJ. Univ. of Wis.-Madison, Marvin Hayenga (ed.). N. Cent. Reg. Res. Prog. 117, Monograph 7. pp. 65-78, Feb. 1979.

4. Graf, Truman F.. "Cheese Production in the United States." Supplement No. 1 to Technical Study No. 3, Organization and Competition in the Dairy Industry. Na- tional Commission on Food Marketing. U.S. Govt. Printing Office. Wash. D.C.. June 1966.

5. Hammond, Jerome W. and Truman F. Graf. Study of Prices for Milk in Manufac- turing Uses. Univ. of Minn. S + A Bui. 497. 1969.

6. Hayenga, Marvin L. Cheese Pricing Systems. Univ. of Wis.-Madison. N. Cent. Reg. Res. Prog. 117, WP-38, Aug. 1979.

7. Jacobson, Robert E., Jerome W. Hammond, and Truman F. Graf. Pricing Grade A Milk Used in Manufactured Dairy Products. Ohio St. Univ.-Columbus. Ohio Agr. Res. and Dev. Cent., Res. Bui. 1105, Dec. 1978.

8. Leathers, Howard. Dairy Product Prices. Minnesota Station Bulletin (to be pub- lished).

9. Lough, Harold W. The Cheese industry. ERS-254. U.S. Dept. Agr.. Econ. Res. Serv.. July 1975.

10. Miller. Arthur H. Pricing American Cheese at Wisconsin Factories. Univ. of Wis.-Madison. Res. Bui. 163. Aug. 1949.

11. Progressive Grocer, "Annual Marketing Survey," June 1979.

12. Tucker, George C, and William J. Monroe. Marketing Operations of Dairy Cooper- atives. U.S. Dept. Agr., Farm. Coop. Serv., Res. Rpt. 38. June 1977.

13. U.S. Department of Agriculture. Agricultural Marketing Service. Dairy Market News.

14. . Economics. Statistics, and Coopera- tives Service. Prices Received by Farmers; Minnesota-Wisconsin Manu/acturing Grade Milk Price Series and Final Two-State Estimates /or 1976-1978. Pr. 1-4(79). June 1979.

15. Dairy Products—Annual Summary 1979. DA 2-1, June 1979.

16. Dairy Situation. DS-377. October 1979.

38 17. . Milk Production, Disposition, and Income.

18. . AgricuituraJ Prices.

19. . Dairy Marlcet Statistics.

20. Waugh, Frederick V. Demand and Price Analysis: Some Exampies from Agriculture. TB-1316. U.S. Dept. Agr.. Econ. Res. Serv.. Nov. 1964.

21. Williams, Sheldon W., and others. Organization and Competition in the Midwest Dairy industries. Iowa St. Univ. Press. Ames. 1977.

39 Appendix table 1—Support prices for manufacturing Appendix table 2—CCC purchase prices of natural grade milk. 1955-79 Cheddar cheese, 1955-79

Announced price at At 3.5% Year and month' Cheddar, 40-lb. blocks Year and month* national average milkfat milkfat Cents per pound DoUars per hundredweight 1955 33.25 1955 3.15 289 1956 33.25 1956 3.15 2.89 April 1 34.00 April 1-17 3.15 2.91 April 18 35.00 April 18 3.25 3.00 1957 35.00 1957 3.25 3.00 1958 35.00 Aprill 3.25 3.02 April 1 32.75 1958 3.25 3.02 1959 32.75 April 1 3.06 2.85 1960 32.75 1959 3.06 2.85 September 17 34.25 Aprill 3.06 2.86 October 24 36.10 1960 3.06 2.86 1961 36.10 September 17 3.22 3.02 July 18 36.50 1961 3.22 3.02 1962 36.50 March 10 3.40 3.20 April 1 34.60 1962 3.40 3.20 1963 34.60 April 1 3.11 2.93 April 1 35.60 1963 3.11 2.93 1964 35.60 Aprill 3.14 2.99 1965 35.60 1964 3.14 2.99 April 1 36.10 April 1 3.14 3.00 1966 36.10 1965 3.15 3.00 April 1 39.30 April 1 3.24 3.09 June 30 43.75 1966 3.24 3.09 1967 43.75 April 1 3.50 3.35 1968 43.75 June 30 4.00 3.84 April 1 47.00 1967 4.00 3.84 1969 47.00 April 1 4.00 3.85 April 1 48.00 1968 4.00 3.85 1970 48.00 April 1 4.28 4.13 April 1 52.00 1969 4.28 4.13 1971 52.00 1970 4.28 4.13 April 1 54.75 April 1 4.66 4.51 1972 54.75 1971 4.66 4.51 1973 54.75 April 1 4.93 4.79 March 15 62.00 1972 493 4.79 August 10 65.00 1973 4.93 4.79 1974 65.00 March 15 5.29 5.17 April 1 70.75 August 10 5.61 5.49 1975 70.75 1974 5.61 5.49 January 4 77.25 April 1 6.57 6.45 April 1 79.25 1975 6.57 6.45 October 2 85.00 January 4 7.24 7.10 1976 85.00 October 2 7.71 7.55 April 1 90.50 1976 7.71 7.55 October 1 92.50 April 1 8.13 7.95 1977 92.50 October 1 8.26 8.07 April 1 Jfl.OO 1977 8.26 8.07 1978 98.00 April 1 9.00 8.79 April 1 103.25 1978 9.00 8.79 October 1 106.00 April 1 9.43 9.21 1979 106.00 October 1 9.87 9.64 April 1 116.00 1979 9.87 9.64 October 1 124.00 April 1 10.76 10.51 October 1 11.49 11.22 Dates refer to when revised suppwrl prices become effeclive ÜaUiH rttUsr lo whr«n r»'vis»ífJ support pr>ciis U.-como fíffíiclivf.v

