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Comprehensive Overview of Cheese Pricing and Market Dynamics

This lecture, led by Dr. Roger Ginder, delves into the complexities of cheese pricing in the U.S. dairy market. It discusses the historical context of pricing based on the National Cheese Exchange and the transition to the CME. Key factors influencing cheese prices, including market dynamics, supply levels, and the impact of by-product values such as whey, are analyzed. The session also covers the cash trading practices at the CME, discussing offers, bids, and how they affect market prices. An insightful exploration for anyone interested in dairy economics.

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Comprehensive Overview of Cheese Pricing and Market Dynamics

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  1. Dairy Marketing Dr. Roger Ginder Econ 338 Fall 2007 Lecture #11

  2. CHEESE PRICING • Bid/offer rules same as for butter on CME • Daily cash trading Mon.-Fri. • price change possible without transaction • An uncovered offer or unfilled bid during the session can change the price even without a transaction • if no transaction occurs or no bids or offers are made the price does not change

  3. CHEESE PRICING • Similar to butter pricing • Up to 1998, it was based on wholesale price at National Cheese Exchange (NCE) Green Bay, Wisconsin • Only cash cheese market in U.S. • Forty trading members (represent 80% cheese market) • Trading for 1/2 hr. Friday a.m. • Trades only in 40# blocks and 500# barrels • Car lot quantities 33,000# or 42,000# • Prices FOB sellers warehouse on nearest rail siding • Prices do not include: transport, freight differentiation, moisture adjustments, barrel deposit

  4. CHEESE PRICING • Up to 1998, it was based on wholesale price at NCE Green Bay, Wisconsin • Farmers came to mistrust the NCE after market forces caused much wider fluctuations in prices in the mid—1990’s • Really due as much to the lack of government CCC activity in the markets removing surplus product as anything done by traders • Trading was moved to the CME where the oversight was thought to be better • CME had also established dairy futures contracts

  5. CHEESE PRICING • Blocks used for cutting packaging • Barrels used for further manufacturing or processing • CME prices used for pricing American type cheeses (incl. Cheddar,Colby, etc.) • Large or excessive supplies usually cause prices to rest at support level (Has not occurred since 2003.) • Also a “thin” market where only a small percentage of total volume is traded • Cheese plants usually sell under contract using NCE (Now CME) “opinion”

  6. CHEESE PRICING • Cheese prices also have a leveraged effect roughly 10# of cheese can be made from 100# milk • Change in cheese price of 1¢ causes approx. 10¢/cwt change in milk price • By-product values (whey) are becoming more important • less dumping • more sophisticated processing in some plants

  7. CME Cash Market Session • Cash Trading from 10:45 am (CDT or CST) For Cheese • Daily trading for Blocks and Barrels • Bids, Offers, and Trades May be Made For Either Size at the Session • All Trades Must Be Settled With Product • Cash Trading From 11:05 am (CDT or CST) for Butter • Trading on Monday thru Friday • All Trades Must Be Settled With Product

  8. CME Cash Market Session 7-18- 07 • ---No Budget To Travel To Chicago • ---Transcript of Session From the CME Trading Chatroom • ----Audio of Session from E Dairy

  9. Milk Pricing By Cheese Plants • A Cheese Plant Purchase Milk From Producers and Manufactures Cheese • How Does the Plant Decide How Much to Pay For the Milk It Needs? • Pay What Everybody Else Pays • Pay As Little As Possible • Pay As Much As It Takes • Other

  10. WHAT INFORMATION IS NEEDED TO DETERMINE PAY PRICE OF A CHEESE MANUFACTURER? • Product price / # • Product yield / cwt milk • By-product price / # • By-product yield / cwt milk • Manufacturing cost / cwt milk

  11. MANUFACTURED MILK PRICING BASED ON MANUFACTURED PRODUCTSAugust—September 2007 • Price of 40# block of cheddar cheese = $1.9300/lb • Value of dry whey = $.50/lb • Yield of cheese / cwt milk = 10.1/# • Yield of dry whey = 5.5# • Plant manufacturing cost = $1.31/cwt

  12. CHEESE MANUFACTURER A’s PRICE CALCULATION • Milk Price/cwt • Cheese @ $____ /# x 10.1#/cwt = $____ • Plus Whey @ $____ /# x 5.5#/cwt = ____ • Less Plant manufacturing cost/cwt = ____ • Plant value of milk ____ • Other Deductions • Less Hauling = .36 • Less Assessment advertising = .15 • Less Unit retain (Coop) = .05 • Net farm price = $_____

  13. CHEESE MANUFACTURER A’s PRICE CALCULATION • Milk Price/cwt • Cheese @ $1.9300/# x 10.1#/cwt = $19.49 • Plus Whey @ $.50/# x 5.5#/cwt = $2.75 • Less Plant manufacturing cost/cwt = $1.31 • Plant value of milk $20.93 • Other Deductions • Less Hauling = .36 • Less Assessment advertising = .15 • Less Unit retain (Coop) = .05 • Net farm price = $20.37

  14. CHEESE MANUFACTURER A’s PRICE CALCULATION • How would it differ if manufacturer A is more efficient than its competitor? Less efficient than the competitor? • How would the Grade B (Class III price) differ if manufacturer A subsidizes transportation costs of its producers by $.10/cwt? • 3. Who would be affected by this change? Why?

  15. Grade B Producer Level Milk Pricing Based on Manufactured Products (9-17-07) • Price of butter / # = $1.3700 • Price of nonfat dry milk = $1.9600 • Butter yield/cwt milk = 4.48# • Nonfat dry milk yield/cwt milk = 8.5# • Manufacturing cost/cwt = $1.21

  16. Questions?

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