RM2

RM2-42
E-193

Cheese Prices

Robert Schwart and David Anderson, Extension Economists, Ronald Knutson, Professor Emeritus, and Dean McCorkle

Cheese has become a much larger part of the nation’s diet. Since 1970 per capital cheese consumption has increased 162 percent. Nationally, cheese production consumes the biggest share, 44 percent, of the nation’s milk production, and is the major factor in determining the value of milk in the United States.

In 1995 the USDA shifted from the Minnesota-Wisconsin (M-W) price series which was a general survey price of Grade B manufacturing plants, to the Basic Formula Price (BFP) series for setting the Class III (cheese milk) price, which relied on the prices paid by manufacturing plants, but which also was adjusted to changes in the cash cheese market prices. This BFP price was the price used to determine other milk prices in Federal Orders. The 2000 Federal Order pricing changes mandated that producers be paid for milk components and that cheese be used to determine true protein prices to value producer milk. Cheese plays a most important role in the process of producer milk price determination and discovery. Yet there is no one definitive cheese price. The industry and government function with several price series.

There are three widely distributed cheese price series: 1) Agricultural Marketing Service (USDA-AMS) Market News, 2) National Agricultural Statistics Service (USDA-NASS), and 3) Chicago Mercantile Exchange (CME). Each series is used in varying degrees by various segments of the industry for pricing cheese, as a source of cheese price information, for pricing milk, and by analysts for research and price projection purposes. All the prices published by the weekly industry press are collected from these three sources.

USDA-AMS Prices

AMS reports four cheese price series. AMS market reporters, who contact cheese manufacturers and wholesalers throughout the United States, develop two of these price series. The firms contacted by the reporters are not obligated to report, but provide the information to assist in efficient marketing. AMS reports the CME prices resulting from daily block and barrel cheese trading on the exchange. AMS market reporters obtain the delivered wholesale prices from wholesalers who deal in less than full truckloads (LTL). These loads range in size from 1,000 to 5,000 pounds. These LTL’s are priced at the delivery point because they most often go through at least three title changes.

These prices are published as “Delivered dollars per pound (1,000-5,000 pounds mixed lots)”. These price quotes may be as much as 30 to 50 cents higher than the FOB prices. This difference is not just transportation but also buyer mark up that occurs at each title transfer. AMS publishes these prices weekly as a price range in the Dairy Market News for the Northeast, Midwest, and West.

Dairy Market News reporters contact manufacturing plants to obtain weekly market comments and FOB plant dock prices. These FOB plant dock quotes are for arm length exchanges where the title to the product changes. Most of the price FOB plant, car lot, and truck lot information collected are used in the market comments Despite the fact that plants across the country are contacted, the only FOB plants, car lot, and truck lot prices published are the Midwest Commodity Cheddar prices. Cheese prices quoted by western plants are generally lower than the prices quoted by Midwestern plants. Part of this difference is due to the CME differential (see the CME Prices discussion below), and that the western states, together, make up the largest cheese producing region of the United States. This region of high production would have a lower price relative to other areas where the cheese is shipped. There are other adjustments in cheese prices that reflect quality, moisture and containers.

The plants reporting FOB plant dock price data may be miles apart, but AMS does not report any distance adjusted prices; only price ranges, and, at times, averages. FOB dock prices imply some minimum container that is either a steel barrel or a fiber container. Many times shippers collect a refundable container deposit for steel barrels.

Cheese buyers and sellers use AMS Midwest Commodity Cheddar prices as “formula” prices for negotiating spot prices and contract prices. Usually when AMS prices are used for spot market transaction prices, buyers and sellers use the prices published a week earlier.

LNASS Prices

NASS is mandated by Public Law 106-532 to survey dairy product manufacturing plants to estimate product pay prices that are used to determine Federal Milk Marketing Order component and Class prices. Title 7 Code of Federal Regulations: Chapter 38; Subtitle III; Section 1637b details the procedures of the mandatory dairy product information-reporting program. The federal regulations require each manufacturer surveyed to report price, moisture content and quantity of dairy products sold by the manufacturer. The questionnaire sent to plants asks for prices for completed sales after title has transferred. The respondent is to report an FOB plant price for “naked” cheese with minimum packaging as required for 40-pound blocks. The prices are to be for cheese aged from four to thirty days. The instructions contained in the NASS questionnaire say to include CME sales and CCC purchases under the dairy price support program. The instructions indicate the respondent is to exclude intra-company sales, transportation charges, aged block cheese, resold cheese, and forwardpricing sales set 30 or more days before the transaction was completed. The manufacturer is required only to give the information for the dairy products (butter, nonfat dry milk, dry whey powder, and cheddar cheese) used to determine Federal Order prices. NASS prices are published weekly in “Dairy Products Prices”.

