Lack of Demand Pressures Markets

Last December, my Cheese Market News guest column focused on four key fundamental stories I believed had the greatest potential to disrupt the cheese markets in one direction or the other.

From the bullish angle, the spread between U.S. prices and other markets in Europe and New Zealand suggested that a window has, and continues to be, open for cheesemakers to move more product off-shore in 2024. Also, in 2023, U.S. milk production was virtually flat versus the prior year, and the swift reduction in available heifer replacements would create challenges for dairy farmers to expand in the coming year (or longer) if profitability was realized and sustained.

From the bearish angle, I opined that the additional cheese capacity that has come online in late 2023 with more commissioned through the first half of 2025 could invoke sustained pressure on price. Recent estimates suggest this new production equates to around 6% of present annual cheese output. That’s a lot of product that will need to find a home. Second, while the U.S. stock market and Bitcoin keep making all-time highs, cheese consumption trends this past year have not been bright. Dairy Management Inc.’s Total Dairy Retail Report stated that national retail cheese volume was virtually flat in 2023 versus the prior year, with growth in reverse each year since 2020. The consumer’s return to restaurants post-COVID has contributed to a portion of that decline, but inflation and, as a result, shrinkflation (smaller package sizes) have also contributed to the retail struggles. On the foodservice side, value pizza chains have been vocal about store traffic in 2023, and if U.S. Mozzarella cheese production last year was any indication, the annual output declined by 0.1% from 2022. Total cheese production for all of 2023 was only 0.3% above the prior year, the smallest annual gain since 2003! Yet prices trended lower in the fourth quarter last year, which suggests that demand is not doing well.

With just over two months of 2024 under the industry’s belt, what have we learned? Demand commands price action, and while the supply side fundamentals are providing more than just a few hints of support, the fact remains that manufacturers are not clearing fresh Cheddar production these first two months of the year. In the most recent data published by USDA, January 2024 milk production fell by 1.1% versus the prior year, the seventh consecutive month of annual declines, and of the top 11 production states, 10 of them were in decline or flat versus January 2023. The milking herd remains in contraction mode, and revisions have trended lower for months. While the Cold Storage report provided no surprises from the normal seasonal trends, USDA’s January 2024 Dairy Products report showed that Cheddar cheese production fell nearly 8%, almost 28 million pounds less than last year, the worst year-on-year percentage decline since December 2009! But when traders take this bullish report data and see no knee-jerk reaction higher, just more cheese offered on the CME spot market and healthy premiums taken out of the Class III milk and cheese futures in the days that follow, one can only conclude that the demand is holding things back.

Will cheese prices find any kind of upward momentum this year without stable demand? Of course they will, but perhaps not until the second half of the year when supplies tighten seasonally. Without any major boost in demand, it is very realistic that block and barrel Cheddar prices hold within their recent $1.40-$1.65 per pound range through the Northern Hemisphere spring flush.

All four of the key factors I mentioned are still in play, though we believe some carry more weight than others. While the export window has been open for months, buyers only seem interested when prices are at extremely attractive levels and even then, simply making nearby purchases. In addition to consumers being a bit thriftier due to 2022-2023 inflation, domestic and global commodity buyers fear overcommitting. On the production side, dairy farmers, many of which are starting to see better on-farm margins due to declining feed costs, are in no hurry to expand. Why? First, heifer prices are through the roof, and availability is extremely tight. And who wants to be overleveraged in a high-interest-rate environment when relief is expected later this year? Might as well sit back and be patient and preserve cash. Or better yet, continue generating cash by breeding for beef, sustaining the heifer replacement tightness.

When demand is not great, patience pays off for buyers as low spot cheese prices are an instant benefit. But as the structure of the supply side tightens further, at some point there will be a rebound in demand. When that happens, U.S. producers may not be able to answer the call for more milk. Perhaps record high cheese prices are off the table in 2024 and maybe into 2025, but when futures markets provide opportunities for locking in prices at realistic targets, don’t let those windows pass without taking any action.