Cheese Pricing - USDA

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United States Department of Agriculture

Economics and Statistics Service

Agricultural Economic Report No. 462

Cheese Pricing Harold W. Lough

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Cbeese Mdng by Harold W. Lough. National Economics Division, Economics and Statistics Service; U.S. Department of Agriculture. Agricultural Economic Report No. 462

Abstract

Cheese prices, key market indicators for the entire dairy industry, rose rapidly in the seventies because of rising demand for cheese. Cheese prices nationwide follow those on the National Cheese Exchange, which itself handles less than 1 percent of total U.S. cheese production. Retailers usually give cheese the highest profit margin of all dairy products; since 1973, retail cheese prices have risen more rapidly than wholesale prices. Dairy farmers receive about 48 cents for the milk used in $1 worth of cheese at the retail level; processing, packaging, and marketing take the other 52 cents.

Keywords: Cheese, marketing, price making, milk, National Cheese Exchange, dairy.

Washington, D.C. 20250 December 1980

Contents

Page Summary i" Introduction 1 Pricing Methods 2

Farm Milk 3 Cheese Plant Sales 7 FirstHandler Sales 8 Retail Store Sales 9 Imports 9

Price Trends 10 Market Prices 10 Price Interrelationships 13

National Cheese Exchange Base Price Analysis 28 Price Spreads 31 Literature Cited 38 Appendix Tables 40

Summary

Cheese prices are key indicators of changing market values for the entire dairy industry. Cheese doubled in price in the seventies and became the prime manufactured dairy product, utilizing 25 percent of all milk. The price paid by cheese manufacturers for milk is a major determinant, along with Federal marketing orders and support 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 correlated very strongly (at least 99 percent statistical correlation) with wholesale prices in Chicago and New York and just a little less strongly with wholesale prices in San Francisco. Price changes between 1975 and 1979 on the Exchange in one week were usually followed the next week by similar price changes at Wisconsin assembling points and wholesale markets across the country.

The farm-retail price spread for cheese increased slowly from 1950 through 1973, after which it sharply widened, as retail prices rose more rapidly than wholesale prices. The total price spread, in constant dollars, increased only a little and the total spread as a percentage of retail price remained fairly constant. Processing, packaging, and transportation account for more than half of the retail cheese price, so for every dollar spent on cheese at the retail level, the dairy farmer receives about 48 cents for the milk. Most retailers give cheese the highest profit margin of all their dairy products.

Cheese Pricing

Harold W. Lough Agricultural Economist

Introductioii

Cheese is the most important manufactured dairy product in the dairy industry in terms of product value and market influence. It is the leading manufactured milk product in the utilization of milk. As a result, cheese prices heavily influence manufacturing grade farm milk prices in Nflin- nesota and Wisconsin. These manufacturing grade milk prices, in turn, largely determine fluid milk price changes. The influence of cheese prices was further strengthened by recent international trade agreements that changed the method of pricing imported cheese, placing more emphasis on domestic cheese prices.

Several different methods of pricing cheese are used as iiîlk ÍB manufactured into cheese and as the cheese moves through the various market levels from wholesale to retail. These mechanisms have made cheese prices highly interrelated among cheese types and regions. An under- standing of the cheese pricing methods is crucial to government policymakers and industry personnel interested in overaU dairy industry pricing. The objective of this study was to describe and analyze cheese pricing from the farm through the retail markets.

Cheese prices are established in an environment of ex- 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 pounds per capita in 1978. One-third of the cheese con- sumed in 1978 was in processed form (16, pp. 20-24).^ Over half of final cheese sales are through retail grocery stores. The other final outlets for cheese are institutional (food service) and industrial (food manufacturing).

Natural cheese production in the United States in 1979 totaled 3.7 billion pounds. (Natural cheese includes all hard cheese which has not been further processed. This excludes cottage cheese, which is not covered in this report.) The principal type of cheese produced is American which includes the varieties Cheddar, Colby, granular, stirred curd, washed curd, and Monterey Jack.

American cheese, nearly three-fourths of which is Ched- dar, accounted for almost 60 percent of 1979 total cheese production. Italian-type cheeses include the varieties mozr zarella, ricotta, provolone, Parmesan, and Romano. Italian cheese, over two-thirds of which is mozzarella, accounted for 25 percent of total U.S. cheese production in 1979. Swiss cheese production was 6 percent of the total. The primary other varieties are cream, Neufchatel. blue, brick, Limburger, and Muenster (15).

Natural cheese production tripled from 1950 through 1979 with the sharpest rate of increase in the seventies (table 1). The rate of increase varied among different cheese types. American production more than doubled the 1950 level of production while Italian increased over 13 times.

Natural cheese production is somewhat seasonal since cheese, along with other manufactured dairy products, utilizes reserve supplies of milk after the demand for the higher valued fluid milk is satisfied. Cheese production is greatest during flush milk production months of spring and early summer. May and June cheese output in 1979 ac- coimted for over 18 percent of the annual total while January and February accounted for 15 percent (15).

All dairy products—including fluid milk, cheese, butter, ice cream, and others—compete for raw milk supplies. Cheese production accounts for an increasing proportion of milk in relation to all other major manufactured dairy products. About half of total milk supplies went to manufactured dairy products from 1950 through 1979 (table 2). During this period, the proportion going to cheese increased from less than 10 percent to 25 percent of total milk supplies and from 20 percent to 45 percent of manufactured use.

Table 1—U.S. cheese production, selected types and years

Cheese type 1950 1960 1970

Production increase

1979 (1950 to 1979)

-Million pounds-

> lUlksiMd iiumbsn In paranthsMt refer to Cittid ' at the end of this report:

•ourcee Ueted in "Utereture

American Italian Swiss Other natural

Total

893 996 1.423 2,188 62 158 394 929 99 121 144 213 137 203 240 385

1,191 1.478 2,201 3,715

Percent

145 1.398

115 181

212

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 Minnesota and Wisconsin, aU but a few States produce at least some. The leading States of production in 1979 were: Wisconsin with 38 percent of the U.S. total; Minnesota. 13 percent; New York, 8 percent; Iowa, 5 percent; and California, 4 percent.

The number of plants manufacturing natural cheese is declining and the average production per plant is increasing (table 3]. The numlier of all cheese plants declined from 2.158 in 1950 to 754 in 1979. The exception was for ItaUan-type cheeses in which the number of plants increased. Average plant production for all cheeses during this period increased almost ninefold. Larger plants are producing an increasing proportion of total cheese production: in 1977. about 12 percent of all cheese plants produced 57 percent of all cheese. Although over half of all cheese manufactured is by corporations, dairy cooperatives have become more involved in recent years. In 1973. an estimated 35 percent of all cheese was produced by cooperaUves (12. p. 38).

Cheese purchased from manufacturing plants is ultimately used as either packaged natural cheese or is further manufactured into processed cheese products. American cheese styles are commonly produced in 40-pound and 64(>-pound blocks and 500-pound Imrrels. Blocks and barrels accounted for almost 90 percent of American-type cheese production in 1973 (9. p. 29). The blocks are commonly cut and sold as natural cheese and the barrel cheese is commonly used for further processing.

For a more complete description of the cheese industry refer to (9).

Pricing Methods

The price of cheese is established in a market that is national in scope. Cheese is less perishable than fluid m\]k products and has a low transportation cost relative to its product value. There is little product differentiation through branding for the major types of cheese at the manufacturing level. These product characteristics facili- tate interrelationships of cheese supply and price among regions. The price movements tend to be reflected through the one central market for cheese, the National Cheese Ex- change in Green Bay, Wis.

The prices for cheese at alternative market levels and the price of the milk used to make cheese are determined under a highly interrelated set of pricing methods. These price-making processes include a combination of a central open market, short-run supply and demand pricing, administrative prices, long-term contracts, negotiated prices, and quoted prices.

The National Cheese Exchange and Wisconsin assembling point spot markets are focal points in the cheese pricing system (fig. 1). Cheese production, the support purchase price, commercial demand, and other factors combine here to influence price levels and trends. Cheese prices estabhshed on the Exchange are then reflected as the basis for cheese prices through the rest of the cheese-

Table 3—U.S cheese plants and average plant production, selected cheeses and years'

Cheese 1950 1960 1970 1979'

type Plants Average production Plants Average

production Plants Average production Plants Average

production

American Italian Swiss

Total

1.000 Number pounds

1,620 551 167 369 274 363

2.158 552

1.000 Number pounds

1.008 988 193 816 164 738

1,419 1,042

1,000 Number pounds

636 2.375 194 2,335 82 1,876

920 2.579

1,000 Number pounds

486 4.501 185 5,022 66 3.232

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 cheese prices. Cheese product prices, in turn, strongly influence farm level manufacturing grade milk prices and, as a result, fluid milk grade prices.

