Soaring Asian pizza appetite costs Northfield's Kraft foods

Asia's growing appetite for pizza and cheeseburgers means the U.S. is exporting the most cheese ever, boosting costs for Kraft Foods Inc.

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, U.S. Dairy Export Council data show. South Korea, the region's biggest buyer, almost tripled imports while China's more than doubled.

The cheese boom pushed milk futures to a four-year high this week and is increasing costs for Kraft, the world's second- largest food company, and Costco Wholesale Corp., the largest U.S. warehouse-club chain. Surging global demand for food will boost U.S. farm exports to a record $137 billion in the year ending on Sept. 30, the government said in May.

Northfield-based Kraft Foods, the top U.S. seller of branded cheese, has passed some of its increased costs to consumers. The majority of the company's first-quarter growth in cheese revenue came from higher prices, spokesman John Simley said in a telephone interview;

“Asians traditionally have not been big cheese consumers, but that's changing,” Jon Spainhour, a broker and partner at Rice Dairy LLC, said by telephone from Chicago. McDonald's Corp., the world's largest restaurant chain, plans to add 200 outlets in China next year, a 16 percent increase from 1,287 at the end of 2010. “That's a lot of cheeseburgers,” Spainhour said.

In the four months ended April 30, cheese shipments from the U.S. increased 68 percent from a year earlier, and exports in 2010 were a record 173,531 tons, according to the export council. This year, the total may be higher, said Jim Tillison, the chief operating officer of Cooperative Working Together, a group which includes dairy farmers that produce almost 70 percent of U.S. milk.

At Issaquah, Washington-based Costco, higher cheese prices have meant smaller profit margins for grocery products including pizza.

“We're not going to change the price of pizza every day, even though cheese prices skyrocketed,” Chief Financial Officer Richard A. Galanti said on a May 25 during a conference call.

Cheddar cheese at American supermarkets climbed to $5.435 a pound in May, the highest since at least 1984, data from the U.S. Department of Agriculture show. Futures linked to class III milk, used to make cheese, reached $21.15 per 100 pounds on July 11 on the Chicago Mercantile Exchange, the highest since July 2007.

Global food costs have doubled in the past six years, climbing to a record in February, a United Nations index showed. High grocery prices and corruption have spurred unrest in northern Africa and the Middle East this year, ousting leaders in Tunisia and Egypt.

Rising dairy production from competing exporters including Australia and New Zealand may reduce demand for U.S. supplies, said Steven Schalla, a dairy market advisor at Stewart-Peterson Inc. Wholesale cheddar may drop to $1.80 and milk futures may slide to as low as $18, he said by telephone from West Bend, Wisconsin.

The export market for U.S. dairy products is growing eight times faster than domestic demand, according to the National Milk Producers Federation. The U.S. is the world's fourth- biggest cheese shipper, behind the European Union, New Zealand and Australia.

“Pizza Hut casual dining in China is absolutely on fire,” Yum! Brands Inc. Chief Executive Officer David Novak said on conference call with investors this week. Same-stores sales in the country jumped 22 percent in the second quarter, he said.

In China and India, the world's two most-populous countries, “there are just a lot of people, particularly people ascending to the middle class,” Chris Galen, the senior vice president of communications for CWT, the milk-industry trade group, said by telephone from Arlington, Virginia. “What we've see time and again is people spending on more of a Western-style diet.”

U.S. shippers may have an advantage over competitors because of the cheese-futures market in Chicago, which offer buyers added pricing transparency, Spainhour of Rice Dairy said. Wholesale cheddar will remain at about $2 a pound this year, he said. Last year, the price averaged about $1.50.

“Our exporters can offer a fixed price on cheese 24 months into the future,” Spainhour said. “That's something no one else can do.”

U.S. cheese exports may be at least 10 percent higher than last year's record, said Jerry Dryer, the Delary Beach, Florida- based publisher of the Dairy & Food Market Analyst newsletter.

“There is very strong international demand,” Dryer said. “Personal disposable income is ratcheting up.”