Business

Cheese So Good, You Can Take It to the Bank

by Mark Hay

April 8, 2015
Photo by Valerie Hinojosa via Flickr

It’s easy to be impressed by the historical and modern wealth of Italy’s Emilia-Romagna region. Heavy with Renaissance architecture, intellectual heritage, and a rich culinary culture, the district also arguably has one of the highest qualities of life in the country. Soaking in this opulence, it’s easy to think that the barbed wire around the region’s major banks must guard gobs of cash and gold. But at least one major banking chain in the region, Credito Emiliano (Credem), has started using its vaults to store and trade a more delicious form of wealth: cheese.

In recent years, Credem has started stocking rounds of Parmigiano-Reggiano cheese. They’re taking this regional dairy specialty as a unique form of collateral so that they can continue to issue loans to farmers who are struggling to find means to stay afloat in Italy’s ongoing financial malaise. On its face, taking on a perishable product seems like an imprudent choice for a financial institution. But in truth, banks have found that the consistently high value of this luxury cheese—the aging and storage of which factors into its high price—makes it win-win collateral. It nets them a profit whether they have to sell it to pay off an unmet loan or whether the local farmers buy it back (and in turn, still profit from its eventual sale). This beneficial and relatively secure model of agricultural-cooperation-as-collateral has been so successful that it has led other institutions to consider issuing loans based on luxury foods as well, although it has been hard to find a good as reliable as Parmigiano-Reggiano. 

These cheese-based loans are actually a fairly old practice in the region—similar records date as far back as the Medici era. But after the Renaissance, the practice faded into obscurity, until its resurgence in 1953. Since then, Credem has revived the cheese-for-cash scheme in various iterations over the years, helping to support local agriculture.

The practice itself is fairly simple: Parmigiano-Reggiano, produced in wheels ranging from 90 to 175 pounds, requires two years to mature. It also requires a massive investment in cattle feed, staff salaries, and general maintenance fees from local farmers. This lag between intensive production costs and payoff means that in lean years or times of crisis it can be hard for farmers to keep their operations running full-tilt until they can start actually selling cheese. To bridge the gap, they need loans to help keep producing, which can be hard to secure.

Welcome to flavor country. Image by J.P.Lon via Flickr

So, lacking other collateral, farmers can bring in their unaged cheese from that year (valued at just under $5 per pound) and receive as much as 80 percent of its expected at-sale value up front to get them through the year, incurring three to five percent interest over a maximum period of two years. If their farms recover, they can come back and buy the cheese, then sell it and still make a profit of 10 to 17 percent. And if they fail to pay back the loan, the bank sells the cheese at market value and earns back 20 percent more than what it loaned out—and the farm still takes in something for the year.

This procedure doesn’t just give the farmers quick cash up front—it actually alleviates some of their operating costs. Parmigiano-Reggiano must be stored in temperature-controlled rooms, regularly turned, and checked for softness with metal hammers, with experts listening for telltale thuds. Then a year into the cheese’s aging it must be checked by professional tasters who stamp it with the Parmigiano-Reggiano seal, massively boosting the cheese’s value, or downgrading it to the shamefully unspecific title of “Italian cheese.” At scale, this maintenance is cheaper for Credem to provide (making the interest on the loan more than sufficient to pay for their time), and simple enough that the bank has a great track record of producing seal-ready cheese. Lifting storage-related financial stresses, and knowing that one’s cheese will be safe and age well with Credem, increases the functional financial value of a cheese loan and allows the majority of farmers to buy back their wheels.

This system has gained momentum recently, as between 2008 and 2013 about 100 Parmigiano-Reggiano producers in Emilia-Romagna (the only region allowed to label its cheese as such), closed their farms forever. That number accounts for just under 20 percent of the world’s Parmigiano-Reggiano farmers. Since 2013, the remaining 400-plus farmers have weathered the storm by stocking 430,000 wheels of cheese, valued two years ago at about $250 million, in Credem’s vaults.

Aging wheels of parm-reg. Photo by Wittylama via Wikimedia Commons

As with any valuable good, Credem’s growing stocks of reliably valuable cheese have attracted criminals. By 2009, the cheese banks had been robbed three times, with one thief making off with 570 wheels through a tunnel. Since then, security has increased accordingly, preventing future snafus of this magnitude. But all in all, Credem’s vaults have proven to be a secure way to prop up hundreds of farmers through a terrible financial crisis, saving Italy’s over $1.7 billion annual Parmigiano-Reggiano market (about 25 percent of the total Emilia-Romagna export market) with ease.

In fact the Parmigiano-Reggiano loan scheme has been so successful that as of 2009, Credem Chairman Gianni Zonin and other Italian officials began to consider whether they could replicate the procedure with other luxury goods in need of aging, like prosciutto and fine wines.

Yet none of these plans have worked out; few commodities are as secure in their profits or as cost-effective to store and cultivate as Parmigiano-Reggiano. China’s experience (where the lack of private land forces people to use commodities as collateral quite often) has proven that the price fluctuations in most commodities over the course of one or two years, especially commodities that can be produced or stored on any significant scale, often make them extremely risky for banks. And most profitable luxury goods are both low in volume, harder to maintain, and less reliable in their eventual quality and profitability (think fine wines).

A few banks have taken the plunge though, like France’s Credit Municipal de Paris, which has a long history of storing reliably fine wines in its own cellar-vaults. The bank ramped up operations on those loans in 2008 in response to the financial crisis. But most financial institutions restrict themselves to offering loans against, say, pre-aged fine wines of known, fixed values. The complications and uncertainties involved in these kinds of collateral deals mean that most farmers cannot benefit from the type of secure, mutually beneficial loans seen in Emilia-Romagna in recent years. But at least Credem has helped to save the Parmigiano-Reggiano industry, making a buck or two for itself and securing a flow of fine aged cheesy goodness to the world—a boon to the local economy and the global culinary scene alike.

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Cheese So Good, You Can Take It to the Bank