Cheddar Blocks Find Support As U.S. Milk Supplies Tighten

Following weeks of low prices — and the largest price spread between Cheddar blocks and barrels seen since earlier this year — Cheddar blocks on the Chicago Mercantile Exchange (CME) found some support this week as sales are steady and more milk is diverted to bottling plants in anticipation of schools opening.

Cheesemakers in the Midwest say spot milk has tightened notably in the past two weeks, according to USDA’s Dairy Market News. As school districts ramp up their seasonal orders, milk is being diverted into bottling. Additionally, those same milk loads are moving out of the region into the Southeast, Dairy Market News says, noting cheese sales are strong in the Midwest region.

“Curd producers say outdoor events, such as state fairs, have locked them up at least into September,” Dairy Market News adds. “Although barrel market tones are lagging, barrel producers suggest customer interest remains intact, but availability has grown in recent months.”

After falling to nearly $1.30 per pound last week, the Cheddar barrel price has increased, settling at $1.45 per pound today. The block price found support at $1.635 before increasing this week to settle at $1.8125 per pound today.

“More milk headed to bottling, declining milk off the farm due to widespread heat and humidity, and cheese product mix issues may have caused markets to tighten up for a short time,” says Sara Dorland, managing partner with Ceres Dairy Risk Management LLC, Seattle.

“A market bottom was likely reached recently, with both block and barrel prices finding some strength this week,” says Lucas Fuess, director of dairy market intelligence at HighGround Dairy, Chicago. “HighGround expects a cheese price recovery into the fall months.”

He adds that while the U.S. economy has largely reopened, issues continue to hold back cheese demand from its full potential; notably, labor issues that are limiting restaurant capacity and the delta COVID-19 variant that has reintroduced uncertainty into the economy and is putting a hold on a full recovery.

Mike McCully, owner of The McCully Group LLC, South Bend, Indiana, notes cheese supplies also remain ample.
“Prices fell back after blocks rallied into the mid-$1.70s in early July. It appears this is repeating itself this week with blocks back into the $1.70s,” he says. “Export interest will slow at these levels, so prices could easily drop back into the $1.60s in coming weeks, while the block-barrel spread remains historically wide.”

Getting kids back into schools this fall will help with fluid milk demand along with cheese into school lunch programs, McCully adds.

“Exports will help clear the surplus in the U.S. market, but prices need to stay below $1.65-$1.70 for that to happen right now,” he says.

Dorland agrees exports will be instrumental in absorbing most of the new milk and resulting dairy products coming online in the next few weeks.

“The more product that moves overseas, dairy product prices could be supported this fall,” she says. “While domestic demand is expanding, supply is expanding faster. It may take government purchases or exports to remove supplies sufficient to raise cheese prices back into the $1.80s. That said, if retail demand continues to drive greater need for 640-pound blocks, there could be shortages later this year that may lift prices. The product mix will be very important this fall.”
Fuess says at the farm level, milk production is another area to watch closely.

“High feed costs and tight margins have already halted herd size expansion, with year-over-year output gains likely to tighten in the coming months after recent robust performance,” he says.

McCully says the evolution of the grain crop and feed costs are the main driver for dairy markets into 2022.

“I expect feed costs to moderate from current levels but remain well above average. This will cut into dairy farm margins as we see the first small signs of a contraction in the number of dairy cows in recent weeks,” he says.

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Source: Cheese Market News