00:00 Speaker A
I was not aware uh that cheese could be used as collateral
00:07 Speaker B
That’s right.
00:08 Speaker A
for a bank loan. So maybe start there. What is a cheese bank?
00:13 Speaker B
So, back in the 50s, this Italian regional bank called Credito Emiliano started essentially loaning against cheese stores for dairy producers. The problem you face as a dairy producer is that if you’re making Parmigiano Reggiano, which is what the bank holds, it’s got to age for at least 12 months, if not longer before you can go sell it to market.
00:36 Speaker A
Mhm.
00:37 Speaker B
Which means once you’ve produced the cheese,
00:39 Speaker A
Uh-huh.
00:40 Speaker B
you basically you have to pay wages, you have to feed your animals, you have, you have all these costs that don’t go away when you can’t make money on your product. So what this bank started doing is taking in wheels of cheese and essentially saying to the dairy farmers, look, we will hold your product, we will age it in a temperature controlled warehouse. They’ve got about two warehouses, 500,000 wheels of cheese, about $300 million worth.
01:03 Speaker A
How much?
01:04 Speaker B
$300 million dollars.
01:05 Speaker A
Wow.
01:06 Speaker B
And then they say to the dairy farmers, you can take out loans with the cheese in the warehouse as collateral against um the loan so that you can actually fund your operations. And it sounds like a bit of a silly story, but for these farmers, it’s a really crucial market.
01:18 Speaker B
And now that we see the heat rising in Europe, uh kind of across the globe, but especially in Europe right now, temperatures in Italy hitting 104 degrees. All 27 of Italy’s major cities are under the highest heat warning possible. The problem is that these banks or the bank that runs these warehouses, excuse me, has to run their cooling system that much harder. That’s costing them money, that’s uh impacting the carry cost of the actual commodity and rippling out into the prices that gets charged on the product, the prices for holding it, and really impacting what is a small market but kind of a microcosm of the broader backdrop.
01:57 Speaker A
Yeah, it’s a bigger story, right? Because you’re not really, you’re not just talking about cheese. You you’re really talking about climate risk and you know, just showing up in ways and places that investors might not expect.
02:08 Speaker B
That’s right. One of the things you have to think about in commodities markets often times is temperature. We were on a few weeks ago talking about the super El Nino weather pattern that’s producing droughts, monsoons across the world and impacting agricultural crops. That’s going to swing a lot of pricing if these crops aren’t can’t be produced at the right volume, if they can’t be harvested at the right volume. That all impacts pricing. Here is a kind of a micro version of the story. You see the stress on the Parmigiano market in Italy with these, you know, these cheese banks. It’s it’s a funny title, but it is a serious business for these guys, for these dairy dairy producers. And to your point, it just shows you you have to think about inclement extreme weather from climate change, from all these other things as a legitimate factor in commodities pricing and trading.
Dining and Cooking