First, cheese production has not been strong. After adjusting for leap year, production in the first quarter was only up 0.5%. New cheese plants are up and running, but the ramp-up at some of them has been slower than expected. The other important factor is that cheese production has been running weak for nearly two years. Some of that weakness was driven by tight milk supplies in 2023 and the first half of 2024, but even as supplies have loosened up, cheese production has remained restrained. Cheesemakers have been anticipating more plant capacity to come online, making them more cautious about overproducing. High interest rates also mean that holding excess inventory is more expensive.
The second supportive factor for the U.S. cheese market has been exports. After adjusting for leap year, first quarter exports are at a record high, up 8.3% from last year. Global demand for cheese has had a strong start this year, with cheese exports out of all the major exporters running above last year, but the U.S. is getting an extra boost from relatively cheap prices. Cheddar in New Zealand recently traded at $2.50 per pound while Cheddar in Europe is around $2.37, and the U.S. spot market is around $1.80. To put things into context, year-to-date (YTD) cheese production is up 19 million pounds while exports are up 24 million pounds. Exports have absorbed all the growth in cheese production this year. With U.S. prices (and futures) still inexpensive relative to the other major exporters, exports should stay good into the third quarter.
The third supportive factor has been inventories. We came into the year relatively tight on inventory, with total cheese stocks down 6.9% from last year. We have seen stocks build a little faster than seasonally normal, and they were only down 4.3% from last year in March. Even if stocks continue to build and are only down 1% to 2% from last year in the third quarter, that will still argue for $2 cheese in my modeling. So, we can continue to see inventories get closer to last year, and it may not push cheese prices lower.
The biggest bearish issue to point out is domestic demand. After adjusting for leap year, YTD domestic disappearance is down 0.5% from last year, an 18-million-pound drop. The weak domestic demand, along with some import growth, is the reason inventories have been rebuilding despite export growth exceeding production growth. While retail sales numbers continue to look good, consumers have cut back on food service trips, and that seems to be denting overall cheese demand.
Milk production is continuing to grow, and it’s still possible cheese production will ramp up in the second half of 2025. Exports are looking favorable, but sudden changes in trade policy could cut that off. Cheese stocks in March were still well below year ago, but if current trends continue, they could be back to year-ago levels in the coming months. Domestic demand has been weak, and it is hard to get optimistic about it. The market could shift lower, but for now, it has been stronger than many expected.
