Product and Quality Differentiation in the Swiss Cheese Market Enhances Raw Milk Prices

Product and quality differentiation in Swiss cheese markets enables higher and more stable raw milk prices. Protected Geographical Indications (GIs) such as the Swiss AOP (Appellation d’Origine Protégée), could further enhance milk prices, although their effectiveness depends on the strength of the GI label.

Many dairy producers face continuous challenges of low and volatile raw milk prices. However, milk prices are very heterogeneous within the Swiss dairy sector. A recent study investigates the extent to which product and quality differentiation in cheese helps farmers achieve higher and more stable raw milk prices.

Prices risks and quality-based product differentiation in the Swiss dairy industries

Since the early 2000s, the gradual liberalization of the Swiss dairy markets has exposed milk producers to increasing price risks, which have become a major source of farmers’ revenue risks. Market-based risk management tools could be key to meeting the challenges of price risks in the long run.

Cheese is the most important product in terms of milk utilization in Switzerland. In 2021, about 46% of raw milk was processed into cheese (Figure 1).

The researchers from Agroscope and ETH Zürich investigated price volatility and price movements and co-movements of raw milk supplied to cheeses with different differentiation strategies, namely artisanal cheese and artisanal cheese with GI labels compared to industrial cheese (Figure 2). For artisanal cheeses with GI labels, the study focuses on two leading varieties in Switzerland, Gruyère AOP and Emmentaler AOP. Between the two GI cheeses, Gruyère AOP provides stronger GI protection in terms of restricting supply of imitation products than Emmentaler AOP, especially in international markets. The producer organization of Gruyère is also more stringently governed in terms of planning, coordinating, and controlling the quantity of cheese produced, and there is a closer and more stable connection between milk producers and cheese processors of Gruyère compared to Emmentaler.

The researchers analyze monthly weighted average milk prices used for the production of industrial cheese, artisanal cheese (which includes artisanal cheeses with GI labels), and Gruyère and Emmentaler from January 2010 to January 2022.

How do different product and quality differentiation strategies enhance raw milk prices?

The researchers find that, overall, the price of milk used for artisanal cheese is higher, less volatile, and less vulnerable to price shocks from other markets than the price of milk used for industrial cheese. Therefore, quality differentiation in cheese is indeed associated with higher milk price levels and higher stability.

For the two GI cheeses, however, the milk prices have performed differently. The milk price for GI-protected Gruyère exceeds that of general artisanal cheese and does not react to shocks in other markets. These characteristics indicate that the milk supplied to Gruyère constitutes a unique market segment that protects milk producers from price risks spillovers from other markets. By contrast, the milk price for Emmentaler is low in level, co-moves closely with industrial cheese milk price, and is prone to shocks from other markets. These characteristics indicate the limited ability of the Emmentaler GI label to protect milk producers from price risks. Altogether, these results suggest that the benefits of GI on milk producer prices may depend on the strength of the GI label and the governance of the producer organization.