Why The Sudden Bounce in CME Spot Cheese Prices?
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Below average CME spot prices between late 2023 and early 2024 prompted stronger-than-expected export volumes, but also pivoted domestic cheese production into non-Cheddar varieties, like hard Italian styles, Mozzarella & Gouda.
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Nearby retail demand has likely picked up with increased promotional activity.
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US milk production has fallen below prior year levels since last June, but acute declines in milk flows in March and April, particularly in areas impacted by Avian Influenza (HPAI), tightened milk in Cheddar-producing regions (i.e. Southwest).
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Managed money/speculative positions have been extremely short, and their recent short-covering exodus has helped enhance recent price volatility.—
The CME spot cheese market, along with Class III milk and cheese futures, have been rallying sharply over the past five weeks after a sustained period of below average pricing. Between Dec 1, 2023 and Mar 28, 2024, the average CME Block Cheddar price was $1.5148/lb. CME spot Block Cheddar prices bottomed on Mar 22nd ($1.3925/lb) and remained below $1.50/lb between Mar 5 to Apr 4. For the most part, the US cheese market settled under $1.60/lb from late Nov 2023 and mid-Apr 2024. CME spot cheese, which has spent months trading well-below industry expectations, prompted near-term demand growth that has brought underlying support. The recent boost, however, has been impressive, with prices spiking $0.535/lb (from $1.4175 on Mar 28 to $1.9525 on May 8, or +37.8%) and over $0.20/lb since the beginning of May.
Daily CME Spot Block Cheddar Price
Cheese exports surprise with strong volumes:
The early catalyst that established the price floor was February’s dairy export volume data (published on April 4), showing a surprise increase in both Cheddar and total cheese exports versus the prior month and year. While there had been chatter that export deals did pick up on a spot basis when CME prices dipped below $1.50/lb beginning last December, the volume in Feb and Mar has been impressive enough to create tightness in the US market, even as domestic demand has been reported to be relatively flat across multiple channels.
Eventually, US milk production declines helped provide price support:
In addition to export volume growth in Feb & Mar, likely with some carryover in Apr and May, US milk production has been in decline for nine consecutive months. While this has not had much of a positive impact on cheese prices over this period (due to poor demand), the sustained losses are now being felt as demand has picked up. The return of export sales are one factor in the increased prices but increased promotional activity at retail may have helped drive incremental cheese sales for Apr and May. Along with national milk production declines, the recent detection of Avian Influenza (HPAI) in Texas and eight other states, known to cause acute losses in milk flows on a percentage of the impacted herds, did some damage to milk production in that region. While HPAI does not appear to be spreading in a major way (and extensive FDA testing has shown impacted commercial milk to be safe), the decline in Texas milk output from Feb to Mar was notable. There are large American-style cheese plants in the Texas Panhandle and New Mexico, and that loss of milk lessened production in Mar, likely through Apr and May as well.
The Managed Money effect:
HighGround market intelligence subscribers know that we pay close attention to the large, speculative traders in the Class III and Cheese markets, and for over a year and a half, they have positioned themselves extremely short. When squeezes do occur in the cheese market, Managed Money trading volumes and movement of positions can have material impacts on daily and weekly swings in the futures markets. Depending on the position of the forward curve, this can cause physical traders to make opportunistic buys in the market. Given that the forward curve (for the most part) has kept a premium to the CME spot market, traders may keep a steady bid in to own physical. While this spike over the past few days appears to be less driven by managed money, their impact in the Class III and cheese futures markets has helped create volatility given their choppy behavior in 2023 and 2024.
Where to from here?
It appears that the US cheese market remains in a state of overcorrection, and 2024 is not showing any different behavior than what it saw last year. Four consecutive months of at or near $1.50/lb prices prompted a demand resurgence. Overall, cheese production has not improved greatly, but product mix shifts out of Cheddar and into more exportable (Gouda, Jack, Mozz) and storable (hard Italian-style) items has tightened up the 4-30 day old block and barrel Cheddar markets which is what the CME spot market spec requires. When that market tightens, it can take weeks for corrective action to occur before it can find equilibrium. Without a strong signal from domestic end-users that a period of resurgence is here, a run to $2.00/lb.+ is possible BUT likely short-lived. Pricey cheese would cause domestic promotional activity to dry up along with inventory-building programs. Additionally, incremental export deals will slow significantly, milk will flow into Cheddar production, and offers will eventually make their way to the exchange.
But will that happen overnight? That is unlikely. If there is an immediate need to fill orders for fresh Cheddar, those buyers will need to drive the price to a level to either flush out that extra inventory or prompt cheese makers to pivot into Cheddar, which can take a few weeks.
Is there anything different about 2024 that can keep US cheese prices higher for longer?
The lack of US milk production growth for the past nine months (likely to continue through at least Q2 2024), the risk of HPAI spreading that would cause other acute declines in milk flows in specific regions/herds, and the tight heifer replacement situation that will likely prevent any material growth in herd size this coming year reasons that could provide support to markets. Also, if domestic cheese demand were to return in 2024 with more consistency, CME spot prices could see higher spikes than it did in 2023 (a short spike to $2.10/lb in Mar and $1.90+ from Jul 28 to Sep 14).
There are some potential pitfalls to the demand side, however, and HighGround will be citing some of those macroeconomic warnings from food companies (i.e. Tyson, McDonalds), giving us pause on a rosy demand outlook, in our upcoming monthly Forecast Report next week (published on May 15). Without supportive domestic demand, export opportunities will remain fickle, and the ebb and flow of CME spot prices will continue. Later this year and into early 2025, additional capacity will be added into the US cheese market, creating potential headwinds with greater supplies funneling into the Class III complex.
The guardrails of support and resistance in the US cheese market appear to remain much wider than anticipated. On Dec 15, 2023, HighGround published its CME Block price forecast with a Q1 2024 average of $1.6850 and Q2 to rise to average close to $1.80. It seems that the ranges extend an additional 20+ cents in either direction.
In conclusion, it is HighGround’s belief that demand continues to be the primary driver of the US cheese market, and periods of opportunistic buying will cause squeezes to occur like the one currently underway. These can cause unexpected daily spikes and enhanced volatility per yesterday’s spot and futures markets. The period spent in the $1.40s and $1.50s are behind us, and likely not going to be seen again during this market cycle. That said, prices at/above $2.00, if they occur, also appear to be short lived unless there are further unforeseen circumstances that take place which could create additional upside, like supply hiccups (i.e. further HPAI spread, summer heat wave, etc.) or a return to sustained domestic demand growth.
Disclaimer
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