Monday, June 25, 2007

Ethanol is Eating Your Cheese

Pizza Makers Raising Prices Amid Higher Cheese Costs

June 22, 2007: 05:23 PM EST

LOUISVILLE (AP)--Before the dinnertime rush, Larry Lewis was chewing over business strategy at the Fat Jimmy's pizzeria he manages. The store had absorbed sharply rising cheese prices as long as possible.

It was time to raise the price on pizzas and pass along some of the expense that had been eating into profits the past few months.

"We don't really have much choice," said Lewis, who competes in a pizza-heavy city that is the corporate home of large chains and features a large selection of pizza restaurants.

How big that price boost would be was still being tossed around. "It's won't be a huge increase, but there will be an increase," Lewis said.

Like Lewis, pizza makers around the nation - from family run pizzerias to national delivery chains - are feeling the pinch from escalating costs for an essential ingredient in a hotly competitive, $30 billion-plus industry.

Block cheddar cheese reached $2.08 a pound Thursday on the Chicago Mercantile Exchange, up 78% from $1.17 a pound a year ago. At the end of 2006, the price was $1.33. Cheddar is the benchmark for mozzarella and other cheeses. Industry observers attribute the price surge to strong demand coupled with higher milk prices.

Some big pizza chains, which use mountains of cheese, already have responded.

Both Pizza Hut and Papa John's International Inc. (PZZA) have raised the price of their cheese-only pizzas to the same amount as one-topping pizzas at company- owned stores.

The higher cheese prices have exacerbated pressure companies already face from higher wages and fuel costs, said Chris Sternberg, spokesman for Louisville- based Papa John's.

Papa John's uses about 100 million pounds of cheese each year, and the cheese typically makes up 35% to 40% of the food cost in making a pizza, he said.

And cheese-only pies cost the company more, requiring an extra cup of cheese, he said.

"So the customer is getting something of extra value for the price," he said.

Pizza prices at Papa John's restaurants vary by location. At a downtown Louisville store, customers were paying $12.58 for a large cheese pizza that used to be $10.99. Customers had the option of adding an ingredient, such as pepperoni, at no additional cost.

Papa John's locked in cheese prices at a "reasonable level" through the third quarter, but cheese costs went up enough to prompt the higher price for a cheese pie, Sternberg said.

Dallas-based Pizza Hut, part of fast-food giant Yum Brands Inc. (YUM), which is headquartered in Louisville, goes through 300 million pounds of cheese each year, spokesman Chris Fuller said. The chain's cheese-only pizza has 50% more cheese than a one-topping pie.

At Domino's Pizza Inc. (DPZ), spokeswoman Lynn Liddle said the Ann Arbor, Mich.-based delivery chain has seen plenty of ups and downs in the cheese market over the years. For the most part, she said, the chain has "managed to work around these peaks and valleys." But if the price of cheese and other items continues to rise, Domino's will have to boost its prices, she said.

Mom-and-pop shops are feeling the pressure, too. Constantly Pizza, a family- run chain of three shops based in Concord, N.H., has stood pat on pizza prices, but the escalating cost of cheese has changed some routines in the kitchen, including tumbling cheese into measuring cups rather than just heaping it onto pizzas.

As a small operator, owner Dave Constant said he doesn't have the luxury of big chains to lock in prices months in advance.

The higher cheese costs are the result of an economic chain reaction, observers say.

Prices for milk, a key ingredient in cheese, have gone up - a result of higher feed grain costs for dairy cattle herds, said Rob Hainer, spokesman for the Atlanta-based Southeast United Dairy Industry Association. In particular, corn prices have risen amid growing demand for ethanol fuel, he said. Also fueling higher cheese costs has been strong U.S. and global demand for dairy products, he said.

Experts see no immediate relief in sight for pizza makers.

A market analyst with Downes-O'Neill, a dairy brokerage firm in Chicago, said continued strong demand, along with a typical summer decline in milk production, could keep cheese prices high for a while.

"There's some definite room to the upside," said analyst David Zaslavsky, projecting that block cheddar cheese prices could reach $2.15 to $2.20 a pound in late summer.

(END) Dow Jones Newswires
06-22-07 1723ET

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