FarmNOIk

The first market in the cheese-marketing system is at the farm, where a price is established for the milk between the seller (the producer or producer bargaining cooperative) and the buyer (the firm that manufactures the cheese).

Milk used for the manufacture of cheese may be either of two grades, manufacturing grade or reserve fluid grade, with 19 and 81 percent of the total supply, respectively. (Fluid grade is generally produced under higher farm sanitary conditions and may be used to produce dairy products in either fluid or manufactured form. Manufac- turing grade farm milk may be used only in the production of manufactured dairy products.) Cheese competes with other manufactured dairy products such as butter-power for this milk. (Butter-powder refers to the combined production of butter and nonfat dry milk, often in the same plant, which together use both the fat and nonfat parts of milk.) Manufacturing grade prices paid to manufacturing grade milk producers are determined under generally competitive conditions. The price paid to fluid grade producers, the blend price, is determined in many parts of the country under the Federal milk marketing order system (see below) and cooperative bargaining for prices in excess of Federal order minimum prices.

Minneaota-Wisconsiii Price. The Minnesota-Wisconsin (M-W) price reported monthly by the USDA is one of the most widely used measures of change in milk values. This 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 influenced by the price support program, depending to a great extent on prices of manufactured products. However, when wholesale product prices are at, or close to. Government support purchase prices, the milk price is largely determined administratively. In theory, the M-W price represents national supply and demand conditions for manufactured dairy products.

The M-W price, being an average price, has a substantial range among reporting plants. About three-fourths of the cheese plants were more than 10 cents higher or lower than the reported M-W price for each of three months in 1976(7, p. 22).

Base month M-W prices are determined from reports from about 275 plants representing approximately 60 percent of all manufacturing grade milk sold in the two States. The estimate of change from the base month to the month to which the M-W price estimate relates is based on reports from a sample of 110 plants (14, p. 2).

The M-W price series reflects the value of milk utilized in the mix of dairy products produced in the two States. It is heavily weighted by cheese values with 86 percent of the 1978 product weight in Wisconsin assigned to cheese and 62 percent in Minnesota (14. p. 3). For the two States combined, cheese had an estimated weight of about 75 percent. This compares to less than half of manufacturing grade milk used for cheese for the total United States.

Rgure 1

Cheese Pricing System (Schematic)

Price Production

Support purchase price

Import level.

Commercial demand

Mük prices paid farmers by other rranufacturing plants

Fkiid grade^ mitk price

Exchange and assembling ix>int price

I

/

Cheese production

Milk prices paid farmers by cheese plants

^

X

Production and price of other nnanufactured dairy products

Commercial demand for specialty cheeses

Milk available for manufactured dairy products

Milk utilized by fluid products

Minnesota-Wisconsin manufacturing grade mitk prk:e

BlerKl milk prk:e

Total milk production level

Itffitlatkm* All the levels of the niilk marketing and pricing system are interdependent. Two important areas of interdependency occur through regulation under the Federal milic marketing order program and the Federal price support program.' The primary pricing impact of these regulations falls on milk at the farm level although the price support program also directly affects the price of cheese.

As of 1980. 47 Federal milk marketing orders covered 80 percent of total U.S. fliiid grade milk. Under Federal orders, milk is priced based on final use. Fluid grade milk used in bottled fluid milk products is called Class 1 milk and this same milk, when used to produce manufactured dairy products is called Class II or reserve milk.' Class I milk commands a higher price (Class I price) than reserve milk (Class II price). The M-W price is the effective price used for pricing reserve milk in all Federal order markets. The specified minimum difference between the Class I price and the Qaas 11 price (the Class I differential) is fixed at Federal order hearing and has remained essentially unchanged since 1968. Therefore, price movements for much of the fluid milk in the United States are based on M-W price changes.

Dairy farmers receive a weighted average price, the bleini price, for their milk. This is the Gass I price times the proportion of the market's milk used to produce Class I products, plus the Qass II price times the proportion of the market's milk used to produce Class 11 products. This assumes that Qass I is used for fluid use and Class II for everything else. Aggregating returns from milk used in Class I and Class n products to arrive at a blend price paid to farmers is called pooling.

The other main area of regulation affecting cheese pricing is the price support program. The Agriculture Act of 1949 directs the Secretary of Agriculture to support the price of milk. Tlie objective of supporting the price of manufacturing grade milk at an administratively determined minimum price is achieved by USDA's Commodity Credit Corporation's (GCC) purchasing, at announced prices, all the natural Cheddar cheese, butter, and nonfat dry milk that is offered to it for sale. In addition, CCC occasionally purchases, through competitive bidding, dairy products in consumer size packages.

to achieve an annual average price, which plants pay to farmers for manufacturing milk, equal to the announce support price.

In determining purchase priera, consideration is given to such factors as average processing and marketing margins, market prices, production, stocks, consumption of different dairy products, results of recont price support operations, volume of purchase. QOC stocks, aiHi utilization in available program outlets. Hiese considerations are used to estimate the level of returns to ciñese plants, as well as to butter-powder plants, that will acccmiplish the objectives of the support price. The CCC purchase price for Checklar ch^se is then calculated, using the average manufacturing ami marketing margins, to estimate the return to plants.

The calculation of CCC purchase prices for support of manufacturing milk at $11.49 per hundredweight which was announced on April 1. 1980. and effective through September 30. 1980, was as follows:

Target returns to cheê plants per hundredweight $12.36

Spread between price of manufacturing milk and the market value of chee^ and whey fat per 100 pounds of milk $ 1.37

Market value of cheese and whey fat perlOOpotmdsofmilk $13.73

Value of 0.25 pound of whey fat $ 0.35

Value of other whey solids o

Value of cheese: Per 100 pounds of milk $i 3.38 Per pound {rounded, using a yield of

10.1 pounds) $ 1.325

ManofactiiriBg and Fhild Grade MIk JMtàmg» Milk supphes for cheese are provided by producers of both manufacturing grade and reserve ßuid grade milk. Therefore, a description of pricing in the procurement market for milk used in cheese must consider supphes from both sources.

The support price for manufacturing grade milk is set once a year and adjust^ once a year, and at the same time, CCC announces the prices it will pay for dairy products. These purchase prices are set at levels expected

avérai Statt» ñtao regúlalo milk pricing but this report discusses only tho Podornl orders.

"Some Federal ordort diffuronHeto products into more tlmn (wo classos.

Milk producers have little bargaining power over the price of milk to be used in cheese. This is due to their large number and relatively small size in relation to their buyers and because the milk is undifferentiated except for the distinction between fluki ami manufacturing grade. However, in a region with many manufacturing plants, producers may have relatively more bargaining power due to their increased choice of alternative market outiets for their milk.

A8 members of a bargaining cooperative, they would have considerably more marketing povêr. However, only a small share of manufacturing grade producers are represented by tmrgaining cooperatives, in contrast to fluid grade milk producers. In 1973, marketing cooperative sales were 35 percent of total cheese production (12). In summary, the managements of both cooperative and non- cooperative cheese manufacturers operate in the role of price-makers and the individual producers as price-takers.

Cheese plants compete for manufacturing grade milk through both price and nonprice practices, with a general emphasis on nonprice practices. The most commonly used nonprice practices are hauling subsidies, selling farm supplies at a reduced cost, and advancing money against future milk deliveries. Other nonprice practices used are providing group insurance plans, providing aid on quality problems through haulers and fieldmen, cosigning notes for patrons, providing limited market information through newsletters, and providing community services (21, p. 87).

Manufacturers consider two factors in determining monthly prices for manufacturing grade milk: prices paid by competing buyers (this is especially true of smaller plants) and gross receipts less cost, since the pay price of milk is usually determined after the milk product has been manufactured and sold. The latter method is generally used by larger buyers who take the lead in establishing price changes in a market (18. pp. 86-87), Therefore, for a few plants, the pay price for milk is directly determined by changing cheese prices for that month. These changes then enter the system as comtïeting prices considered by other plants.

The price setting of milk that goes into cheese is a combination of supply and demand and administered pricing. As discussed above, prices for manufacturing grade milk are arrived at more or less competitively, but influenced by support prices.

Even so, manufacturing grade milk prices are not com- pletely uniform in a given producing area. Producers often operate with incomplete price knowledge and often use factors other than price in their choice of market outlets. Prices paid by individual plants vary because of product quality (especially with cheese), efficiency, product transportation costs (which vary with plant location), and competition, A competing plant may pay more because it is producing a product that currently yields a greater return (5, p. 17).

