World Market Pulse
submits:
It may sound cheesy, but what
is
really cheesy is that cheese, being such a widely consumed
commodity, was not traded on The Chicago Board until recently. In
Europe cheese is a key dairy commodity, while in the US the cheese
industry is largely focused on 3 or 4 states. Maybe it's got
something to do with the fact that some European cheeses are so
smelly that most common American and Asian consumers would run away
never looking behind.
Cheese, a highly nutritious and palatable food, is of
significant value in the diet because it contains almost all of the
protein and essential minerals, vitamins, and other nutrients of
milk. According to ancient records passed down through the
centuries, the making of cheese dates back more than 4,000 years.
No one really knows who made the first cheese. According to an
ancient legend, it was made accidentally by an Arabian merchant who
put his supply of milk into a pouch made from a sheep's stomach, as
he set out on a day's journey across the desert. The rennet in the
lining of the pouch, combined with the heat of the sun, caused the
milk to separate into curd and whey. That night he found that the
whey satisfied his thirst, and the cheese (curd) had a delightful
flavor which satisfied his hunger. Travelers from Asia are believed
to have brought the art of cheesemaking to Europe. In fact, cheese
was made in many parts of the Roman Empire when it was at its
height.
US Cheese Industry:
As cheese demand continued to grow and spread rapidly, manufactured
and processed cheese production increased dramatically. Total
natural cheese production grew from 418 million pounds in 1920 to
2.2 billion pounds by 1970. Rising demand for cheese throughout the
1970s and 1980s brought total natural cheese production to more
than 6 billion pounds by the beginning of the 1990s. Processed
cheese also experienced a surge in consumer demand with annual
production exceeding 2 billion pounds a year by the beginning of
the 1990s. Currently, more than one-third of all milk produced each
year in the US is used to manufacture cheese. Recent increases in
the overall demand for farm milk have in large part been due to the
continued growth of the cheese industry. As consumer appetites for
all types of cheese continue to expand, so will the industry.
From humble beginnings, the US has become the largest
cheese-producing country in the world.
As global appetites for cheese grow, the US is well prepared to
supply the increased demand.
US Cheese Production (in MT)
The Inception of Cheese Futures
After successfully trading milk and dairy futures and options,
the Chicago Mercantile Exchange, CME, the world's leading
derivatives marketplace, launched cheese futures and options on
futures on June 21. For the first time, cash-settled contracts are
now available on CME Globex, the exchange's electronic trading
platform. According to CME, the cheese contracts were requested by
customers (manufacturers and processors of cheese) in an attempt to
hedge their risk profiles. When this launch was announced, the CME
noted that many of its customers were already involved in Class III
milk and dry whey futures and options markets and hoped that this
new contract would allow these customers, in theory, to lock in
prices.
The Cheese contracts are listed monthly with each contract
representing the equivalent of 20,000 pounds of cheese and the tick
size of $0.001 per pound. Trading hours are Sunday through
Thursday, 5:00 p.m. to 4:00 p.m. Central Daylight Time, and Friday
until 1:55 p.m., with daily trading halts from 4:00 p.m. to 5:00
p.m.
Cheese is made from Class III milk. Dry whey is a byproduct of
processing the milk into cheese. Manufacturers, processors, food
companies and others have used the Class III contract to meet their
hedging needs since 1996 and the Dry Whey futures contract launched
in 2007.
(Click to enlarge)
Advantages of Cheese Futures
: The supporters of a cheese contract say that the existing
exchange traded futures and options (ETFOs) that serve them, Class
III, exclude significant swaths of the dairy industry because of
the multiple components that are all included in the Class III
index. The supporters say that a cheese contract would allow
additional sections of the dairy industry to enter the world of
dairy ETFOs, benefiting the formerly excluded by offering superior
price risk management tools and benefiting the industry as a whole
by providing a much needed additional liquidity into the CME Dairy
Complex.
- Trading cheese futures options offers the dairy industry an
alternative to hedging in cheese futures contracts as a means to
reduce market price risks.
- The holder of options receives protection against adverse
price movements without sacrificing benefits from favorable price
movements.
Some concerns have however been raised about whether this new
contract will reduce trading activity in the Class III market. The
question is whether cheese manufacturers or buyers who have been
using Class III contracts will switch to cheese futures, hence
reducing volume and open interest in milk futures.
