From mid-April to mid-May, the price of CME block cheese rose by nearly 50 cents a pound, and the June Class III futures contract jumped from $16.50 per hundredweight (cwt.) to more than $21 per cwt. What has driven this price strength, and where do we go from here?

First let me say that rarely does anyone know exactly what is driving any market. You hear pundits talk about this or that driving the stock market, foreign exchange, or a commodity market, but they are just theories. Their explanations, and my explanation, for what is moving a market is based on what we know and what we think we know, mixed with our personal biases, and fed through a model (in our heads or in a computer) of how we think a particular market works. Still, here is my theory of what has happened in the cheese market.

The domestic story

Domestic cheese disappearance in the first quarter was bad. Domestic disappearance in January was down 3.7% from last year, and after adjusting for leap year, February was down 3.5%. March was up just 0.8%, leaving the first quarter down 2.2%. The average growth for domestic disappearance is around 2.5%, so a 2.2% decline is a big deviation from the normal demand situation. Retail sales volume has been up in range of 1% to 3% this year, so the demand weakness has been in food service and the use of cheese in processed foods. Cheesemakers did a good job of cutting cheese production to match the weak domestic demand and that kept cheese stocks in balance, essentially flat compared to last year in March (down 0.1%).

On the other hand, exports have been fantastic. The weak domestic demand depressed CME spot prices and kept them mostly in the $1.45 to $1.55 per pound range during the first quarter while cheese prices in Europe and New Zealand were in the $1.80 to $2 per pound range.

The cheap U.S. cheese led to record-high exports in March, with exports in the first quarter up 21.6% from last year. It typically takes some time between when export orders are placed to when the cheese actually ships, so even with the rally in cheese prices, we should still see strong April, May, and maybe June exports. However, the anecdotal comments I have heard suggest the export sales have been on a spot basis. Buyers have been reluctant to book purchases from the U.S. for the second half of the year, so we should see exports slow down in the second half if U.S. prices stay at elevated levels.

It's important to keep in mind that only Cheddar aged between four and 30 days can be traded on the CME spot market. Cheesemakers have throttled back cheese production and inventories look balanced, so there isn't much supply buffer out there. But that was true in the first quarter of the year and prices were depressed. What happened in mid-April to shift the market?

What we hear, and what makes sense to me, is that domestic cheese demand bounced back. If you combine the weak supply situation with exports that are good and domestic demand that is suddenly much better, you can easily justify a cheese price in the $1.80 to maybe $2 per pound range. The next question is, will cheese stay this high?

Exports are going to slow down at these price levels, but it will take another month or two. Domestic buying will probably back off a little at these levels, too. While milk isn't abundant, cheesemakers will probably step cheese production a little higher to match the elevated demand. All of those things combined should cause cheese prices to pull back. In my models, a cheese price in the $1.80 to $1.85 per pound range is fair for the next couple of months. The market often trades above and below fair value, so I think $1.70 to $1.90 per pound is a reasonable range to expect for cheese prices this summer.

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(c) Hoard's Dairyman Intel 2024
May 16, 2024
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