Competition in the long run should force all plants producing manufactured dairy products to pay similar prices for milk. In the short run, when net returns from cheese production are higher than from butter-powder production, butter-powder plants can either pay the same price for

their milk as the cheese plants, with resultant lower returns, or they can lower their price and compete on nonprice factors. If the product price imbalance persists, butter-powder plants would be forced to reduce their price. The milk would then shift to cheese plants resulting in more cheese production and an eventual readjustment in product prices due to supply and demand in the market. Cheese assemblers have sometimes used quotas to restrict plant production. Then, most of the surplus milk moved through butter-powder plants.

Cheese manufactured from reserve fluid grade milk competes with cheese from manufactured grade milk. However, plants in an unregulated market are not required to pay the same minimum price for milk as are plants subject to Federal orders. All cheese plants under Federal orders are required to pay the same price for reserve fluid grade milk for manufacturing use. Although unregulated handlers are not required to pay that price, competition usually sets the Class II price at the M-W price level. The two prices are usually about the same. Farmers producing milk for fluid markets respond to the blend or average price they receive rather than to the separate prices for the fluid and reserve classes.

The cost of the reserve Grade A milk is essentially the same for all plants regardless of supply and demand interactions among products. Milk will cost a butter-powder plant the same as a mozzarella cheese plant, even though the butter-powder plant is selling to the CCC and the mozzarella plant has a private market.

Since the blend price is paid to fluid grade producers and the manufacturing price to manufactured grade producers, the two prices do not compete in the short run. However, if the blend price is sufficiently higher, producers will be induced to switch to fluid grade production if the price difference more than covers the cost of producing the higher grade. Because of zone differentials, the farther the producer is from the fluid market, the lower is the blend price and the closer it is to the price for manufacturing grade milk increasing the chance for price competition. In some past periods of rapidly increasing cheese prices, there have been instances in the Upper Midwest when cheese has been able to outbid milk for Class I use because the Class I price with the 2-month lag could not keep up.

The Class II price in a Federal milk order may at times be at a level that enables efficient plants making cheese to obtain a greater margin on milk used for cheese than the handling charge they receive on milk sold for Class I use. In such circumstances, cheese plant operators may be reluctant to make milk available for Class 1 use, once performance standards for participating in the markelwide pool are met and, in addition, because it reduces the

volume of milk available for processing and adversely affects unit processing costs. The term "give up costs" is often used to describe the compensation required to offset losses realized, or profits not realized, by a cheese plant when milk is made available for Class I use.

Cheese Plant Sales

The price at this level represents the cheese that first leaves the manufacturing plant in wholesale sizes. Any general description of the price-making process at either the cheese plant or first handler levels must recognize the diversity of cheese-marketing practices at these levels. Here exists a wide array of ownership types, degrees of vertical integration, and levels of service performed by the buyers and sellers. For example, cooperatives are becom- ing increasingly important at both of these market levels. A high degree of vertical integration is often present at these market levels, extending from plant ownership through the retail sales outlet. The services performed in assembling the cheese may be by either the buyer or seller. For example, cheese manufacturers vary in their ability to ship truckloads versus less than truckload quantities of cheese from their plants. As a result, there is often not a clear distinction between buyer and seller at these market levels. However, a manufacturing plant price for the cheese exists, if only as an imputed value for inter- nal firm use.

Price transactions at the cheese plant are either through spot sales or contract sales. Spot sales include a very small part of the total cheese volume traded and are reflected in National Cheese Exchange and assembling point prices. They involve transactions between large first handlers of cheese or sales from manufacturing plants not contracted to a first handler. Long-term contract sales between a cheese plant and first handler represent the bulk of cheese trading at this marketing level.

National Cheese Exchange. The National Cheese Ex- change, located in Green Bay, Wis., is the only central spot market for cheese in the country. It meets every Fri- day and provides a place for members and owners of licensed cheese factories to buy or sell 40-pound block Cheddar, barrel American, and Swiss block cheese. In 1978, the Exchange had about 44 members who handled an estimated 80 to 90 percent of all the cheese marketed in the United States [2, p. 14). However, the volume bought or sold on the Exchange represents only a small proportion of those members' supplies and has never exceeded 1 percent of U.S. production (3. p. 68). Sales of Cheddar on the Exchange in 1978 included 9.9 million pounds of barrel and 1.9 million pounds of 40-pound block, 0.78 percent of U.S. production.

Trading on the Exchange is interpreted as follows. The last sale is considered to represent the market for the coming week except- that a subsequent bid higher than the last sale, or a subsequent offer lower than the last sale, is considered indicative of the market. In the absence of sales, the last bid higher than the previous week's market, or the last offer lower than the previous week's market is considered indicative of the market. In the absence of any sales, offers, or bids, the market is considered to be unchanged. These prices are reported weekly by USDA (13).

The primary purpose of the Exchange is as a source of supply and a place to dispose of surplus. It is an alternative market since most trading in cheese is done through regular commercial channels. The Exchange serves as a national index of the value of cheese and is used by the cheese industry as the best reflection of supply and demand conditions. The prices arrived at on the Exchange on Friday provide the basis for nearly all transactions in American and Swiss cheeses, and some ItaHan, blue, and pther specialty cheeses, for the following week. On the other hand, some varieties such as swiss and mozzarella, in which a greater proportion of the butterfat is separated out, are also more sensitive to butter prices than others. Higher butter prices may lower the prices of these varieties of cheese.

Assembling Point Prices. Assembling point prices represent spot trading at points where the first handler may obtain alternative supplies resulting from a short run supply and demand imbalance. The premiums, which are negotiated for each shipment separately, tend to fluctuate more than premiums under a long-term contract.

Changes in these premiums are often the first indication of a changing cheese market, as Leathers notes:

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 determined, must reflect supply-demand conditions. But in which component of the price—Exchange or premiums—are changes in supply-demand reflected? The answer to this question can be found in a description of normal procurement and disposition pro- cedures. If a buyer finds himself a little short of cheese in blocks or barrels, he does not im- mediately run to the Exchange and bid up the price; such an action would increase the price he paid for all products. Before going to the Ex- change, the buyer will try to purchase spot shipments either from small unattached plants or from other large sellers. The buyer may bid up the premium he is veiling to pay in order to

attract these extra shipments. When there are indications that tight supplies are not peculiar to a particular buyer but are more general, the Exchange price is bid up. [&).

Thus, small price movements at Wisconsin assembling points may give an early indication of cheese market price directions. In a tight supply and demand situation, the mid- point of the range in assembling point prices may be several cents per pound over the Exchange price plus the assembling charge, whereas in a **flat*' market there may be no price difference. This may increase the Exchange price sometime in the following weeks, after which the assembling point price will also further increase.

Assembling point prices are currently published for the Cheddar cheese style 40-pound block and American cheese (Cheddar or stirred curd) in barrels [13]. These prices cover open market transactions for 15 to 20 of the major cheese assemblers and national cheese firms in Wisconsin. As with the Exchange, the volume of open market transactions covered by these prices represents only a small part of total sales. However, a much larger portion of the open market transactions in barrel and 40-pound block cheese moves in the market covered by assembling point prices as compared with sales on the Ex- change.

Qmtract Sales. Cheese plants sell to first handlers, which are typically national cheese-marketing firms (9. pp. 31-33). National cheese firms originally bought much of their cheese on the o];)en market but now assemble most of it directly from cheese plants through a variety of arrangements. There are few independent assemblers per- forming only assembly functions left in the industry. Ap- proximately 20 percent of U.S. cheese is manufactured by national marketing firms from their own plants with the rest coming from either independent or cooperative cheese plants or imports.' Cheese purchased from these plants is used as packaged natural cheese, processed cheese products, industrial, or institutional products.

Long-term contracts are generally used between cheese plants and national cheese marketing firms. In these, all or a sj>ecific proportion of a plant's production is included with the price based on the reported price from the Na- tional Cheese Exchange plus a prenegotiated premium.

