What’s in Store for 2024?

In my last column back in late September, I had coined the phrase “Year of Overcorrection” for the 2023 U.S. cheese market, and that mantra has held true throughout the fourth quarter. After averaging $1.98 per pound in Q1, spending much of that time above $2 due to strong exports, the Chicago Mercantile Exchange (CME) spot block Cheddar average crashed to $1.57 per pound in Q2, capped off by a move into the low $1.30s by late June as exports collapsed and domestic demand suffered. But the lowest U.S. on-farm margins in over 10 years, along with a summer heatwave in the West and Southwest, prompted cheese prices to rally in Q3.

During this period, block Cheddar prices averaged $1.825 per pound, with yet another run above $2 per pound.

Cheese demand has struggled throughout most of this year, both at retail and in foodservice, with notable declines in pizza consumption, which has migrated product mix back to Cheddar. This shift has occurred at a time of capacity expansion and without incremental exports, leading to price declines through Q4. At the time this article was written (Dec. 19), Q4 CME spot blocks are averaging $1.65 per pound, but this week both block and barrel Cheddar are poised to produce a weekly average in the $1.40s! Demand has been the clear story, violently steering market fluctuations in 2023. While there was a temporary supply tightening during the Q3 rally, we believe factors such as shrinkflation, retail price inflation and reduced restaurant visits across various foodservice segments have contributed to the decline in cheese prices during Q4 2023. So… What’s in store for 2024?

The Bearish Angle:

Here comes cheese production!
With high cheese and whey protein prices on average over the past few years, along with global dairy demand projections on food consumption, most recent U.S. processing projects, either completed or in the pipeline, are in the Class III (cheese and high-protein whey) space. Some of that cheese has already begun making its way to the market in late 2023, but more is coming in both 2024 and 2025 — and a lot of it. With heavy debt loads, milk will continue flowing to these plants, and capacity will be maxed out to generate cash to service that debt. In addition, farmers who are supplying these new plants are likely well-positioned financially to deal with low milk prices for an extended period.

Global economic slowdown keeps buyers on sidelines
Supply chain squeezes, inflation and high interest rates forced major changes to dairy buyers’ modus operandi that had been in place when money was cheap. Buy and finance unlimited amounts of cheese, stock up when prices were advantageous, rinse and repeat. Now, any decision involving a substantial capital outlay has become much more challenging. A slowdown in U.S. pizza demand was unforeseen in 2023 given previous recessionary environments when consumers typically trade down, but growth post the recent COVID-19 boom for the industry was going to be tough to hold on to. Will 2024 be any different when it comes to buyer behavior? Will the resumption of student loan debt payments in the U.S. this past October roll into a consumer spending hangover in Q1 2024 with additional holiday debt piled on top? It is a very possible scenario that could keep prices lingering at lows through March and even beyond.

The Bullish Angle:

Milk production growth to struggle
HighGround and USDA both have our most recent annual 2024 U.S. milk production forecast UP 0.9% from 2023, though milk solids expectations are supposed to be firmer than that, but this past week’s report suggested those estimates may be optimistic. U.S. milk production fell by 0.6 % in November from the prior year, lower than expectations with the milking herd still in decline, which is highly suggestive that the lowest percentage of heifers to milk cows since 1997 (Source: July 2023 USDA Cattle Inventory Report) is having a much greater impact to the herd than the recent significant pullback of weekly dairy cow slaughter. That spells trouble — when demand returns to normal growth and the market begins asking farmers for more, they may struggle to answer the call due to decimated heifer inventories.

Export window wide open
Back in 2022, the U.S. had benefited from record export volumes due to low and competitive cheese markets in 2021. In December 2022, European cheese prices plummeted and remained low throughout the first half of 2023, allowing EU suppliers to capture market share from the U.S. beginning in Q2 2023. But this past quarter, the tables have turned. CME spot and futures prices are now extremely competitive, both against Europe and New Zealand, which opens a big window for export business, likely beginning in Q2 2024.

However, contacts are currently suggesting that global demand is also soft for cheese, limiting export deals today, but I expect that to change once the calendar rolls forward into the new year.

In conclusion, there are a myriad of reasons other than the four I highlight above that could have a material impact on cheese prices this coming year, but I believe this covers some important storylines that may shape 2024 that industry participants should be thinking about. With CME spot prices in the mid-$1.40s near the conclusion of 2023, there is a clear path for upside of 30% to 40% from these levels by second half 2024.

Don’t get lulled to sleep by these low prices; be prepared for the bull market lurking in the shadows.