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Perspective:
Dairy Markets

Seasonal support persists for cheese

Lucas Fuess

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

The Thanksgiving holiday quickly approaches, and the first snow fell on LaSalle Street in Chicago this week.

As the calendar rapidly progresses through the fourth quarter, a traditional seasonal cheese price run would typically be expected to be complete by October; this year, however, cheese price strength has lasted longer than expected and persisted well into November.

A variety of factors have driven the market higher; even as it seemed like the run was concluded in late October as both block and barrel Cheddar markets dropped back below $2 per pound, a resurgence into the middle of this month has values back above that benchmark price, with CME spot block Cheddar at its highest since June and holding a 20-cent premium versus barrels as of mid-week. There are a few factors keeping cheese values supported, but critical questions remain about how long this might last.

From a fundamental perspective, supply remains tighter than expected. Cheddar production was weaker versus prior year in both August and September and likely continued struggling in October, impacted by firm Mozzarella demand. Milk is seasonally at its tightest of the year, and holiday needs remain. Total cheese output was able to remain higher versus prior year in recent months, but it was Italian-style cheeses driving the increase at the expense of Cheddar eligible to be traded on the CME spot market. Mozzarella production showed another significant year-over-year build in September; volume has been higher versus prior year during each month of 2022 to date, with year-to-date volume up 4%, equivalent to the year-over-year build in September. The strength is partially driven by additional pizza consumption (think value chains and frozen pizzas) as consumers trade down to value items at the grocery store and carry-out in light of persistent inflation.

On the demand side, total cheese exports reported gains for the 15th consecutive month into September as shipments increased to Mexico and Australia. In Cheddar specifically, demand remained robust, driven by exports to South Korea, Australia and Japan. U.S. cheese prices have been relatively competitive on the world market in recent months, with firm exports expected to persist into 2023.

More recently though, opaque details about government cheese purchases have stimulated spot and futures markets higher, with many questions unanswered about the ultimate demand potential of the program. While summer 2020 was two-and-a-half years ago, the mere whisper of “government cheese buying” inspires a shudder down the spine of many market participants who dealt with intense cheese price volatility during the Farmers to Families Food Box program of that pandemic year.

Back in September, USDA issued a press release stating it would invest nearly $1 billion to “purchase food for emergency food providers like food banks.” Specifically, USDA will use $943 million to procure food for use by emergency feeding organizations facing increased need. USDA will identify products most likely to be available for purchase and offer those products based on a formula to The Emergency Food Assistance Program, or TEFAP, for further distribution to local agencies, primarily food banks. Orders will be possible in fiscal year 2023 for delivery in fiscal years 2023 and 2024.

More recently, on Nov. 8, USDA issued a pre-solicitation announcement with plans to purchase a variety of “protein items.” Potential materials may include dairy, meat and poultry items. The pre-solicitation means that the market soon will know exactly how USDA plans to spend the funds, but many questions remain.

More details will be known soon as those official solicitations are announced, likely any day now. Critical questions include how much funding will be devoted to dairy and over what timeframe deliveries will be completed. HighGround estimates that most of the allocated dairy funding will be spent on cheese, aligned with USDA’s language of “protein items,” but it is also possible that fluid milk items could be purchased as well; cheese and fluid milk are the two dairy products available for purchase through the TEFAP program.

There remain many questions around the ultimate size and impact of the purchasing program.

Cheese values are supported in the immediate term until more details are revealed to gauge the ultimate impact of USDA’s food purchasing program. If government purchases are not substantial, or are spread over nearly two fiscal years, seasonal price downside is expected into December and the first quarter of 2023.

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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