In a survey of the pricing system of six leading cheese processing and marketing corporations, Hayenga reported:

This type of formula price contract is typically based on a specification of the type of cheese to be manufactured, the particular process which is to be used (including the enzymes or other ingredients to be used), shape of the

cheese (block, longhorn daisy, mammoth, etc.), the type of wrap, the moisture discount schedule, and a prenegotiated penalty for not meeting the buyer's specifications. In addition, the contract, whether oral or written, generally specifies: whether the container is to be furnished by the supplier or the buyer; whether grading, testing, and assembling is to be done by the buyer or the supplier; the length of storage required; and the assignment of responsibility for freight charges and handling costs. All of these factors are ouilt into the negotiated premium which typically is applied to the quoted price on the National Cheese Ex- change for 40-pound block Cheddar cheese if the cheese is to be cut and packaged, or the quoted price for 500-pound barrels if the cheese is to be used for processing. Typically, the date that the cheese is made by the cheese plant is considered the pricing date, and the National Cheese Exchange on the prior Friday is then the effective base price.

The volumes specified in the formula price contracts are often all the plant can produce, or a specified portion of the plant's production, as long as the suppliers meet the buyer's quality specifications which are especially critical for their branded, cutting-type cheese. Several of the largest cheese marketing firms prefer long term arrangements to insure consistent quality and quantity: consequently, they nego- tiate premiums that remain stable throughout the year, during both periods of surplus and shortage.

While some contracts allow very little flexi- bility for a three month period at the prenegotiated premium, they do make the premium renegotiable upon 90 days notice if market conditions change. However, the premium structures under these arrangements tend to remain quite stable relative to many others. The prenegotiated premiums for several large buyers are stable for shorter lime periods; renegotiations occur three to four times a year, on the average, as costs of materials change, labor contracts change, or either the supplier or the buyer get a better offer from someone else (6. pp. 10-12).

Fint-Handler Sales

The price at this level represents the transaction between the first buyer (first-handler) of the cheese from the plant and the final commercial market. The final commercial

markets before consumption are retail, institutional (food service), and industrial (processed foods). The retail market utilizes well over half of all cheese marketed while the institutional market utilizes most of the rest, leaving less than 10 percent of the cheese for the industrial markets.

Retail stores are primarily serviced through brokers who take orders in an area, sometimes in combination with regional company representatives. A few companies have representatives checking with individual stores and some companies employ broker-distributors who have warehouses and trucks and service individual stores in an area.

First-handler sales to these commercial markets are often made under slightly different pricing systems than are employed at the plant sales level. Hayenga reported that most manufacturers' brand cheese is sold to retail markets on the basis of a weekly price list and that the price Usts for nonspecialty cheeses often follow price changes on the Ex- change. However» firms with major brand name cheeses also consider other factors such as changes in other costs and changes in target profit margins. Some sales of private label cheese to large retail customers are also based on a price list (less advertising and promotion costs), but most are on a formula using the Exchange price plus a cost premium (6, p. 17-18).

Sales not requiring special formula cheeses to full line institutional customers (which in turn service several accounts) commonly use weekly or monthly price lists. These are based on the Exchange price plus a premium, which may remain unchanged for up to a year if there is little change in marketing costs or the quantities of cheese required during the year. Sales to large volume food service customers (major food service chains) who require special formula cheeses often use a long-term formula price. This is based on the average Exchange price for the preceding month plus a premium. Most first handler sales to industrial markets use formula pricing based on the Exchange price on the date of cheese production plus a premium (6. p. 18-21).

Retail Store Sales

Retail grocery stores today display an average of 100 different cheese items, almost 150 in the larger stores.compared with only 40 items displayed for all dairy products 50 years ago (11). Over 70 percent of the natural cheeses and 85 percent of the process cheeses sold in retail stores in 1972 were either a major brand or a chain store's private label. Over half of the natural cheeses and Ihree- fourlhs of the process cheeses sold were major manufac- lurers* brands (9. pp. 38-41).

Retail chain pricing is commonly made through weekly price Usts with either a target market goal or a percent of gross margin goal. However, a competitive pricing strategy, using an optimal product mix with the goal of balancing the total gross margin for a department or store. is increasingly employed rather than a strict percentage markup. Cheese is frequently used in retail chains* specials and promotions, which are also determined by a competitive pricing strategy. The specials are commonly on the relatively inexpensive styles of cheese to attract im- pulse buyers to the cheeses with higher profit margins.

High sales and retail margins of cheese products make them highly profitable dairy items for retailers, who usually give cheese a gross margin that is as high as or higher than the average of all items handled in the store. However, cheese types vary considerably in their profit margin contribution. Process cheeses typically have low margins and large turnover while specialty cheeses generally have higher margins. The dairy departments of large supermarkets in 1978 had 13.3 percent of total store sales. After fluid milk products, cheese was the best selling dairy product with 17 percent of dairy department sales. Also, cheese had the highest gross margin of the major dairy products, more than 27 percent, and contributed more than 20 percent of total dairy department gross profits (1. pp. 63-66).

Imports

Prices for imported cheese are usually established between the importing coimtry and the importing firm in the United States at the time of transaction and are for delivery at a specific point. New York, for example. Some countries allow individual exporters to establish their own prices while other countries operate with a central dairy marketing board or an export association which governs all prices of cheese exports, hi both cases, price lists are published periodically, effective on a given day. The degree of price negotiation between importers and exporters varies depending on the cheese types and varieties, the number and size of importing and exporting 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 exporting firms or associations do follow price trends in the U.S. cheese industry, such as National Cheese Exchange price movements and future expected support price develop- ments, when establishing their prices.

Importers in turn add their costs to the delivered cheese to arrive at a sale price. Those costs include duties, insurance, costs of clearance, transportation of containers to wiirehouso. and the warehousing charges, which include unloading of containers, storage, and in-oul charges. Also included is a profit margin which takes into con-

siiii^ralion ilonu^slii' iluvso priiv Iriuuis. If Iht; fiiuil iltislinatUm is ullior than llui pt)rt iif arrival, aildiliimal lrt'i>iht rhar>¡tís an^ aisi» iiuiiultîd.

IntiírnaliDiuil tradi' ajirtumuMUs. vvhit:li U)ok cUcci on lanuarv I. 19Ö0, miHÜfiíítl nuw iniporl restrictions un ti>rtñ>;n iheeso. l'hostí a^nuînuuits involved two primary moiiifiiations in the rhooso import proj^ram. First. Iho I'nittHt States pUued all ehooso imports unilor tiuota o\- tvpt sheep and kîoat milk cheeses. Brynd/.a. Gammelust. Nolkelosl. anil soft-ripened cheeses. Second, exporting countries that subsidi/.e their I'heese industry are subject both to the quota and a commitment not to undercut U.S. domestic cheese prices.

Price Treads

Trends of farm milk prices and cheese prices at the Viirious levels includinji spot, wholesale, retail, and imported prices result from the price-making? processes sum- marized earlier. Prices in all of these markets often fluctuate widely.

Almost all cheese and milk prices at all market levels at least doubled between 1969 and 1978 (table 4). The prices of other cheese types, with the exception of blue, increased faster than the prices of American types. The kîreatest percentage price increases were by domestic and imported Parmesan. In ¿jeneral. the prices at Chicago appeared to increase slijjhtly more than prices at each of the other two areas.

Regression analysis indicates that long-term price trends accounted for at least 90 percent of the variation in prices about the mean for 1969-78 (85 percent for imported Par- mesan). The average monthly trend increase in plant level (spot) cheese prices was around one-half cent per pound. Wholesale prices for most of the American-type cheeses increased 0.6 cent per pound while the prices for other types increased more, with an average monthly trend increase in retail prices of about 1 cent per pound. In comparison, the average monthly price increase for each of the milk prices was 5 cents per hundredweight.

The monthly price seasonalities for selected cheese types and milk used to make cheese were also compared at different market levels for 1969-78 (table 5). Each of the milk prices and the American and blue cheese prices were lowest from May through |uly. Each of the wholesale Swiss and Parmesan cheese prices and the retail cheese prices were lowest from fune through August.

Market Prices

Several different milk price trends were examined including the M-W manufacturing price, the prices paid for milk by American cheese and butter-powder plants, and

the priiHî of milk cligibhï for fluid use [fluid oliîible milk pricj;—iin approximation of a IJIIMUI price). The fluid eligible milk price and the price paid for milk by manufacturing plants were ctdculated for Minnesota and Wisconsin to lîompare with the M-W manufacturing grade price. The fluid eligible prices were weighted by the monthly fluid milk production in the two States. The American cheese plant prices paid were weighted by American cheese pro thuition and the butter plant prices paid were weighted by nonfat dry milk prwluction. Also, all prices were con- verted to equivalent prices for 3.5 percent fat content milk as a standard for comparison.

