Mozzarella cheese maker Lucille Farms Inc has announced a net loss for the year ended 31 March 2005 of $3.269m, compared with a profit of $209,000 the year before.
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Sales for the year were $47.8m, compared with $42.2m last year.
The company had a negative gross profit of $1.668m for the quarter ended March 31, 2005, reflecting a continued and exacerbated disconnect between the price of cheese and the price of milk that started in the quarter ended 31 December 2004.
The decline of gross profit margin has affected all cheese makers throughout the United States, the company said.
While the company has made great strides over the past two years in reducing its operating expenses and, through efficiencies, bringing down its cost of producing a pound of cheese, consistent profitability for the company is dependent upon stability in the price of block cheddar on the CME and the price of milk (the principal ingredient and cost factor in the manufacture of cheese), it said.
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By GlobalDataGenerally, the price of milk for any particular month, is computed, based on formulas determined by the United States Department of Agriculture, by the National Agricultural Statistical Service after the end of the month by reference to the average selling price of block cheddar cheese, barrel cheddar cheese, butter, non-fat dry milk and whey. Thus, everything else being equal and there being stability in the price of cheese, the price of milk will follow the price of cheese in an orderly manner, the normal spread between the selling price of cheese and the cost of milk will be maintained, and there will be stability in the company’s gross profit margin.
However, sometimes things are not equal, it said. For one thing, the market information required by NASS to compile the price of milk is not immediately available and takes time to collect. For this reason, the commodity prices used to calculate the milk price is two weeks old when the NASS receives it at the end of a particular month (i.e. it includes the commodity prices for two weeks of the current month and two weeks of the prior month), creating a “lag” between the data used for determining the selling price of cheese for the month (the CME Block Market prices for the month) and the data used for determining the cost of milk for the month (based upon commodity prices for two weeks of the current month and two weeks of the prior month). Thus, if there is a precipitous increase or decrease in the price of block cheddar cheese during a given month, it may not be reflected in the average selling price of block cheddar cheese utilized in computing the price of milk for such month. In such event, there is a disconnect between the average price of cheese for the month and the cost of milk for the month. In such case, the price of milk does not increase or decrease as fast as the price of cheese, and the company’s gross profit margin is affected accordingly. By virtue of the fact that the company does not know its cost of milk for the month until the following month and customers are billed for cheese when its shipped to them during the month, the company cannot pass along to customers the changes in the cost of milk. As a consequence thereof, the company’s gross profit margin for its product is subject to fluctuation, which fluctuation, however slight, can have a significant effect on profitability.
