Guest Columns

Perspective:
Dairy Markets

Demand deserves our respect

Dustin Winston

Dustin Winston is a commodity analyst at StoneX Group Inc.* and is a guest columnist for this week’s issue of Cheese Market News®.

Buyers came into this year waiting for a break in cheese prices that historically happens at the end of December/early January. That break never happened. Over the succeeding months, the key story was one around logistics issues, labor issues and overall economic inflation. Prices climbed. Mr. Putin then invaded Ukraine, which sent shockwaves through commodity markets, including dairy.

Demand was quite strong. Total cheese sales through the first quarter of the year increased 4.8% above last year as domestic sales were up 4.2% and exports were 12.6% higher. For all the logistics issues, 2022 has been a banner year for cheese sales.

Now it seems a developing story is one in which cheese buyers are stepping back a little bit. Inventories are good, nerves are more relaxed, and both foodservice and retail operations are raising prices. Sales are at risk of slowing.

Target and Walmart both missed Q1 sales expectations recently, and that’s likely before any material increase in food (dairy) prices. Market bulls will point to milk supply tightness. After all, we’re on the tail end of flush seasonally with little sign of overwhelming supplies of milk. For all intents and purposes, milk flows seem rather in balance.

Dairy farmers are facing some historically high milk checks but are also facing historically high input costs. It shows. The most recent milk production report released by USDA shows milk production down 1.03% from last year’s levels in April (see related story on page 1 and chart on page 15). Cooler weather has led to lower yields but is keeping component levels high (+1.6%). Component adjusted milk production is running less than a full percent below year-ago levels. With this kind of milk, all dairy product production can be stretched a bit further — especially cheese.

Total cheese production as of March was just over a percent above last year in March; add in that labor constraints are being smoothed out, and it looks like U.S. production of cheese should be on the rise.

Mozzarella was particularly strong. Cold storage levels are holding steady reflecting a consistent stream of available product to interested parties with the opportunity for more product to be available moving forward.

If prices fall, it likely won’t be entirely because of supplies of fresh milk. Finished demand looks promising as people get ready for summer. But as inflation grips Main Street, the real risks to cheese prices specifically (and all dairy products more broadly) is demand destruction.

There’s a myriad of reasons that could slow upside price momentum. The China lockdown (and slow reopen), $5 gasoline, just-in-case purchases slowing down, rising U.S. consumer debt levels, rising interest rates — you name it. And Mexico just eliminated its tariffs on foodstuffs, which weakens our competitive advantage on some dairy products (mainly skim milk powder and nonfat dry milk).

They all have implications for dairy demand going forward because these are the things that can tend to drive economic recessions. And historically, economic recessions are not great for cheese prices.

The markets have a bullish posture today. We’re in an inflated environment that will likely be with us for some time to come. But our take is that $2-$2.40 cheese seems like a reasonable range for prices. Given that the 10-year average Chicago Mercantile Exchange block and barrel Cheddar price in May is $1.66 and $1.62, respectively, $2 is still a highly inflated cheese price.

CMN

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

*This material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by the FCM Division of StoneX Financial Inc. (“SFI”) or StoneX Markets LLC (“SXM”). SFI and SXM are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. Contact designated personnel from SFI or SXM for specific trading advice to meet your trading preferences. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by SFI or SXM.

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