First, a comparison was made between prices paid for milk used in American cheese production and butter- powder production. Greater demand for cheese in recent years has made cheese more profitable than other manufactured dairy products. Cheese manufacturers, therefore, have been more willing to pay more for milk to increase their output. Although both American cheese and butter- powder prices increased and followed similar fluctuations, cheese returned a higher price than butter in 242 of the 384 months during 1947-78 (fig. 2a). Starting in November 1968. American cheese plants in Minnesota and Wisconsin paid higher prices than butter-powder plants for milk in all but five months (fig. 2b). The average price paid during 1947-78 was $4.38 per hundredweight by cheese plants and $4.32 per hundredweight by butter plants.

Further. American cheese prices have been consistently higher than the M-W manufacturing grade price and the butter prices have been consistently lower. American cheese prices averaged 2.5 cents per hundredweight above the M-W price between 1955 and 1978 and butter plant prices averaged 3.3 cents per hundredweight below the M-W price (fig. 3).

The M-W manufacturing grade milk price averaged 34 cents per hundredweight above the support price between 1955 and 1978 (fig. 4). The support price was above the M-W for only 19 months and these instances closely followed support price increases in 1971, 1974, 1975. and 1977. Fluid eligible prices in Minnesota and Wisconsin averaged 47 cents per hundredweight over the M-W during 1955-78.

The price trends for 40-pound block and barrel cheese of the National Cheese Exchange (and its predecessors) and. to a lesser extent, Wisconsin assembHng points are the most important indicators of market value for the cheese industry and are some of the most important for all dairy products (figs. 5 and 6).

Barrel and 40-pound block price trends often follow each other closely although there have been periods when the price differences have been substantial when either may 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

Cheese and milk prices

Farm level (milk): Minnesota-Wisconsin manufacturing

grade Milk eligible for fluid use.

Minnesota and Wisconsin Milk used for American cheese,

Minnesota and Wisconsin

Plant level: National Cheese Exchange—

40-pound block Barrel

Wisconsin assembling points— 40-pound block Barrel

Wholesale level. American types: 40-pound block—

Chicago Eastern area West Coast

5-pound process— Chicago Eastern area West Coast

Brick and Muenster, Chicago Wholesale level, other types:

Swiss, Grade A— Chicago (block) New York (cuts) San Francisco (block)

Parmesan— Chicago New York San Francisco

Blue, (Chicago) Retail level:'

American sliced process Imports, New York—

Parmesan Swiss wheels Blue

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

Sources: (15. 18. 19).

Average price prices and time (monthly)

1969-78 1978

Price

1

Index

Constant

Effect on price of a 1-month

change

In Standard effect error

Coeffi- cient

of deter-

mination

Dollars —per cwt—

1969= 100 —Dollars per cwt— Percent

6.66 9.57 216.5 3.58 0.051 0.002 91.2

7.14 10.08 204.4 4.04 .051 .002 91.0

6.72 9.62 —Cents per Jb.—

213.8 3.66 .051 —Cents per Ib.~

.002 90.6

72.9 69.9

103.6 100.6

210.7 215.0

40.36 38.26

.54

.52 .01 .01

91.9 91.2

76.2 72.5

107.1 102.2

206.0 204.9

43.20 41.58

.55

.51 .02 .02

90.5 90.2

86.9 85.5 92.3

123.9 124.6 125.7

217.5 202.7 202.7

46.26 44.60 54.11

.67

.67

.63

.02

.02

.02

93.7 93.7 91.7

85.4 82.2 91.0 88.9

121.1 116.8 122.9 127.1

211.0 214.5 198.4 209.9

47.57 45.25 55.04 49.56

,63 .61 .59 .65

.02

.01

.02

.02

93.7 94.0 92.6 93.1

104.2 111.1 106.4

154.0 161.3 153.0

229.3 227.0 227.0

53.11 57.84 53.65

.84

.88

.87

.02

.02

.02

94.7 93.2 93.0

143.2 137.3 139.7 106.7

217.3 199.1 200.6 147.4

256.1 233.1 230.0 199.3

58.93 65.06 71.40 63.35

1.39 1.19 1.13

.72

,03 .03 .02 .02

94.1 93.9 96.1 95.1

133.3 180.0 191.5 80.16 .93 .02 94.5

259.7 125.6 125.8

446.1 181.8 177.3

330.8 197.0 208.1

103.37 77.71 68.57

2.58 .79 .95

.10

.02

.02

85.2 91.1 95.6

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 3 cents per pound at the Exchange and 3.7 cents per pound at Wisconsin assembly points. Prices of 40-pounci block on the Exchange during this time increased from 46 cents per pound to $1.13 per pound while prices at the assembUng points increased from 49 cents per pound to $1.19 per pound.

There were 72 different wholesale domestic cheese prices reported weekly for the Midwest (31 prices), Eastern Area (29 prices), and West Coast (12 prices) in 1978 (13). Thirty- four of the reported prices were for American type cheeses and 38 were for other cheeses. These prices are intended to reflect representative cheeses since it is im- possible to report all of the numerous cheese prices at the wholesale level. These reported wholesale prices, which may be subject to volume discounts, are thought to reflect most closely first handler sales to the institutional sector.

The reported domestic wholesale cheese prices reflect different cheese types and varieties, package sizes, and delivery points (sellers' dock versus dehvered to retail point). The American-type wholesale cheese prices were reported as point prices, while the other cheese-type wholesale prices were reported as price spreads.

Selected monthly wholesale cheese prices are shown for 1962-78 in figures 7 to 11 (the average price was used for those prices reported as price spreads). These include American-type 40-pound block and 5-pound process, swiss, and Parmesan at Chicago, New York, and San Francisco. Also shown are domestic wholesale prices for brick and Muenster combined and blue cheese at Chicago. No direct comparison of cheese price levels can be made regionally or with imported cheeses due to regional definition differences in the wholesale cheeses chosen for price repxjrt- ing and the frequent use of average prices when price spreads were reported. However, price trends and fluctuations can be compared. All wholesale cheese prices increased gradually until 1973, after which prices increased more steeply and fluctuated more. The prices for comparable cheeses appeared to follow similar patterns when compared among regions.

The only retail price series on cheese was monthly for American process packaged cheese. This series of actual prices was discontinued in July 1978 and replaced with an index. The average retail price reported until that time represented prices that consumers paid for cheese in half- pound packages. Since packaging cheese represents a service to consumers, it also adds to the margin and makes Ihe price of cheese in half-pound packages somewhat less responsive to changes in price at the farm level than the price of butter.

The retail price of American process cheese was very steady in the early sixties, after which the price gradually increased (fig. 12). As with wholesale prices, a large price jump occurred in 1973, after which the retail price fluctuated more but continued to rise.

There were 35 prices reported weekly for imported cheeses in 1978 [13], These were all for other than American cheese types at the sellers' docks or warehouses at New York, Chicago, or San Francisco. They were reported as price spreads. Imported cheese prices are comparable in degree to either the cheese plant or first handler sales level domestic prices depending on the use of the imported cheeses. However, due to differences in types, varieties, and package sizes, direct price com- parisons with domestic wholesale cheeses are generally not possible.

Monthly import cheese prices from 1962-78 (price spread average] are shown for Parmesan, swiss, and blue cheeses coming into New York (fig. 13). Parmesan's price fluctuated more and increased more than that of the other two cheeses.

Price Interrelatioiiships

Historic price trends of cheese and the milk used to make cheese at alternative market levels reflect the highly inters related cheese marketing system shown in figure 1, resulting in similar price movements for different marketing levels. These interactions can be seen from the monthly price trends (figs. 2-6) and from the relationship between the Exchange price and the support purchase price (table 6). Cheese and milk prices are affected by the commercial demand for cheese, milk production, the support price level, and other manufactured dairy product prices.

The support purchase price usually provides a price floor for the cheese at the plant level. The support purchase price has had the most effect during cyclically high periods of milk production and during May and June, the seasonally high period of milk production. A summary of support and purchase price decisions since 1955 is given in appendix tables 1 and 2.

The amount by which the National Cheese Exchange 40-pound block Cheddar price exceeded the support purchase price is shown in table 4. This table reveals the strong cheese market which developed during 1973, the generally lower price difference between the Exchange and the support program in May and June, and the effect of support price decisions on commercial cheese prices.

The level of milk production indirectly affects cheese production, 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 ~

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

^-^^^ BUTTER PLANTS

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

fA AMERICAN CHEESE PLANTS ¡u ^,^ •••' BUTTER PLANTS

w ^ „H^ft»««% V

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

0.20

0.15

0.10

0.05 h

• • • • S ■ "^ if

-0.25

AMERICAN CHEESE PLANTS

Sa ■ ■• •■» ^m

U • 'S'

• w

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 -

8

6

^.^.»«^.ai^-«^^..,»...,«^^».,».

