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Perspective:
Dairy Markets

Weak commercial demand key driver of bearish cheese market

Nate Donnay

Nate Donnay is the director of dairy market insight at StoneX* and has been applying his interest in complex systems and statistical analysis to the international and U.S. dairy markets since 2005. He contributes this column exclusively for Cheese Market News®.

There are three important drivers for U.S. cheese prices right now: weak commercial demand, restrained cheese production and government purchases. The weak commercial demand is the big bearish driver in the market, and if it weren’t for the restrained cheese production and government purchases, we would likely be dealing with sharply lower cheese prices right now.

Retail cheese sales, in volume terms, have been running 9% to 15% above the previous year since last June. But those retail gains are being more than offset by declines in foodservice, schools and workplace cafeterias.

By our calculations, domestic commercial cheese disappearance was down 2.2% between May and December. That calculation excludes cheese moving through government programs. Even if you add in the massive government purchases, domestic cheese disappearance was only up 0.1% from May through December.

Since the retail and foodservice sales have stabilized in their current range, it is hard to see total cheese demand (outside of government programs) improving dramatically until restaurants are back to full capacity, kids are back in school and people are going back to offices (at least for a few days a week). That won’t be happening until September at the earliest, so we still have at least six months of weak domestic demand to get through.

Cheesemakers have understood that underlying demand is weak, and they have been limiting cheese production. For instance, during the fourth quarter of 2020, milk production was up 3.0% from 2019, while cheese production was only up 0.1%. Instead, the milk has been pushed into other products like butter (butter production was up 7% in Q4). There is downside risk for cheese prices if the strong milk production growth gets forced into cheese production due to processing constraints for other products, but so far, cheesemakers have been keeping a tight lid on cheese production to try and match the weak commercial demand. Even with the restraint, cheese inventories built up in November and December as government purchases slowed.

While restrained cheese production is helping to keep prices out of the basement, it’s government purchases that pushed cheese prices through the roof in 2020 and have kept them living on the second floor during January and February this year. The original expectation was that government purchases would slow in 2021, but between the fifth round of the food box program, announced Section 32 purchases, the newly created dairy donation program and another couple billion allocated to commodity purchases in the $1.9 trillion stimulus package making its way through Congress, it now looks like total government expenditures on dairy purchases in 2021 will be larger than 2020.

The difficulty in these markets lies somewhere between pandemic-era government purchasing pegged against a backdrop of otherwise burdensome supply — and lackluster demand — stories. And we’re not delving into the prospect of increased export business that is slowly building steam. Ultimately, increased government purchases may not be enough to push cheese prices back up to 2020 levels given how much milk is being produced, but you ought to expect volatile periods of price action as the market focus throttles between the bullish government orders and the bearish commercial demand/supply factors.

CMN

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

*Comments in this article are market commentary and are not to be construed as market advice.

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