Cheese Stocks:
Cheese Oriented Companies Listed on NYSE
Dean Foods (
DF
)
: carries over 63 product brands focused within the dairy industry.
Seventy-one percent of Dean Foods' $11 billion revenues are
obtained from milk, while ice cream only contributed 10% to the top
line.
American Dairy, Inc. (
ADY
)
: American Dairy, Inc., producer and distributor of milk powder,
soybean milk powder, and related dairy products in the People's
Republic of China ((PRC)). As of December 31, 2009, the Company had
over 200 Company-owned milk collection stations, two Company-owned
dairy farms, seven production facilities with an aggregate milk
powder production capacity of approximately 1,234 MT per day and a
distribution network that reaches over 95,000 retail outlets
throughout China.
Kraft Foods (
KFT
)
: the world's second largest food company after Nestle (NSRGY.PK),
with $50 billion in revenues coming in from 160 countries. Kraft
carries such popular brands as Trident, Oreo, Philadelphia, Oscar
Meyer and Maxwell House, and recently acquired confectionary giant
Cadbury. Its diverse food portfolio consists of 11 billion-dollar
brands, and over 70 that are worth more than $100 million.
Lifeway Foods, Inc. (
LWAY
):
Lifeway Foods, Inc. ( is engaged in the manufacturing of probiotic,
cultured, functional dairy and non-dairy health food products.
Lifeway manufactures Lifeway Farmer Cheese, a line of various
farmer cheeses, a line of gourmet cream cheeses, and Sweet Kiss, a
fruit sugar-flavored spreadable cheese similar in consistency to
cream cheese.
- Mkt cap 169.35M
- P/E 29.37
Cheese Pink Sheet Stocks:
1: Nestle SA (NSRGY.PK):
Nestle SA is a Swiss Company engaged in the nutrition, health and
wellness sectors. It is the holding company of the Nestle Group,
which comprises subsidiaries, associated companies and joint
ventures throughout the world. It has such business units as Food
and Beverage, Nestle Waters and Nestle Nutrition.
2: Groupe DANONE (DANOY.PK)
: A French company founded in 1899 which was earlier trading as
ADRs on the New York Stock Exchange but is now a Pink Sheet Stock.
Danone SA is a France-based company engaged in food processing
activities. The Company operates in four business lines, including
Fresh Dairy Products, Waters, Baby Nutrition and Medical Nutrition.
The Fresh Dairy Products business line's brands are Danone,
Actimel, Activia, Danacol and Vitalinea.
Other World Companies
1: Warrnambool Cheese & Butter (ASX:WCB
)
: Warrnambool Cheese and Butter Factory Company Holdings Limited,
together with its subsidiaries, engages in the manufacture,
processing, and sale of dairy products in Australia. It produces
dairy commodities, such as cheese, milk powders, whey protein,
butter, and cream, for both domestic and export markets. It also
produces fresh milk under the Sungold brand and food supplements
under the brands of Enprocal and Pro10Active. It offers its
products to wholesale and retail customers in Australia, Japan,
Korea, China, Indonesia, and the Middle East. The company was
founded in 1888 and is headquartered in Allansford, Australia.
2: Dairy Crest Group plc (LON:DCG
)
: Dairy Crest Group plc is a dairy company engaged in processing
and selling fresh milk and dairy products in the United Kingdom and
Europe. The Company operates in five segments: Cheese, Spreads,
Dairies, Share of Joint Ventures and Other. The Cheese segment
manufactures branded cheese in the United Kingdom and Ireland, and
sells to retail customers.
Overview of US Cheese Consumption:
The industry estimates that there are now more than 300 varieties
of cheese available in the US marketplace. By far the two most
popular single varieties of cheese in the United States are
mozzarella (10.7 pound per capita) and cheddar (10 pounds per
capita). Per capita consumption of all Italian-type cheeses
declined slightly in 2008, but remained above 14 pounds. Mozzarella
per capita consumption also declined slightly in 2008 to 10.65
pounds. In the American-style category, cheddar remained the same
at 10 pounds per capita consumption in 2008, while consumption of
other American varieties grew slightly (0.3%) to 3.1 pounds per
capita.
Disclosure:
No positions
See also
Thursday Options Recap
on seekingalpha.com