/;• ii !» •• • n* ■ ■

/

r

FLUID ELIGIBLE

^^J MINNESOTA-WISCONSIN

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

0.7

0.6

^>—fxA

BARREL

^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

0.4

0.2

V...-'

1 1962

P^;^

NEW YORK

65 70 1

75 1978

FIGURE 8

Process Cheese Prices, Wholesale, Monthly, 1962-78

CENTS PER POUND —

1.4 -

1.2

1.0 -

0.8

0.6

0.4

0.2

\'*»»,y*'v

NEWYORK

1962 J I L

65 70 75 1978

K9 to FIGURE 9

Swiss Cheese Prices, Wholesale, Monthly, 1962-78 CENTS PER POUND

0.4 -

0.2 -

0.0

CHICAGO

SAN FRANCISCO

1_J L J L 1962 65 70 75 1978

FIGURE 10

Parmesan Cheese Prices, Wholesale, Monthly, 1962-78 CENTS PER POUND

2.4 -

2.0 -

1.6 -

1.2

0.8 >*w^Ml ■*■■■■*■■'

0.4 -

0.0

NEW YORK

I i I I \ I L 1962 65 70

CHICAGO

SAN FRANCISCO

J I I \ \ I \ \ 75 1978

FIGURE n

Blue and Muenster Cheese Prices, Chicago Wholesale, Monthly, 1962-78 CENTS PER POUND

1.4

1.2

1.0

0.8 -

0.2 -

0.0

BLUE V ÍV

,»•"• ..-••^./V*—' ,-v«^"

>^ «■•■

BRICK MUENSTER CHEESE

^...^-••—•

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 1960 65 70

Ï L 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

2.5

2.0

1.5

1.0 b^

0.5

0.0 1962

PARMESAN CHEESE

.«••;-

SWISS CHEESE ^* .•"•"••••

¿V*í*^

,.u«a^

BLUE CHEESE

J L 65

1 70 75

J I 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

1978 1.63 2.75 3.25 -1.00* -1.00 -1.00 -.25 5.62 7.15 9.19* 9.25 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 less milk available for cheese production, as well as for production of other manufactured dairy products, given a relatively constant demand for milk needed for fluid products. This places upward pressure on spot cheese prices. Cheese prices also tend to decline seasonally during May and June, usually the months of highest milk production.

Supplies of milk in excess of commercial demand from 1952-65 generally kept dairy product prices closely in line with support prices, except in periods of seasonally low production. Several times, an increased volimie of milk available for manufactured dairy products lowered the manufacturing grade and blend prices. Support prices declined twice during this period, in 1958 and 1962, which were fully reflected in declines in manufacturing grade milk prices.

Since then, declines in milk production in 1966, 1973, and 1975 combined with other market conditions during these years to create tight supply-demand situations. There were three, two. and three support price increases in those years, respectively. These factors combined to increase wholesale product prices and milk prices sharply. In general, dairy product and manufacturing milk price increases at other times since 1966 closely followed increases in the support price.

Periodic jumps in cheese demand relative to production over the years caused shifts in milk prices and utilization. These shifts occurred in late 1960. late 1963. late 1965-66. 1969-early 1971, and 1972-73. Cheese plants became ac- tive bidders for milk relative to butter-powder plants and paid higher prices for the milk. Increased manufacturing grade milk prices, and increased prices for all dairy products, were largely a result of the strong cheese markets during these periods. Milk supplies also shifted from use in butter-powder plants to use in cheese plants and from butter to cheese in diversified plants. Of course, there were also periods of strong butter markets, but with less frequency, size, or lasting shifts in milk utilization.

The strong cheese market in 1973 (causing prices to increase by 36 percent) made possible a support purchase price increase of 7.25 cents per pound for cheese and a decrease of 6.75 cents per pound for butter to increase cheese production and butter consumption (an additional 100 million pounds of cheese imports was also allowed). The result of the price increases was a sharp increase in cheese production along with a substantial increase in cheese-manufacturing capacity.

Cheese prices made another major jump (35 percent) late in 1975. This increase was primarily because of tight milk supplies (milk production had not yet recovered from the sharp drop in 1973) and lagging cheese production combined

with lower-than-normal commercial cheese stocks. Much of the low production and stocks was due to the strong 1973 cheese market and the market's subsequent weaken- ing in price due to strong industry and Government reac- tion.

National Cheese Exchange Base Price Analysis

The influence of the National Cheese Exchange as an indicator of prices for all cheese markets makes Exchange prices an important area of study. Further interest is focused on Exchange prices because of the relatively small volume of cheese traded on the Exchange, and because cheese prices have substantial economic significance throughout the dairy industry.

Two earlier studies, using correlation analysis, found very high relationships between Exchange prices and prices at the Chicago and New York wholesale markets (table 7, 4, 10). Higher correlations generally existed between Ex- change prices and wholesale prices for the week following a change in Exchange prices than for the same week as a change in Exchange prices. Thus, both studies concluded that changes in Exchange prices were generally reflected in changes in market prices.

Graf also examined the number of times a price change on the Exchange either preceded or followed a price change at Wisconsin assembUng points and the Chicago and New York wholesale markets in 1964-65. For four styles of cheese (Cheddar. 40-pound blocks, single daisies, and longhorn), the total number of price changes on the Exchange preceded Wisconsin assembling point price changes 85 percent of the time, they followed 4 percent of the time, and there were no resultant price changes at Wisconsin assembling points 11 percent of the time. The 40-pound block price changes on the Exchange during this time led Chicago wholesale price changes 76 percent of the time, they followed 4 percent of the time, and there were no resultant price changes at Chicago 20 percent of the time. For the New York wholesale market. Exchange 40-pound block price changes led 56 percent of the lime, they followed 12 percent of the time, and there were no New York wholesale price changes associated with Exchange price changes 32 percent of the time. He concluded that the Exchange appeared to have a dominant influence on cheese prices in other markets throughout the country.

In this study. I followed the pattern of those earlier reports in examining the association between National Cheese Exchange prices and prices at both Wisconsin assembling points and wholesale markets to determine if the same price relationships still hold.

28

Table 7—Coefficients of correlation between cheese exchange prices and (1) Wisconsin assembling point prices and (2) wholesale prices. American cheese, weekly, 1948

and 1964-^5

Prices correlated with exchange prices'

Coefficients of correlation

1948 [iO] 1964-65 (4)

40-pound block: Wisconsin assembling point price—

Current week Following week

Chicago wholesale prices— Current week Following week

New York wholesale prices— Current week Following week

Single daisies: Wisconsin assembling point prices-

Following week Chicago wholesale prices-


New York wholesale prices- Current week Following week

0.953 .972

.960

.989

.867

.888

.882

0.953 .991

.937

.981

— s Not available.

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 same Friday as the Exchange and the following week quotation were from 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 the current and following week. Since the Exchange price was established on Friday of each week, current week assembling point and wholesale prices actually preceded the Exchange price.

Sources: (10. 4).

First. 1975-79 weekly price changes on the Exchange were compared with price changes in those other markets for 40-pound blocks. There were 27 weekly price decreases at the Exchange during this time period and 67 price increases. Price changes on the Exchange one week were commonly followed the next week by similar price changes in each of the other markets (table 8). Price changes of the same sign as the Exchange were found in at least 95 percent of the cases in the following week for the Wisconsin assembling point. Wisconsin wholesale, Chicago wholesale, and Eastern area wholesale markets. West Coast wholesale price changes of the same sign occurred in about 85 percent of the cases. Price decreases on the Exchange appeared to be followed slightly closer by the other cheese markets than did price increases.

In addition, during 1975-79. 10 price changes at the Wisconsin assembling points did not follow the Exchange price changes of the previous week. 3 at the Wisconsin wholesale level, 16 at the Chicago wholesale level, 19 at the Eastern area wholesale level, and 24 at the West Coast wholesale level. There did not appear to be any pattern to these price changes in relation to the Exchange. Some preceded Exchange price changes and some followed 2 weeks later. Rather, it appeared that although some regional price adjustments were sometimes made in- dependently at the other markets, they usually readjusted rather quickly back to the original price relationship with the Exchange, either on their own or in conjunction with the Exchange price change. In fact, a majority of the cases where the other market price changes were not of the same magnitude as the Exchange price change the previous week occurred as a result of those markets being slightly out of line in their prices. This required more ad- justing in comparison with changes in the Exchange price to bring them back into line.