40 Appendix table 3—Farm-retail price spreads for American process cheese. 1950-78

Price per 8-ounce Farm-retail spread Total spread Constant Farm pacKBKe ■ as a percent dollars value' Year Wholesale- Farm- of retail total Total Retail* Wholesale' retail wholesale price spread'

• uenisI'^anfc .... — — Percent Cents

1950 28.9 17.8 13.7 15.2 11.1 4.1 52.6 18.6 1951 33.0 21.4 16.9 16.1 11.6 4.5 48.8 17.7 1952 33.9 22.0 17.6 16.3 11.9 4.4 48.1 18.4 1953 33.9 20.4 15.4 18.5 13.5 5.0 54.6 21.2 1954 32.4 18.3 13.9 18.5 14.1 4.4 57.1 21.1 1955 32.2 17.7 13.8 18.4 14.5 3.9 57.1 21.0 1956 322 18.1 14.2 18.0 14.1 3.9 55.9 19.9 1957 32.5 18.3 14.4 18.1 14.2 3.9 55.7 19.4 195B 32.5 18.0 14.1 18.4 14.5 3.9 56.6 19.5 1959 32.6 18.4 14.1 18.5 14.2 4.3 56.8 19.5

1960 33.9 19.8 14.9 19.0 14.1 4.9 56.1 20.0 1961 35.9 19.8 15.1 20.8 16.1 4.7 57.9 22,0 1962 35.7 19.2 14.5 21.2 16.5 4.7 59.4 22.4 1963 35.7 20.8 14.8 20.9 14.9 6.0 58.5 22.1 1964 36.6 21.1 15.1 21.5 15.5 6.0 58.7 22.7 1965 37.4 21.7 15.3 22.1 15.7 6.4 59.1 22.9 1966 41.9 25.6 18.6 23.3 16.3 7.0 55.6 23.4 1967 43.6 25.4 18.4 25.2 18.2 7.0 57.8 25.2 1968 44.4 26.2 19.3 25,1 18.2 6.9 56.5 24.5 1969 47.0 28.7 20.7 26.3 18.3 8.0 56.0 2^.7

1970 50.4 30.7 22.2 28.2 19.7 8.5 56.0 25.5 1971 52.8 31.8 22.9 29.9 21.0 8.9 56.6 26.2 1972 54.3 33.4 24.1 30.2 20.9 9.3 55.6 25.4 1973 60.4 39.9 29.8 30.6 20.5 10.1 50.7 22.7 1974 73.1 44.6 34.0 39.1 28.3 10.8 53.5 24.4 1975 76.7 48.2 36.6 40.1 28.5 11.6 52.3 22.9 1976 85.9 53.5 41.0 44.9 32.4 12.5 52.3 24.5 1977 86.0 55.6 41.4 44.6 30.4 14.2 51.9 23.0 1978^ 93.5 60.5 45.0 48.5 33.0 15.5 51.9 23.2

•Farro-rolail spreads for food products. Marketing and Transportation Situation, and working files. U.S. Dept. Agr.. Econ. Slat, and Coop. Serv. 'Computed from USDA Market News quotation on 5-pound loaf at Chicago. 'EXeflater used was Wholesale Price Index for all commodities. ^Second quarter retail price.

41

Û OS GOVtRMWNT PRINTING Of MCE I9M -3-i'-1-932/E.SS-16 UNITED STATES DEPARTMENT OF AGRICULTURE POSTAGC AND FEES PAlO /WASHINGTON. DC 20250 US DEPARTMENT OF AGRlCULTUWE AGR 101 THIRD CLASS

Economics and Statistics Service

The Economics and Statistics Service (ESS) collects data and carries out research on food and nutrition, international agricultural trade, natural resources, and rural development. The Econo- mics unit researches and analyzes production and marketing of major commodities; foreign agricul- ture and trade; economic use, conservation, and development of natural resources; trends in rural population, employment, and housing and rural economic adjustment problems; and performance of agricultural industry. The Statistics unit collects data on crops, livestock, prices, and labor, and publishes official USDA State and national estimates through the Crop Reporting Board. Through its information program, ESS provides objective and timely economic and statistical information for farmers, government policymakers, consumers, agribusiness firms, cooperatives, rural residents, and other interested citizens.