AMS had the responsibility for calculating Federal Order prices from the NASS product price estimates. As a result, AMS publishes the NASS prices in the weekly Dairy Market News. The formulas AMS uses are found in Title 7 Code of Federal Regulations: Chapter X; Part 1000.50; Subpart G.

CME Prices

CME prices serve as the major pricing guide for trading cheese in the United States. The CME price influences regional cheese prices as well as AMS Midwest commodity prices. Prior to May 1, 1997, the National Cheese Exchange (NCE), Green Bay Wisconsin, was the only auction type cheese exchange. NCE trading took place every Friday morning for 15 minutes. On May 1, 1997 NCE ceased operation and spot trading began on the Chicago Mercantile Exchange. Trading takes place 15 minutes every CME business day by posting bid and offers on a chalkboard in the cash cheese area of the commodity trading floor. Any of the CME floor traders that trade in the futures pits are eligible to represent a cheese trading firm in the CME cash cheese trading area. All the rules governing the cash cheese market are contained in the Chicago Mercantile Exchange Rulebook, Chapter 53S, Cheese-Spot Call. The rules cover specifications, includingload sizes varieties, styles, grades, age, moisture, and markings All cheese traded must be produced in USDA Grading Service approved plants.

Hauling Rates

The buyer is responsible for transportation. If there is an applicable freight differential, it is credited to the buyer. The buyer of cheese traded in the spot cheese market has seven days after the date on the invoice to pay for the cheese unless the seller demanded immediate payment or other arrangements are agreed to. Cheese traded in the CME cash market may be delivered to any point within the Continental US, and the price is quoted as a “delivery point” price. However costs are imposed on deliveries that occur at points other than at 300-mile radius of Green Bay, or between parties that are located farther apart than their distance from Green Bay.

Cheese delivered from points more that 300 miles from Green Bay, WI is subject to a freight differential (53S04.D). Distances are based on the most current issue of “Household Goods Carrier’s Bureau Mileage Guide”(HGCB). The CME Rulebook must be consulted for an accurate determination of the freight differential credit to the buyer (seller payment) in each situation in question. The freight differential deducted from the selling price is the amount by which the cost of shipment (published in the Rulebook) from the shipping point t to Green Bay exceeds the cost of shipment for 300 miles.

The CME differentials can be thought of as a means to compensate for some of the cost of moving cheese from a distant plant to the exchange point in Green Bay. The CME differentials are applied to FOB prices plants greater than 300 miles from Green Bay. Therefore, the CME pricing structure effectively treats cash cheese prices as if all transactions are to take place at Green Bay so the Green Bay price has to be high enough to encourage cheese to move from outlying plants to Green Bay. The cheese does not physically move for the distant plant to Green Bay for exchange, but the differential is subtracted from the selling price to reflect the costs of physically moving cheese. Although transportation usually is considered the responsibility of the buyer, it is subject to negotiation.

FOB plant dock implies that the buyers will pay for hauling. Cheese is moved in either the buyer or seller controlled trucks. If one or both parties to the transaction own or control trucks, then they will negotiate premiums or discounts to help cover transportation. If a seller is in an excess supply situation, he or she likely will discount the price. The opposite will occur if the buyer is in an excess demand situation. The hauling rates for cheese sold in interstate commerce are not regulated. They could be regulated in some intrastate situations. Neither AMS nor NASS publish hauling raters for cheese and dairy products.

An Example Application of Differentials and Hauling Rates

The following example illustrates the application of CME differentials and the impact of hauling rate of $1.60 per loaded mile, and a product weight of 44,000 pounds. If the load travels 1,000 miles, then the cost of moving the cheese is about $0.04 per pound. If the load travels 1,600 miles then cost of moving the cheese is about $0.06 per pound.

The CME Rulebook applies to cheese traded on the CME. The prices agreed to at the time of sale on the Exchange apply. To compensate the buyer for moving the cheese the differential is subtracted from the selling price. Not every sale of cheese takes place on the CME. Much of the cheese traded in the United States is private treaty between the buyer and seller. However, the CME rulebook may be the agreed rules governing the private treaty sale. If such an agreement exists then the private treaty terms of sale mimic the terms of a sale on the CME.

Suppose a cheese plant opens in San Antonio, Texas. Suppose all the output of the plant is sold through the CME. Suppose a buyer for the cheese is a firm in San Antonio and uses the CME to buy all its cheese. The CME Rulebook likely would be used to determine what the buyer ultimately must pay for the cheese produced in San Antonio and sold on the CME.

