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Cheese Market

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I’m looking for a definitive, plainspeak, detailed-as-necessary explanation of how the cheese market price is established.

I’ve heard everything from “it’s a guy in Chicago who decides what he wants to do and does it” to “it’s just like the stock market” (both of which are totally untrue, I’m convinced).

Yesterday’s market showed ‘2 unfilled bids at $1.1000’

HUH??

I also know that the price is based off cheddar blocks/barrels. I’ve also read (sometime in the past couple of years on these pages) that the barrel price is a huge mystery, no one knows why it even exists. And, I know there is an established markup above market cost for shipping/shredding/packaging/profit. One broker told me that is pretty much standard at $0.44/#, which seems logical and not out of line. And, what price we all pay depends on when the product we are ordering today was bought by the distributor. Lots of variables. But the market is the market, and it has to have some semblance of rhyme and/or reason.

So, I’m not looking for someone’s response who “thinks this is how it works” or has been told this or that. Someone who knows factually, totally, indisputably, please reply!!!

steve
 
Steve,

There was a PMQ article in the spring of 2004 in which Big Dave Ostrander discussed the pricing of mozzarella cheese. I assume that the practice has not changed since then, although actual numbers may have. I have excerpted below the relevant part:

How Mozzarella is Priced

The Chicago Mercantile Exchange – CME
The wholesale price of mozzarella is the same as the Cheddar Block price posted everyday on the web at www.cheesereporter.com/prices.htm. Most suppliers buy cheese off the CME’s weekly average. They pay the Block price, plus a little more. Your distributor has now purchased finished product. They need to pick it up at the backdoor of the plant and truck it to their distribution center. They will then rotate it into their cooler inventory, pull the order, load into a route refrigerated truck and deliver it to your back door. Your distributor will need to cover all transportation, warehouse, administration, sales commission and company margin on this transaction. The majority of distributors make very slim profits on mozzarella. They make just pennies a pound. They are aware that mozzarella is usually a commodity ingredient and the competition for your order is fierce.

The Best Way to Buy Cheese
After sampling available cheeses in your area, narrow your choices. In order to call a cheese mozzarella the USDA has developed Federal Standards of Identity. These are a set of minimum and maximum percentages of ingredients in the cheese with a heavy emphasis on the Moisture and Milkfat in Solids. When a cheese has too much water or not enough milkfat in it, it can’t be called mozzarella. It can be called Pizza Cheese or Cheese for Pizza. More than a few of the large chains use this cheese because it’s cheaper to make that the real thing. Check out a few menus and you’ll see. The proof is in the dumpster.

You will now start to buy your cheese on a Block Plus program. The supplier will quote you a weekly price for your cheese based on the CME weekly Block average, plus an agreed upon cents over Block up-charge. This up-charge will cover their freight, warehousing, shipping to you, plus profit margin and commissions to DSR’s. Most supplier sales reps will need to contact their dairy buyer to arrange for your invoice cost to be ‘locked in’ for a one to three, or six month, period.

For over 15 years, I never asked my DSR the price of cheese. The pricing was completely out of his hands. I simply went to the web, checked the weekly average, added my 13 cents over block price and saw it reflected on the invoice. I bought a good quality, packer label mozzarella in loaf form. If I wanted to buy shredded or diced, I’d expect to pay and additional 12 to 15 cents a pound to cover this cost. If you choose to use a high end, name branded, premium cheese you should expect to pay an additional 50 to 70 cents a pound. These dairies pay a premium for the extra high quality milk they must use in their cheese. They also generally run tighter specifications. When you enter into a Block Plus program you’ll commit 100 percent of your cheese to one distributor. They commit the lowest possible price. If you start falling for lowball pricing and start shopping around they will end the program. Mozzarella is a perishable product. If the buyers have commitments for X tons a week and the cheese isn’t purchased, it may cause an over-inventory problem that could lead to throwing cheese in the dumpster that is out of date. In the long term, this is the most cost-effective way to purchase cheese. It eliminates the adversarial weekly dance with the rep. Remember: If you’re everybody’s date…you’re nobody’s steady. Now that you’re buying right, the next interventions are completely under your control. To this point, you’ve been reacting to situations out of your control.
 
from today…no change in block price but
5 cars traded @ $1.1600; 1 @ $1.1575
Click to expand...

WTF??​

And, those articles really don’t address the core of my question.

Who actually buys the cheese on the market? Is it Borden’s, or the DFA or whatever the initials in the one article? Or, is it people like Sysco, US Foodservice, Roma Foods? What is the difference between the barrel and block price, and why? If we wanted to form our own co-op and buy cheese from the CME, could we, realizing that this is only cheddar?

What about companies like Wisconsin Cheese Group, who I would think buy milk and make cheese themselves–do they supply TO the Merc or buy from? Or only refer to the pricing? Or Land o’ Lakes, as a f’rinstance of another major dairy product provider?

The whole system seems a bit wierd to me. Maybe I’m showing my lack of passing any econ classes, and naivete about the trading industry overall, but it just doesn’t seem right somehow.
I guess this way makes it easier to price cheese–if every manufacturer would set its own price, there would be turmoil in the buying rooms of Sysco, US Foods, Roma, et al. But, could that help bring the cost to the end user down?

I sure don’t know.

steve
 
Steve,

The block price is the important one for cheese. It reflects the cost of the class of milk that is used to produce cheddar cheese and is what a company like Leprino and others (the cheese manufacturers) pay to purchase the milk. After they are done making the cheese, they mark it up and sell it (usually by the truckload) to distribution companies who in turn mark it up again and sell it to you and me.

Not all milk is purchased on this market - in fact only a small percentage of the whole is traded, but this is the figure used to determine the cost of most all of that class of milk when bought and sold. And much like gasoline, the cheese manufacturers and distributors charge according to the market price at the time they sell the cheese - not what they actually paid for it.

Brad.
 
Mike, I’m too tired to read that article right now, but it looks like it will have a lot of what I’m looking for! Thanks!

steve
 
The first paragraph reads like this, which has me very interested:

Cheese is the most important manufactured dairy product in the U.S. commanding 85 percent of the milk from Wisconsin and 33 percent of all milk in the U.S. However, the price of cheese has even more effect on the nation’s dairy farmers than these figures suggest. Cheese prices largely determine the manufactured grade milk price (previously the M-W price but now
the Basic Formula Price), which is the main driver of farm milk prices throughout the country.
 
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