Guest Columns

Perspective:
Dairy Markets

What’s on the 2025 bingo card?

Eric Meyer

Eric Meyer is the founder and president at HighGround Dairy*, Chicago, a firm specializing in dairy risk management, market analysis, hedge advisory and insurance services. He contributes this column exclusively for Cheese Market News®.

Looking back to the start of 2024, CME spot block and barrel Cheddar prices were mired in the $1.40s, U.S. milk production had been in decline versus the prior year for nearly six consecutive months, and the remnants of commodity price inflation post-COVID had done a number to both foodservice and retail demand. While the window of opportunity for exports had opened, the lack of domestic demand growth during the first half of the year scared a lot of industry participants into believing that it would be a difficult year for cheese prices.

Specific to foodservice, McDonald’s had warned in their Q1 2024 earnings report back in April that reduced consumer spending was causing challenges within their system, which was affirmed in their Q2 earnings published in July as same-store sales (not just store traffic!) had fallen for the first time since Q4 2020. A $5 meal deal was hastily launched in June to try and win back value customers and other chains followed suit, prompting a run on barrel Cheddar cheese that sent prices to all-time highs ($2.6225 per pound) by mid-September, as less milk flowed into cheese varieties that saw better demand like Mozzarella.

U.S. Cheddar cheese production has been lower versus the prior year for 12 consecutive months (through October) and year-to-date, nearly 220 million LESS pounds have been made versus 2023, down 6.5%. The industry has never seen that type of contraction in the Cheddar space before, and it showed when quick-service restaurants came asking for product mid-year. But promotional activity failed to provide a long-term demand spark, and high prices quickly cured high prices as the squeeze prompted a recovery in milk and cheese production, and CME spot barrel values dropped nearly 40% in just over a two-month timeframe.

In addition to all-time high barrel prices during the late summer squeeze, there was another supply-side event that was not on our 2024 “bingo card.” A mystery virus impacting milk production in Texas quickly became known as highly pathogenic avian influenza (HPAI), which has created a two- to three-month supply hiccup within impacted herds, and as of Dec. 16, has spread to 865 dairy farms across 16 states. California is still dealing with the rapid spread of this virus, and with USDA recently announcing a national testing strategy, bird flu remains a lingering issue hanging over the industry.

So, as the calendar lunges into the final days of 2024 and the New Year is upon us, what COULD be on the cheese market’s “bingo card” in 2025? I think the easy answer here is that there are so many different potential wild cards this coming year, that volatility in cheese pricing will almost undoubtedly be enhanced. We may not see barrel prices get as high as $2.60 next year, but I can just as easily build a case for $1.30 as I can for $2.30 cheese at some point this coming year.

The lingering issues of HPAI and the expense and availability of replacement heifers may continue to provide challenges to milk production growth in 2025. Will there be a second round of bird flu in the states, and in Europe, will their version of the “cow flu” (Bluetongue disease) also re-emerge? In addition, total cheese inventories in this country are depleted, with USDA reporting October 2024 ending stocks down 8%, or 116 million pounds lower than they were versus the prior year. Per capita consumption of cheese continues to rise in the U.S., and exports have also shown consistent growth, which means more cheese is needed and the inventory pipeline must be refilled. When demand for mild Cheddar cheese is tepid, this inventory figure can mean very little. But when multiple aging varieties need re-stocking (hard Italian styles, Cheddar, etc.) and that coincides with a pop in demand for immediate needs, whether it be domestic or export driven, there is easily a case to be made for various physical squeezes throughout the year leading to price spikes.

However, the U.S. market will also be coming from a place of milk and component growth in 2025. Milk production growth has been above the prior year for three consecutive months, and once California recovers from bird flu as other states have, extremely elevated on-farm margins that began this spring and continue down the forward curve all the way through 2025 will prompt dairy farmers to do all they can to pump out milk. The most recent milk production reports suggest that farmers are already getting their growth plans started in multiple states.

There will also be more cheese capacity added in 2025, which could weigh on markets if domestic demand does not pick up materially. In addition, a new U.S. president and administration will be installed this January that has already created some potential market hiccups. A stronger dollar since Election Day and threats of immediate tariffs to some of the U.S.’s largest trading partners could restrict export business this coming year.

And has food consumption in this country pivoted, at least temporarily, with more people on GLP-1 drugs like Ozempic? Will that keep the outlook soft for restaurant demand in 2025? At the same time, the need to get at the whey stream to fulfill insatiable whey protein isolate demand will be a high priority in 2025, accelerating the potential for cheese production this coming year.

The overcorrecting nature of the U.S. cheese market these past two years will likely not die down in 2025. In addition to all these potential wild cards, USDA will likely be implementing the largest changes to the federal milk marketing order over the past 25 years, and we may be saying goodbye to CME barrel Cheddar prices having any relevance in how milk is priced. Be realistic and prudent with your risk management strategies this coming year, and hold on for what will likely be another wild ride in 2025!

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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