San Antonio is 1,367 miles from Green Bay. The seller to buyer mileage is less than 300 miles and is less than the seller to Green Bay mileage. Therefore the seller pays $0.0 freight differential. The closing daily block cheese price at the CME for August 28, 2002 was $1.1575. The San Antonio firm would pay the full $1.1575. If the seller were in Green Bay and the buyer in San Antonio, the buyer would pay the Green Bay FOB price plus the freight to move the cheese to San Antonio. The cost of moving the cheese from Green Bay to San Antonio would be $0.0497 per pound. The total cost of the Green Bay produced cheese to the San Antonio buyer would be $1.2072 ($1.1575 plus $0.0497).

Suppose the San Antonio cheese maker does not use the CME to sell all its cheese, but decides to be completive with other western cheese plants uses the CME Rulebook as a guide to set its dock price. The freight differential published in the Rulebook is $2.62 per cwt. ($0.0262 per pound). The “published” FOB (selling price) for a plant at San Antonio likely would be $1.1313 ($1.1575 minus $0.0262).

Conclusion

There are several sources of cheese price information. Each represents different markets and is used for different purposes. For example, NASS data are used to calculate product prices for the Federal Milk marketing Order Classified prices. The CME cash cheese trade reflects the spot market for cheese, and delivery differentials are codified to reflect delivery to Green Bay, Wisconsin.

When the CME assumed the functions of the National Cheese Exchange, the spot cheese market potentially has become more transparent and the parties to the transaction might better keep their anonymity. The cash cheese board is open every day. The old National Cheese Exchange conducted trading session only on Friday. Member traders may represent several different buyers and sellers, but the traders likely will not divulge for whom they are trading. In the old Exchange each company or organization had a trader who could easily be associated with that company. Unlike futures contracts, which are FOB Chicago, spot cheese contracts are for all practical purposes, FOB Green Bay.

The CME spot prices are published daily at the end of every trading day. The frequency of trading and publication of prices has the potential to make cash cheese prices to be more responsive to market changes.

Examples of calculations for freight differentials:
	Example 1	Example 2	Example 3	Example 4	Example 5
A. Seller location	Eau Claire, WI	Twin Falls, ID	Dallas, TX	Fresno, CA	Mankato, MN
B. Seller mileage to Green Bay	194	1,586	1,095	2,218	343
C. Seller deduction per cwt. Gross wt. vs. Green Bay	$0.00	$3.09	$2.02	$4.49	$0.11
D. Buyer location	Milwaukee, WI	Ogden, UT	Spfld, MO	Mankato, MN	E Atlantic City NJ
E. Buyer mileage to Seller	234	184	421	1,895	1,230
F. Seller deduction per cwt. gross wt. vs. buyer	$0.00	$0.00	$0.29	$3.72	$2.26
G. Net seller deduction per cwt. (lesser of C. or F.)	$0.00	$0.00	$0.29	$3.72	$0.11

Example 1: The seller to buyer mileage (E) is greater than the seller to Green Bay mileage (B). Both are less than 300 miles. The seller pays $0 freight differential.

Example 2: The seller to buyer mileage (E) is less than the seller to Green Bay mileage (B). The seller to buyer mileage is also less than 300 miles. The seller pays $0 freight differential.

Example 3: The seller to buyer mileage (E) is less than the seller to Green Bay mileage (B). Both are greater than 300 miles. The seller to buyer mileage applies. The seller pays $0.29 freight differential.

Example 4: The seller to buyer mileage (E) is less than the seller to Green Bay mileage (B). Both are greater than 300 miles. The seller to buyer mileage applies. The seller pays $3.72 freight differential.

Example 5: The seller to buyer mileage (E) is greater than the seller to Green Bay mileage (B). Both are greater than 300 miles. The seller to Green Bay mileage applies. The seller pays $.11 freight differential.

Information for this publication came from the following sources:

“Changes in Per Capita Consumption, 1970-99,” Briefing Room, Food Consumption: Food Supply and Use.
ERS, USDA, November 19, 2002.
http://www.ers.usda.gov/briefing/consumption/Supply.htm

Statistical Bulletin 979, Federal Market Order Statistics, 2001 Annual Summary. AMS, USDA, May 2002.
http://www.ams.usda.gov/dairy/mncs/weekly.htm

“Dairy Products Summary,” Bulletin Da 2-1, April 2002. NASS, USDA.
http://usda.mannlib.cornell.edu/reports/nassr/price/dairy/2002/
http://www.cmerulebook.com/cmewg/wg.dll?page&file=c53s

Partial funding support has been provided by the Texas Wheat Producers Board, Texas Corn Producers Board,
Texas Farm Bureau and the Houston Livestock Show and Rodeo.