Warren Buffett-backed Kraft Heinz and Papa John's are bracing for higher cheese prices. Donald Trump might make things worse.
- Warren Buffett-backed Kraft Heinz and Papa John's are bracing to pay more for cheese in the coming months.
- Kraft Heinz says cheese prices are rising "dramatically," while Papa John's expects them to be 10% higher this year.
- If Donald Trump slaps tariffs on European cheeses as he's threatened, prices could climb even higher.
- Watch Kraft Heinz and Papa John's trade live.
Warren Buffett-backed Kraft Heinz and Papa John's are bracing to pay more for cheese in the coming months. If President Donald Trump slaps tariffs on European cheeses as he's threatened, prices could climb even higher.
The maker of Kraft Macaroni & Cheese, Velveeta, and Lunchables flagged cheese prices rising "dramatically" as a key risk to its second-half performance in its latest earnings call. Kraft Heinz - which counts Buffett's Berkshire Hathaway conglomerate among its biggest shareholders - also warned of mounting competition from private labels in the natural cheese space.Similarly, Papa John's expects the average price of a pound of cheese to jump 10% to $1.72 this year, driven by a 16% year-on-year price spike in the third quarter and a 24% surge in the fourth quarter. Cheese prices are a big deal for pizza companies: Domino's Pizza flags "changes in operating expenses resulting from changes in price of food (particularly cheese)" in the risk factors for its business.
Kraft Heinz won't welcome higher cheese prices, given pricing pressures and higher costs weighed on its second-half showing. Its net sales dropped 5%, sending operating profits down 55%.
Similarly, lower restaurant sales and franchise royalties pushed Papa John's revenue down 9% in the first half, slashing its pre-tax profits by 78%.
A range of demand and supply factors are driving up cheese prices. For example, droughts in Australia and New Zealand have reduced milk production, while concerns about milk output in Europe have fueled demand, according to the FT.
"Global cheese prices are expected to increase seasonally during the second half of 2019 and to exceed lower-than-average prices experienced in the same period of 2018," Mary Ledman, Rabobank's global dairy strategist, told Markets Insider. "Stagnant growth in global milk production and fewer stocks are buoying global cheese prices."
US stockpiles of American cheese totaled 365,000 tons in June, down 1.9% from a year earlier, Ledman said. Wholesale cheddar cheese prices in the Oceania and the US are set to rise by 5% and 8% respectively this year, she added.Unsurprisingly, the US agriculture department forecasts a cheese price of $1.85 a pound this month - a 10% increase from last year. European cheeses are also getting more expensive. The average wholesale price of grana padano has soared 28% this year, while Parmigiano-Reggiano and cheddar have jumped about 12%, according to CLAL, an Italian dairy economic consultancy.
Prices could climb even higher if Trump slaps tariffs on various EU products including cheeses. He has threatened the duties in retaliation for the bloc's subsidies to airplane manufacturer Airbus. If they're imposed, the prices of Parmigiano-Reggiano and gouda could double, according to Modern Farmer.
Steeper prices for European cheeses would likely fuel demand for American cheeses, driving up their prices and creating even more headaches for Kraft Heinz and Papa John's.