Name: Cong Ngo Economics 1902 Writing assignment 1 Professor: E. A. Blackstone Cheese Manufacturing Industry The Cheese Manufacturing Industry (NAICS: 311513) comprises establishments primarily engaged in producing cheese (except cottage cheese) from raw milk or processed milk and manufacturing cheese substitutes from soybean and other nondairy substances. Its main products are eclectic, ranging from Mozzarella, Parmesan to Cheddar, Cream, and other American Cheese. According to the Economic Census of 2012, there are 390 firms in this industry. The definition of this industry is exhaustive and reasonable, because no substitution can be found outside this industry. Because cheese is one of the most fundamental ingredients in American diet such as pizza and pasta and can be found in every family’s kitchen, it is widely bought in supermarkets and grocery stores throughout the United States. Cheese is so common and important that everyday it is served for a wide range of customers—from amateur home cooks to restaurants, young students
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Name: Cong Ngo
Economics 1902
Writing assignment 1
Professor: E. A. Blackstone
Cheese Manufacturing Industry
The Cheese Manufacturing Industry (NAICS: 311513) comprises establishments primarily
engaged in producing cheese (except cottage cheese) from raw milk or processed milk and
manufacturing cheese substitutes from soybean and other nondairy substances. Its main products
are eclectic, ranging from Mozzarella, Parmesan to Cheddar, Cream, and other American
Cheese. According to the Economic Census of 2012, there are 390 firms in this industry. The
definition of this industry is exhaustive and reasonable, because no substitution can be found
outside this industry.
Because cheese is one of the most fundamental ingredients in American diet such as pizza and
pasta and can be found in every family’s kitchen, it is widely bought in supermarkets and
grocery stores throughout the United States. Cheese is so common and important that everyday it
is served for a wide range of customers—from amateur home cooks to restaurants, young
students to the elder, and low-paid workers to high-paid ones. Therefore, the consumption and
demand of cheese in America tends to be stable and is continuously increasing in the recent ten
years. Based on the chart below from ibisworld.com, per capita cheese consumption in 2016
increased by approximately 5% compared to 2007’s while the domestic demand rose from $38
billion in 2007 to $51 billion in 2016. With its popularity and attractiveness to consumers, cheese
consumption is promised to rise in the next five years.
1st Chart (Source: IBISWorld)*IVA: Corporate Profits with Inventory Valuation Adjustment
There are some factors that influence the amount of cheese demanded, including the price of
cheese, individuals’ preference, and the income of people. It should first be recognized that
cheese’s retail price has a huge impact on the consumption of cheese.
2nd Chart (Source: John Geuss’s Blog)
Indeed, cheese’s price elasticity of demand varies from year to year. While cheese had inelastic
demand—when the price rose cheese consumption did not decrease—from 2000 to 2002 and
from 2010 to 2012, its demand became elastic—when the price plummeted cheese consumption
increased—in the recent years from 2012 to 2015. There are several potential reasons for those
changes in cheese’s price elasticity of demand, one of which might be the amount of cheese
imported in the U.S. Based on the 1st chart, the government’s money spent on cheese imports
from 2012 to 2015 ($1.2 - $1.3 billion) was much greater than on those of two years ago ($1 -
$1.1 billion). Hence, from 2010 to 2012, there were fewer substitutes for domestic cheese and
customers had to purchase cheese despite its rising price due to their lack of options for cheese
compared to three years later.
Preferences of consumers hold no less importance in cheese consumption. In the past few years,
there has been a cooking trend that encourages American to add melting cheese to every type of
dishes, such as steak and grilled pork ribs, leading to a huge increase in the amount of cheese
consumed. According to Malinda Geisler’s article, there has been a mainstream acceptance of
ethnic cooking in the United States such as Mexican and Italian, which use substantially more
cheese. The total per capita consumption of Italian style cheese, therefore, is reported to rise in
2013 to 14 pounds and the per capita consumption of Hispanic cheese is reported to grow in
2013 by nearly 6 percent to 0.71 pounds (Malinda Geisler).
Finally, because cheese is essential in American daily meals, its demand is likely to be slightly
affected by the income of people. Although the higher salary does raise the cheese consumption,
such increase is not so big. As cheese is not a luxury good like jewelry and cars, people tend to
continue buying cheese until it reaches its satisfactory limit and does not make any difference in
customer’s satisfaction for additional amount.
On the other hands, the main factors that affect cheese supply are the entries of new firms and
the state of technology. Because of its growing popularity, cheese industry has been promised to
attract several new companies to join the market. Indeed, in the past five years, there has been a
constant increase in the number of cheese establishments and in the quantity and variation of
cheese products. Such a surge in cheese manufacturers increased the amount of cheese supplied.
Moreover, technology is also crucial to the production of cheese. Recent technological advances
in cow raising, milking, and some cheese-making processes such as molding and aging bring
about higher productivity and quality of cheese. Therefore, American cheese has become a
favorite product of not only domestic customers but also international ones, substantially raising
the quantity of cheese exported to global markets.
In terms of market competition, according to the Economics Census of 2012, the CR4 for this
industry is 29.9% and the HHI is 373.9. These data indicate that cheese manufacturing industry
is highly unconcentrated, and none of the firms is dominant in the market share. Its CR4, which
is much lower than the minimum CR4 for oligopoly industry, points out that this industry is very
competitive. The giant firms in this industry, such as Kraft Heinz Co. and Sargento Foods Inc.,
each only holds less than 6% of market share and focuses on competing in certain aspects, such
as special varieties and cheese quality, and brand reputations.
Moreover, because some people tend to prefer homemade cheese, manufacturers have to
compete with local products, which account for considerable percentage in the market. Besides
competition within the U.S., firms also face pressure from a large amount of imported cheese
from other European countries. In fact, according to an article of Alan Bjerga and Lydia
Mulvany, in 2016 the U.S. Department of Agriculture planned to buy $20 million of stockpiled
cheese due to a combination of plentiful supply and flagging global demand of cheese as
international consumers preferred European cheese products, which are cheaper but same
quality. Because of such competiveness, the annual growth of cheese manufacturing industry has
decreased recently. While in the past five years (2011-2016) the annual growth was 2.7%, it is
predicted to fall to 1.7% in the next five years (2016-2021) (IBISWorld). Although expected to
grow at a lower pace in the future, industry enterprises’ revenue is estimated to steadily increase
as consumers are willing to pay a premium for better-quality cheese in their food. Based on the
1st chart, the total revenue in cheese industry in 2021 is estimated to reach $55 billion, producing
more than $5 billion compared to 2016’s total revenue.
Though most of major companies in this industry are private firms, such as Sargento Foods Inc.