American Food-Makers Face a New Burden: Cheese Inflation

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Raw materials prices aren’t the only thing being driven higher by surging demand in emerging markets, as today Bloomberg reports that growing demand for pizza and fast-food in Asian nations is fueling record levels of US cheese exports. The rising cheese prices, which have contributed to higher commodities and staple foods costs, are poised to threaten balance sheets of companies like Kraft (NYSE:KFT) and Costco Wholesale Corp (NASDAQ:COST).

Cheese shipments from the U.S. have risen 68 percent from a year earlier, and exports in 2010 were a record 173,531 tons. In 2011 experts project the highest level of cheese exports on record. Among the fastest growing markets for cheese are in South Korea, where imports have nearly tripled in the past year, and China, where they have more than doubled in the last few months. According to the U.S. Dairy Export Council, “Wholesale cheddar-cheese prices have rallied 49 percent this year as the U.S. shipped more than twice as much to Asia in the first four months of 2011 as a year earlier.”

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Jon Spainhour of Rice Dairy comments, “Asians traditionally have not been big cheese consumers, but that’s changing.” International fast-food brands are helping to fuel the growth in cheesy consumption as they expand through the region. McDonalds (NYSE:MCD) for example, plans to add another 200 locations in China alone this year, a 16% increase from its current store total. Pizza specialists such as Papa John’s (NASDAQ:PZZA) and Domino’s (NYSE:DPZ) have also recently stepped up their regional presence, with Papa John’s currently operating 160 stores in the country. (For an educative look at cross-cultural marketing, check out Domino’s Chinese website here).

Back state-side, American corporate execs are seeing lower profit margins on cheese and dairy products as a result of the higher prices. Kraft’s CEO told investor’s last month that higher commodity costs were “headwinds” towards growth, citing “mostly milk,” as a major culprit in price gains. Costco’s (NASDAQ:COST) CFO Richard A. Galanti also told shareholders at a May conference call that the company would be forced to absorb higher production costs for items such as pizza, saying, “We’re not going to change the price of pizza every day, even though cheese prices skyrocketed.”

Average Americans are also starting to feel the brunt of more expensive cheese, as according to Bloomberg, “Cheddar cheese at American supermarkets climbed to $5.443 a pound in June, the highest since at least 1984, while futures linked to class III milk, used to make cheese, reached $21.15 per 100 pounds on July 11, the highest since July 2007.”

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