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Cheese prices find springtime support: Can it last?

Lucas Fuess

Lucas Fuess is the director of dairy market intelligence at HighGround Dairy*, Chicago, a firm which specializes in dairy hedging, risk management and market analysis services. He contributes this column exclusively for Cheese Market News®.

Cheese prices have caught a bid in recent weeks after collapsing in the fourth quarter of last year and moving even lower into January to flirt with the lowest levels seen in just under a decade, at least in the barrel market.

With decent cheese production, continued stronger milk output in many parts of the United States and continued trade and tariff issues, there was not much excitement at the start of the year for rapidly stronger cheese prices. Indeed, three months ago the potential for higher nonfat dry milk prices that would increase the Class IV market dominated most of the discussion, with strong cheese stocks expected to keep the Class III climb muted throughout 2019.

The Class IV futures premium over Class III has narrowed sharply throughout the remainder of this year as cheese prices have gained strength in recent weeks. In mid-March, both blocks and barrels at the CME spot market started pushing higher: During the week of March 18, the block Cheddar weekly average climbed 3.7 cents and then found a whopping 10.9 cents in the last week of the month; the barrel market climbed even higher, up 10.1 cents and 5.4 cents during that same two-week period. It was a strong climb that saw consistently higher bids in multiple sessions that were not met with offers to keep the price down. On March 27, blocks peaked at $1.73 per pound, the highest price since October, before the autumn collapse. In addition to the price increase in both markets, the block/barrel spread has narrowed to levels much closer to the long-term average and is less than 10 cents so far in April — a sharp reduction from the 30+ cent spread seen on a handful of trading days in recent months.

A key question arises: Where can prices go from here? Prices will almost surely average higher in 2019 versus last year, with both the February and March block monthly averages stronger than one year ago. There are multiple factors driving the recent price climb, some of which are not easily reversed in the short term.

First, even though total cheese production remained stronger versus prior year in the first two months of this year (for which data is available), cheese output has turned away from Cheddar production and instead into Mozzarella. This dramatic shift in cheese style saw milk in all regions of the country moving away from Cheddar to mark the lowest February output since 2016. Cheddar was lower in every reported state and region in the month, with the exception of Iowa (where one plant expanded production capacity in the past year), showing that milk was less burdensome in most regions of the country throughout most of the first quarter of this year, a departure from the past two years when milk dumping ramped up quickly due to overwhelming supplies.

This lower output helps to explain the climb in CME prices: Less cheese made to CME specifications that can find its way to the market when unsold via normal channels means fewer offers during the spot session to meet available bids. The surge in Mozzarella output cannot make its way to the CME, reducing available supplies and allowing the price to jump higher on lower tradeable cheese supplies. While arguably not the perfect way to price cheese or milk, the pricing system considers Cheddar supplies only, and lower Cheddar production regardless of total cheese output will push prices higher.

A second factor driving cheese prices higher is, perhaps surprisingly, good exports to start the year. While only January data is available, total cheese exports in the month marked the strongest start to the year since 2014, a year that few in the industry have forgotten due to the record high levels that cheese and milk prices climbed to throughout that year. More specifically, Cheddar exports were good in the month, also reaching the highest January exports since 2014, driven by demand from both Japan (up 32 percent year over year) and Mexico (up 416 percent year over year). The shipments to Mexico took many by surprise, especially in a month where there was no relent from trade and tariff strains. Good Cheddar exports that made up a larger percentage of total cheese exports in the month also reduced available supplies of this cheese type to further support prices.

Third, domestic demand remains decent. According to the Census Bureau, sales at “food service and drinking places,” one approximate measure of restaurant and fast-food sales, climbed 4.1 percent higher in the first two months of this year versus January and February 2018. Continued strength in restaurant sales, coupled with an ever-increasing amount of consumer spending on food at restaurants versus at grocery stores, further drives Cheddar demand due to restaurant meals using more cheese on average than meals prepared at home. Fast-food restaurants continue to innovate with cheese as well with menu twists like extra American slices on breakfast sandwiches or fries doused in cheese. While stronger foodservice sales and additional cheese on the menu are not new trends, the continued increases further accelerate domestic cheese demand and consumption per capita.

Finally, while total cheese in storage is at the highest February levels on record, American-style stocks dropped lower in February at the strongest rate for the month since 2011. While this was partly due to lower production, it also points to good January demand (specifically export driven) continuing into February, reducing the fundamental burden that stocks have had on markets in recent months. American-style cheese in storage does remain above prior year levels, but a lower than average spring build could pull cheese in storage lower soon.

These conspiring factors have made for an exciting start to the cheese markets so far this year. Regardless, many questions remain. It is possible that some market-supporting CME spot bids are driven by just one or two companies that need cheese in the near term, which could allow markets to fall back in the coming weeks.

While the stocks build is lighter than normal so far this year, inventories remain heavy. However, lower production and good demand will be the strongest driving factors, keeping prices supported in the near term. It would be surprising to see Cheddar values push sharply higher, but a modest yet steady climb is likely. With blocks currently finding support in the mid-$1.60s, there is room for markAets to fall slightly during the spring flush, but current sentiment would likely keep the block market well supported were prices to fall back to the mid-$1.50s. Continued lower Cheddar production into mid-year or an easing of trade and tariff burdens could increase price expectations even further.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

*These observations include information from sources believed to be reliable, but no independent verification has been made and therefore their accuracy and completeness cannot be guaranteed. Opinions and recommendations expressed are the opinion of the authors and are subject to change without notice. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition.

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