A guide to understanding cheese prices
Cheese. What’s pizza without it? Thirty-three percent less food cost for one thing. A pizzeria has two prime costs that must be controlled every day — labor cost and food cost. You probably understand the importance of measuring the cheese on every pizza. Over 35 years as a pizza operator has taught me that when a pizzeria measures the cheese on every pizza, the savings is, on average, 50 pounds of cheese per week. But that is only half of the cheese equation. The other half is the price you pay for cheese.
Before you start negotiating cheese prices with your supplier, it is helpful to understand how cheese pricing works. To understand, let’s look at the past, present and future of cheese pricing.
The price of cheese is decided by government regulators using a complicated formula. In other words, cheese is not a free-trade market like that of the other ingredients used on pizza. In a free-trade market, competition keeps prices low. In a regulated market, the government uses tax dollars to subsidize the dairy industry in order to keep the price of cheese low. Regulated prices never change as efficiently as they would in a free-trade market.
The past: In the 1990s and early 2000s, the formula had worked well enough for the dairy farmers and producers to make money. However, for the past decade, they have operated at a loss. According to the DFC (Dairy Farmers of Canada: commissioned report in 2015), 73 percent of United States dairy farmer income comes from government subsidies. That’s over $22 billion per year! This does not seem to be a sustainable plan. Over the past 30 years, cheese consumption has grown steadily in the world, with the U.S. and Europe as the largest consumers. The rate of growth has been consistent, with no spikes to disrupt the supply/demand balance. The largest market in the world, China, has historically not included cheese in their diet. Up until recently, no restaurant chains have been willing to invest to change this. Of course not; it is estimated that the Chinese population in 90-percent lactose intolerant.
The present: The complicated formula is broken. Two factors have contributed to this. First, the demand for whey has skyrocketed since 2017 due to the protein shake craze. This has led to a gap between block prices (used for cheese) and barrel prices (used for byproducts such as whey), causing an additional $600 million loss to dairy farmers. The second factor is related to the pizza industry. The formula uses cheddar cheese as a baseline. Cheddar has been forever the No. 1 cheese in the U.S., but for the second year in a row mozzarella cheese has outsold cheddar cheese. Not only is the formula broken, but a new consumer has entered the global cheese market: China. Pizza Hut is opening, on average, a store EVERY DAY in China. If you remember your Economics 101 class, supply and demand play a factor in prices, even in a regulated market like cheese. It is expected that China’s demand for cheese will increase 30 percent per year for years to come. Without the infrastructure to produce this cheese, much is expected to be imported from the U.S.
The future: If the formula is corrected, cheese prices will go up. If the government decides to reduce the $22 billion in annual subsidies, cheese prices will go up. As China learns to eat pizza, demand for U.S. cheese may surpass supply, and cheese prices will go up. We have had inexpensive cheese for many years in the pizza industry. It appears that may change.
As a pizzeria owner, what can you do to manage the price of cheese? First, know that you can monitor the price your vendor is paying from the block market. Visit cheesereporter.com/prices. Second, consider a single vendor approach to purchasing. If you are using the single vendor approach, you can negotiate a cost-plus contract for your cheese pricing. If you are using a multiple vendor approach, you may be selecting the best cheese price each week, but it will still be ‘street prices’; meaning higher prices than a contract would bring you. A cost-plus contract is exactly that; you pay the block market price plus X cents per pound. Because you have access to the block market price, you know you are paying a fair price for your cheese. You can spot-check your invoices any time you like to ensure your vendor is holding up their end of the contract. Even if you have one location, most vendors in a single vendor relationship will give you a cost-plus deal on cheese. You get the added benefit of having that vendor control the aging of your mozzarella, so you have the best cheese for your customer. A single vendor contract can be as little as one year, although I recommend at least two years before going back out for bids. Cheese prices are on the rise. Last January the block market was at $1.37/pound. This January it was at $1.87/ pound. That is a 36-percent increase in one year!
Another question facing pizzeria owners is how to deal with fluctuations in cheese price. Should we adjust prices based on the price of cheese? I recommend you ride it out. Certainly, you must measure your food cost and adjust prices annually, but no more than that. Our customer looks for consistency not only in our product, but also in our pricing.
According to the U.S.D.A., Americans consume over 30 pounds of cheese each year. Not surprisingly, our favorite way to eat that cheese is on pizza. Our future in the pizza business looks bright, but profitability is always at risk. Now is the time to get control over how much you pay. Say ‘no’ to street pricing and develop a relationship with a single vendor. Lock in a cost-plus contract and get back to doing what you do best; serving your customers the best pizza on the planet! Do this and you will always have a friend in cheeses!
Dan Collier is the founder of Pizza Man Dan’s in California and a speaker at International Pizza Expo.