Second, two statistical measures, the coefficient of correlation and the elasticity of price transmission, were used to determine the relationship between weekly National Cheese Exchange prices and selected wholesale market prices for 1975-79. The Exchange prices examined for price comparison were the 40-pound blocks, barrels, and 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 levels (tables 9, 10. and 11). All coefficients of correlation were over 0.94 and were significant at the 1-percent level.

Of interest is that the Chicago and Eastern area 40-pound block prices were at least as highly correlated as were the Wisconsin assembling point prices to Exchange 40-pound block prices. This reflects the importance of the Exchange price as a market price indicator, even after the cheese leaves the manufacturing plant. West Coast prices were generally less correlated with Exchange prices than were Chicago and Eastern area prices.

A higher correlation existed between Exchange prices and other market prices for the following week than for the current week. This, together with the information from the price change analysis, suggests that Exchange prices on Friday morning are generally reflected in Wisconsin assembling point and wholesale markets the following week.

The high correlation between swiss Grade A prices on the National Cheese Exchange and prices at the wholesale markets shows the close relationship of swiss cheese prices nationwide. However, since all cheese prices examined were highly correlated, including a correlation of 0.9776 between Exchange 40-pound block prices and Ex-

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 price change at the National Cheese Exchange

Exchange price

changes

Price change in other markets following National Cheese Exchange price decrease: Price decrease, same magnitude Price decrease, different magnitude No price change 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 Price change, same direction, different

magnitude No price change Price change, opposite direction

40.7 9 33.3 48.2 13 48.2

7.4 4 14.8

45.7

4B.g

change swiss Grade A prices, Swiss prices in the market- place may. in practice, follow 40-pound block price changes as a general indicator of market value.

market prices of cheese of the same type. However, the lowest coefficient was at the 0.94 level, still indicating a close relationship.

The elasticity of price transmission was measured between Exchange prices and prices in other markets the following week as a result of the closer relationship than exists with prices in other markets during the current week. All elasticities for 40-pound block, barrel, and swiss Grade A were in excess of 0.0 with higher elasticities for the Wisconsin assembling points. Therefore, weekly Ex- change price changes of 1 percent were associated with average changes in the same direction in other market prices of at least 0.8 percent.

Forty-pound block Exchange prices were also statisticaUy compared with prices of other cheese types at several alternative wholesale levels (table 12). This was to test the general impression that 40-pound block prices are important industry indicators of market value for cheese other than American types. The correlation coefficients were generally lower than those between Exchange and other

Table 9—Relationship between National Cheese Exchange 40-pound block prices and selected other 40-pound block

pricing points, weekly. 1975-79

Pricing point' Coefficient Elasticity of price of correlation' transmission^

Wisconsin assembling points: Current week Following week

0.9935 .9974

Chicago wholesale: Current week Following week

.9944

.9983

Eastern area wholesale: Current week Following week

.9948

.9981

West Coast wholesale: Current week Following week

.9665

.9688

Percent

1.03

.93

.98

.82

'Since the National Cheese Exchange price was established on Friday of each week, the current week assembling point and wholesale prices actually preceded the Exchange price. The coefficient of correlation is a measure of the degree of association between the National Cheese Ex- change price and either the assembling point or wholesale price, that is, the larger the coefficient, the closer the relationship between the prices. The elasticity of price transmission (Ep) indicates the effect of National Cheese Exchange prices one week on the assembling point and wholesale 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 increase in the Wisconsin assembling point price.

dPo PE_

dP^ P

Price Spreads

The price spread for American process cheese was computed from annual retail and wholesale product prices and the farm value equivalent of milk going into the cheese for 1950-78. All three price levels followed the same general trend (fig. 14 and appendix table 3), with each price level over 99 percent correlated with others. Following a price bubble in the early fifties, each price series remained relatively unchanged imtil 1966 when prices began rising moderately through 1972. and sharply thereafter. Retail prices, wholesale prices, and the farm value each increased by about 8 percentage points annually during 1950-78.

Table 10—Statistical relationship between National Cheese Exchange barrel prices and selected other barrel

and process cheese pricing points, weekly. 1975-79

Pricing point' Coefficient Elasticity of price of correlation' transmission^

Wisconsin assembling points, barrel:

Current week 0.9933 Follovdng week .9991

Percent

0.94

Chicago wholesale, process 5-lb. loaf:


Eastern area wholesale, process 5-lb. loaf:


West Coast wholesale, process 5-lb. loaf:


.9861

.9916

.9855

.9910

.9851

.9891

.93

.92

.85

where Pp = National Cheese Exchange price

P = Other pricing point

'Since the National Cheese Exchange price was established on Friduy uf each week, the current week assembling point and wholesalo prices actually preceded the Exchange prices. The coefficient of cumilHtiun is H measure of the degree of association between the National Cheese Ex- change price and either the assembling point or wholesale prtcui) Ihat is. the larger the coefficient, the closer the relationship between (he prices The elasticity of price transmission (Ep) indicates the effect of National Cheese Exchange prices one week on the assembling point and wholesale prices the following week. A 1 percent increase in the Exchange price was associated with the reported tabular value increase, that is. 0.94 percent increase in the Wisconsin assembling point price.

E = -i^ ^ where Pp = National Cheese Exchange price dP. P = Other pricing point

31

American cheese sold at retail during 1978 for an average price of 93.5 cents for a half pound and at wholesale for 60.5 cents for a half pound. The farmer received about 45 cents per half pound of cheese for the milk used by the cheese plant. Stated in a different way. in 1978 the farmer received 48 cents out of every dolieras worth of cheese bought by the consumer, and 52 cents went to pay for the services and supplies to procure, manufacture, and market the cheese.

The farm-retail price spread averaged 24.5 cents from 1950-78. 28 percent of which was the farm-wholesale price spread and 72 percent of which was the wholesale- retail price spread (fig. 15). About 55 percent of the retail cost of American process cheese over the entire time period represented a marketing charge, with a high of about 59 percent in the early sixties. The farm-retail price spread increased slowly through 1973. after which it sharply increased. The rapid increases in recent years were due mainly to rapidly rising retail prices.

Based on past studies of price spreads for other agricultural coounodities. the price spread is assumed to include parts of both (1) fixed charges that represent procurement, manufacturing, and distribution charges, and (2) a constant percentage spread where the price spread is a percent of the farm or retail price [20].

Table 11—Statistical relationship between National Cheese Exchange Swiss Grade A prices and selected other

Swiss Grade A pricing points, weekly, 1975-79

Pricing point' Coefficient Elasticity of price of correlation^ transmission'

Chicago wholesale, block': Current week .9964 Following week .9984

Eastern area wholesale, cuts: Current week .9681 Following week .9993

West Coast wholesale, block: Current week .9416 Following week .9349

Percent

1.00

.93

.84

Several factors were examined to determine further the nature of the price spread for American process cheese. Deflated price spreads for American process cheese have shown a slight upward trend (fig. 16). Such a trend is con- trary to expectations if price spreads are determined primarily by costs outside the cheese marketing system and if index numbers of wholesale prices of all commodities reflect these costs. Deflated price spreads averaged 19.6 cents during the 1950's, 23 cents during the sixties, and 24.2 cents during the seventies. A general upward trend was apparent through 1971, when the price spread reached 26.2 cents; after that the spread declined to about 23 cents in the late seventies. This suggests either that the index of wholesale prices of all commodities used

Table 12—Statistical relationship between National Cheese Exchange 40-pound block prices and selected other

cheese pricing points, weekly. 1975-79

Pricing point* Coefficient Elasticity of price of correlation' transmission^

Chicago wholesale. Blue: Current week 0.9848 Following week .9886

Chicago wholesale. Gorgonzola:

Current week .9811 Following week .9846

Chicago wholesale, Parmesan: Current week .9368 Following week .9410

Chicago wholesale, Provolone: Current week .9410 Following week .9460

Wisconsin wholesale. Mozzarella:

Current week .9900 Following week .9942

East Coast wholesale. Edam: Current week .9702 Following week .9702

Percent

0.89

.90

.77

.79

.94

.87

'Since the National Cheese Exchange price was estabhshed on Friday of each week, the current week assembling point and wholesale prices actually preceded the Exchange prices. The coefficient of correlation is H measure of the degree of association between the National Cheese Ex- change price and the wholesale prices. That is. the larger the coefficient, the closer the relationship tietween the prices. The elasticity of price transmission (Ep) indicates the effect of National Cheese Exchange prices one week on the wholesale prices the following week. A 1 percent increase in the Exchange price was associated with the reported tabular value increase, that is, 1 percent increase in the Chicago wholesale point price.

