Our Take

Musings on the Foodservice Industry

The New Reality of a World Dairy Market

Twenty years ago, a foodservice operator could take a chart of the cheese market and overlay year after year in order to predict the cost for the next few months. Fast forward to cheese trades at the Chicago Mercantile Exchange (CME) plus an expansion to a world dairy market and predictions are a difficult science. 

cheese array 2

In the past, Americans consumed all of the cheese produced domestically. The world had no interest in our product and cheese producers had a ready local market so they never looked beyond our borders. With the rise of dairy as a food source in Asia, the world now comes to the U.S. dairy industry for our output. As incomes rise in China, milk and cheese use has increased. It will take decades for China to produce enough dairy to satisfy its domestic needs. Traditional, New Zealand & Australia filled the gap. Persistent drought in that region (combined the fourth largest milk shed in the world) forces Asian buyers to seek U.S. producers.

The top 5 milk processing countries in 2011 were: 1. USA, 2. Germany, 3. China, 4. France and 5. India. In addition, the U.S. has an extensive and sophisticated dairy industry that is highly efficient at producing and processing dairy at the lowest cost in the world.

Cow Milk Production by Country -2012
EU

139.00

United States

90.00

India

55.00

China

32.10

Russia

31.90

Brazil

31.30

New Zealand

19.10

Argentina

12.40

Mexico

11.00

Ukraine

10.50

Australia

9.70

Canada

8.40

Japan

7.50

Production volume in million metric tons

The volatility of the CME has resulted in huge fluctuations of cheese prices. In the past three years, the food industry has seen a CME high of $2.20 and a low of $1.10 – the floor that the U.S. government puts under the market. The biggest cheese users among us are price takers, meaning they have to buy at whatever cost the market issues. Very large buyers can “hedge” by buying Class III milk futures but that only reduces the pain, it does not eliminate it.

Why bring all this up?

Most restaurant operators recall the “old days” of the simple prediction of cheese costs. As a result, many operators “believe” that cheese prices are temporarily crazy and will settle down “soon”. This is not true. The world has found the U.S. industry and American dairy producers, like any other business, will sell to the highest bidder. The years of low stable cheese cost is over. Foodservice operators need to accept this reality and price their pizza, sandwiches and cheeseburgers to account for permanently higher costs. If market forces create some temporary low price, promote, promote, promote, but now is an era to raise quality, improve service and raise prices.

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