Guest Columns

Perspective:
Dairy Markets

Cheese poised for volatile H2 due to U.S., global fundamentals

Betty Berning

Betty Berning is a contributing dairy economist at HighGround Dairy*, Chicago, a firm specializing in dairy risk management, market analysis, hedge advisory and insurance services. She contributes this column exclusively for Cheese Market News®.

To start the year, cheese fundamentals indicated that this was going to shape up to be a milquetoast type of year in terms of price action. Long-awaited cheese capacity had come online, adding 750-900 million pounds to U.S. production when fully operational. Put differently, these additions could increase U.S. cheese output by 5%-6.5%. Although California was struggling with avian influenza, milk output elsewhere was increasing after two consecutive years of national decline. Collections in Texas, Kansas, Colorado and South Dakota, states that will support these new plants, were increasing. While the heifer shortage was a concern, farmers were finding ways to increase volumes through higher component levels, reducing their cull rate, and via genetic gains. It appeared supplies would be robust, with no shortage of milk to make dairy commodities.

Although the industry anticipated tariffs at the start of the year based on President Trump’s campaign promises, and initial announcements rattled markets, the impact to cheese exports was minimal, as most tariffs to cheese-importing nations were paused or renegotiated. The major importer of U.S. cheese, Mexico, continued to bring product across its border tariff-free. Through April, it appeared to be business as usual, with Chicago Mercantile Exchange (CME) spot prices range-bound from $1.60-$1.80 per pound.

But the markets have held some surprises, as they pushed past $1.90 per pound the week ahead of Memorial Day and maintained that level during the last full week in May. A confluence of factors has come together to help these prices move toward the upper end of their range — the most significant item being increased exports due to U.S. cheese being at a steep discount to the rest of the world.

Stateside products became cheaper than global cheeses after Cheddar barrels made their all-time high in September 2024. The variance since October 2024 has ranged from about a 30- to 60-cent discount, with May 2025’s reading around 50 cents. This is comparing CME spot Cheddar blocks against the average of Dairy Market News’ midpoint for Oceania Cheddar and German Edam. The weaker U.S. dollar, collateral damage from the Trump tariffs that were implemented, has also increased exports by exacerbating this price gap. If the euro to U.S. dollar exchange rate were closer to the past two-year average of $1.08, it would reduce German prices by 11-12 cents and narrow the difference between the two markets, potentially slowing exports or at least curtailing them from record-high levels.

Historically, when U.S. prices are lower than world prices, exports have increased. Plotting the price difference between U.S. and global prices from January 2014 onward (lagged by three months) against exports shows this relationship (see chart above). As the price difference grows, exports increase. A larger discount means more export volume approximately three months later. With the current spread near historical highs, this implies more months of near-record (or record) cheese exports, at least through the third quarter.

The price differential has started to erode slightly, moving toward $0.30 per pound, given the higher block prices as of late and the erosion of Oceania Cheddar prices, which could slow exports. Market chatter suggests that international demand begins to wane at $1.90 or more, potentially leading to a decrease in Q4 exports from the substantial levels seen in Q2 and Q3.

Slower-than-expected starts to the new cheesemaking assets have also moved prices higher. These plants are running but are not at 100% capacity, meaning that although Q1 2025 cheese volumes increased relative to Q1 2024, the growth was not as big as expected, with totals up just 0.6% (30-day adjusted), limiting supplies. Cheese exports have picked up in recent years and surpassed 1 billion pounds in 2024. While international cheese sales account for less than 10% of the U.S. market, they are a significant component of demand, and this capacity was intended to grow the sector further.

Other factors influencing current market conditions include cold storage stocks and the futures curve. Cheese inventories have been at five-year lows since November 2024, keeping supplies scarcer than they have been, which may be making market participants nervous, adding some premium to price. In addition, the futures curve had been at a premium to spot market, and buyers began to bid on the cheaper product, which also had a hand in the rising prices. Now that futures and spot are in line with each other, it seems less likely that this upward trend will continue unless supplies get tighter, which is unlikely.

Smaller-than-usual domestic disappearance is a key reason that markets will struggle to spend much time, if any, over $2 in 2025. Domestic demand is the other 90% of U.S. cheese sales, and it has not been great in 2025. USDA supply and utilization data shows January to March 2025 domestic disappearance at its lowest level since 2021, down 0.8% from Q1 2024. Softer pizza and fast-food sales are part of the contributors.

Without a material increase in stateside demand, prices will be hard-pressed to move higher.

As the calendar nears the second half of 2025, expect volatility. Market drivers for July to December include exports, currency, weather, foodservice demand and tariffs. Exports have the ability to run up prices, especially with the current exchange rates, but they dry up quickly once prices surpass $1.90 per pound.

Weather can also have a sizable impact on summer milk production and could change the supply side of the equation. While it seems unlikely that foodservice sales will pick up, summer is the time for travel and vacations, and restaurateurs are rolling out deals. There is a chance these could bolster domestic demand and tighten supplies. Finally, while tariffs have not impacted cheese too much, President Trump has shown he will make decisions and changes quickly. With flush over, expect prices to move higher seasonally, and more, if any of these factors are realized.

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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