E_ =s —2 _^ . where P,. = National Cheese Exchange price

P = Other pricing point dPp P

E o

'Since the National Cheese Exchange price was established on Friday of each week, the current week wholesale prices actually preceded the Ex- change prices. The coefficient of correlation is H mensure ni Ihe deKfPR »f association between the National Cheese Exchange price and ihe wholesale prices. That is. the larger the coefficient. Ihe closer the rdalion- ship between the prices. The elasticity of price transmission (Ep) indicnles the effect of National Cheese Exchange prices one week on ihe wholesale prices the following week. A 1 percent increase in the Exchange price was associated with the reported tabular value increase, that is. 0.94 percent increase in the Wisconsin wholesale Mozarclla price.

fiPo Pp E^ = ^ . where P^ = National Cheese Exchange pnce dP^

P = Other pricing point

32

FIGURE 14

Price Levels of American Cheese, Annual, 1950-78

CENTS PER POUND

90 -

80 -

70

60

50

40 h-

30

20

10

J I L 1950 55

RETAIL PRICE

WHOLESALE PRICE

FARM PRICE

■ ■ I L J I L 60

I I 65

J I L 70

>

/

J I L...-L 1 I 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

25 -

15

10

FARM-RETAIL

WHOLESALE-RETAIL X/' ••...

\ ^«•■■«■■a■■■■■*

FARM-WHOLESALE

-2^-

/■

I I I L J I I L 1950 55

J I I L 60

_l I I I L 65 70

I I I I I 75

J L 1978

as the deflator may not have increased as much as some costs of dairy marketing or that some portion of the price spread is related to the rapidly increasing retail prices.

Second, the variability of actual price spreads was compared with the variability of deflated price spreads:

Price spread Coefflcient of

variability (percent)

Actual Deflated

Farm-retail Wholesale-retail Farm-wholesale

37.3 10.6 34.2 8.9 46.8 20.6

The coefficients of variability (the standard deviation divided by the average price spread) were reduced considerably when the price spread was deflated by index numbers of the wholesale price of all commodities. This suggests that prices of factors used in cheese marketing, transportation, labor, and equipment costs, for example, are largely determined outside the cheese market system.

Finally, the constancy of the price spread as a percentage of total retail costs was examined. Constant values over time would imply the use of constant percentage markups by the system or costs of marketing that parallel retail prices over time. Again, the coefficient of variabihty was a low 5.4 percent, which indicates a close relationship of total price spreads with retail prices.

Given the above mixture of results suggesting both percentage and absolute markup factors, an equation was estimated of the total price spread from 1950-78. The average price spread was equal to about 5 cents plus almost 0.4 cent monthly and 0.7 times the farm value of 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 the 0.4 cent may explain monthly adjustments in the constant markup due to increasing marketing costs.

The following equation was used to explain the average monthly farm-retail price spread of American process cheese from 1950-78:

Given: Where:

PS PS

FP M

b =

a + b(EP) + c(M) Farm—retail price spread of American process cheese. Farm price of milk equivalent, Months, where January 1950 = 1, etc.. Marketing costs when a constant markup is used. The percentage markup, and Other factors explaining changes in the price spread.

The resulting equation was:

PS = 5.14 + 0.70 FP + 0.36M R^ = 984 ( .58) ( .04) ( .05)

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 1975 1976 1977 1978 1979 All

years

Wisconsin assembling points Wisconsin wholesale Chicago wholesale Eastern Area wholesale West Coast wholesale

3.0 7.4

17.9 15.7 25.3

4.1 7,5

14.7 17.6 24.1

Cents per pound

2.8 2.9 8.3 8.2

19.1 19.7 18.6 20.4 20.4 21.5

6.0 11.4 22.8 22.7 24.0

3.8 8.7

19.8 19.1 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 Cheese Exchange price and prices at selected other market levels for 40-pound block Cheddar cheese. The actual price spreads for 1975-79, using the Exchange price as a base, increased slightly through 1978 for Wisconsin wholesale. Chicago wholesale, and Eastern area wholesale markets (table 13). They remained about the same for Wisconsin assembling points and declined for the West Coast wholesale market. The actual price spreads for all markets increased greatly in 1979. with the West Coast re- maining below the 1975 spread. These findings are tempered. )iowever. because regional cheese prices cannot be compared directly as a result of definitional differences in the wholesale cheeses chosen for price reports.

Regression analyses were made on these same markets where changes in the price spreads were examined as a result of a change in the Exchange price the previous week (table 14). The price spread increased appreciably with increases in the Exchange prices for all markets but 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.

Table 14—Regression price spread relationships for selected 40-pound block markets as a function of the

National Cheese Exchange 40-pound block price, weekly. 1975-79'

Markets Intercept

(a) Slope

(b)

Cents/lb. -Percent-

Wisconsin assembling points -2.5 6.6 99.5 Wisconsin wholesale - .7 9.8 98.7 Chicago wholesale 8.7 11.5 99.7 Eastern Area wholesale 2.4 17.1 99.6 West Coast wholesale 22.5 0.8 93.8

'Price spread = a + b (National Cheese Exchange 40-pound block price per pound for the previous week). The significance level wâs at least 99 percent in all cases.

Source: (13).

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 published).

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 grade milk. 1955-79

Appendix table 2—CCC purchase prices of natural Cheddar cheese, 1955-79

Year and month* Announced price at

national average milkfat At 3.5% milkfat

DoUars per hundredweight

1955 3.15 289 1956 3.15 2.89

April 1-17 3.15 2.91 April 18 3.25 3.00

1957 3.25 3.00 Aprill 3.25 3.02

1958 3.25 3.02 April 1 3.06 2.85

1959 3.06 2.85 Aprill 3.06 2.86

1960 3.06 2.86 September 17 3.22 3.02

1961 3.22 3.02 March 10 3.40 3.20

1962 3.40 3.20 April 1 3.11 2.93

1963 3.11 2.93 Aprill 3.14 2.99

1964 3.14 2.99 April 1 3.14 3.00

1965 3.15 3.00 April 1 3.24 3.09

1966 3.24 3.09 April 1 3.50 3.35 June 30 4.00 3.84

1967 4.00 3.84 April 1 4.00 3.85

1968 4.00 3.85 April 1 4.28 4.13

1969 4.28 4.13 1970 4.28 4.13

April 1 4.66 4.51 1971 4.66 4.51

April 1 4.93 4.79 1972 493 4.79 1973 4.93 4.79

March 15 5.29 5.17 August 10 5.61 5.49

1974 5.61 5.49 April 1 6.57 6.45

1975 6.57 6.45 January 4 7.24 7.10 October 2 7.71 7.55

1976 7.71 7.55 April 1 8.13 7.95 October 1 8.26 8.07

1977 8.26 8.07 April 1 9.00 8.79

1978 9.00 8.79 April 1 9.43 9.21 October 1 9.87 9.64

1979 9.87 9.64 April 1 10.76 10.51 October 1 11.49 11.22

Year and month' Cheddar, 40-lb. blocks

Cents per pound

1955 33.25 1956 33.25

April 1 34.00 April 18 35.00

1957 35.00 1958 35.00

April 1 32.75 1959 32.75 1960 32.75

September 17 34.25 October 24 36.10

1961 36.10 July 18 36.50

1962 36.50 April 1 34.60

1963 34.60 April 1 35.60

1964 35.60 1965 35.60

April 1 36.10 1966 36.10

April 1 39.30 June 30 43.75

1967 43.75 1968 43.75

April 1 47.00 1969 47.00

April 1 48.00 1970 48.00

April 1 52.00 1971 52.00

April 1 54.75 1972 54.75 1973 54.75

March 15 62.00 August 10 65.00

1974 65.00 April 1 70.75

1975 70.75 January 4 77.25 April 1 79.25 October 2 85.00

1976 85.00 April 1 90.50 October 1 92.50

1977 92.50 April 1 Jfl.OO

1978 98.00 April 1 103.25 October 1 106.00

1979 106.00 April 1 116.00 October 1 124.00

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

Farm-retail spread Total spread Constant dollars pacKBKe

value' ■ as a percent

Year Total

Wholesale- Farm- of retail total Retail* Wholesale' retail wholesale price spread'

I'ânfc .... — — Percent

52.6

Cents

18.6 1950 28.9 17.8 13.7

• uenis

15.2 11.1 4.1 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.

Û OS GOVtRMWNT PRINTING Of MCE I9M -3-i'-1-932/E.SS-16

41

UNITED STATES DEPARTMENT OF AGRICULTURE

/WASHINGTON. DC 20250 POSTAGC AND FEES PAlO 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 agriculture 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.

Documents

Cheese Pricing - USDA