The Chicago Mercantile Exchange (CME) spot Cheddar markets have given the dairy industry plenty to talk about in 2023 thus far. While general domestic and global fundamentals have leaned bearish throughout the first quarter, block prices have remained supported, spiking to nearly $2.20 per pound in early January and recently peaking at $2.10 per pound during the final week of March before rolling back.
Barrel prices looked very depressing early on, spending nearly all of their time at or below $1.60 per pound in late January through the entire month of February, but they too found strong and dramatic support with buyers picking up well over 100 loads in March, driving the price from $1.53 to a high of $1.9625 per pound, a 28% boost. It is rare that CME prices are driven sharply higher when volume is plentiful. So what’s happening in today’s cheese market?
The industry has been dealing with a wide block-barrel spread for months (or really, the past few years), and both the Upper Midwest mild winter and a fire at Associated Milk Producers Inc.’s plant in Portage, Wisconsin, displaced plenty of barrels and milk throughout the region. This helped keep the price of barrels low during the first two months of the year, but a need to accumulate inventory before the start of the summer grilling season has helped clean that market up over the past month. However, once that demand is satisfied, we are not sure there is much behind it. This could lead to barrels rolling over as spring milk ramps up over the next few months without strong support from the rest of the market.
HighGround has been calling the block Cheddar market “thin” for months, and volume at the CME justifies that, as overall trading volume has been one-third of barrels thus far in 2023. Each year, manufacturers who can produce 40-pound colored block Cheddar have found ways to make anything but. Hard Italians, Mozzarella, Gouda, white Cheddar (mostly for export) and Jack varieties have taken precedent as demand for these has improved, but also, profitability is better. This has left the CME spot market with fewer sellers who can bring product to the exchange. As a cheese seller, why come to the exchange to depress the market when it impacts the price of nearly all the natural cheeses you sell?
Because of this lack of sell-side liquidity, when buyers do have a need to pick up extra loads of 40-pound colored blocks, they sometimes have to get aggressive in order to shake that product loose. Numerous industry contacts suggest cheese is aplenty if you have interest in another format (640-pound blocks, aged barrels, etc.), but if CME-eligible product is your need, it may take a sharp and sudden price increase to slow demand of the other varieties and force manufacturers to pivot. This takes weeks, not days, to materialize, hence the recent spike in cheese prices.
But when getting back to the fundamentals, supply and demand data does not suggest the market should be in an uptrend, at least over the coming months. Milk production growth, while not incredibly robust, is still intact and should be through the third quarter. Milk seems to be moving into the Class III channel versus Class IV, and with the Upper Midwest spot basis at or near record lows since the start of 2023, much of that excess milk will find its way to the vat. Additional natural American-style cheese capacity is coming online later this year, and if U.S. manufacturers cannot find a way to move incremental product overseas, we could see prices stagnate and remain at or close to the longer-term average ($1.80s) rather than rally in the second half of the year.
And while the industry may choose not to look at this reality, the global economy is not as healthy as the stock market suggests. Inflation has made it challenging for consumers worldwide, and this has had an impact on food spend. U.S. retail demand data in January was quite poor and continues to tell the story of “shrinkflation” as many dairy case cheese SKUs are smaller in size than they were a year or two ago. Like the McDonald’s double cheeseburger (two slices of cheese) that became the McDouble (one slice) years ago, the change at retail is demand the industry will never get back unless they innovate, and that takes time.
Last, a decrease in milk production does not necessarily correlate to an increase in price. More data is available on the supply side, so analysts tend to focus on that statistic to predict when the market will turn.
However, take a good look at New Zealand’s production over its past two milking seasons. While milk has come back a little during the shoulder of the current season, both will end up being below the previous year. A statistic like that out of the world’s largest export country a few years ago would have sent bullish shockwaves across the global market. Instead, prices of New Zealand’s primary commodities have been stuck in a downtrend for some time. Why? Its biggest customers (Asia, Middle East) have either seen their demand drop or have been able to source product from another region.
Demand in a recessionary environment may take time to get back, and we believe it is the key to turning this market around in 2023, even more so than the potential of declining supplies.
Reprinted with permission from the March 31, 2023, edition of CHEESE MARKET NEWS®; © Copyright 2023 Quarne Publishing LLC; (608) 288-9090; www.cheesemarketnews.com