Cheese Demand Softens As Milk Flows To Vats
MADISON, Wis. — As the U.S. milk production season hits its peak flush, a steady flow of milk is keeping cheese vats filled and pressuring prices a bit as government buying slows and supply builds. However, dairy market analysts say consumers’ return to restaurants this summer, coupled with projections for strong economic growth throughout the remainder of the year, could lead to a run-up in cheese prices in the coming months.
“Demand will be robust for the next several months, an encouraging sign opposite record cheese production,” says Lucas Fuess, director of dairy market intelligence at HighGround Dairy, Chicago. “Heavier demand, especially from foodservice, will keep Chicago Mercantile Exchange (CME) cheese prices supported throughout the next several months. Many Americans will spend gleefully at restaurants that have been closed or capacity-limited since the pandemic began. Stimulus bills have increased available cash for many people as well, helping demand at both the retail and foodservice level.”
As the United States started to open up with the vaccine rollout early this year, analysts heard of a lot of pipeline refilling from the foodservice industry, with market participants not wanting to get caught short on product as some had last year, notes Kevin Peterson, a broker at ever.ag, Chicago.
“After that, along with the end of (USDA’s) food box program, cheese prices couldn’t hold in the $1.80s through the end of flush,” he says.
Indeed, CME cheese prices have declined from the $1.80-per-pound level seen in early May. CME barrels settled at $1.6150 per pound today, with blocks settling at $1.5000.
“Milk availability is evidence that peak flush season has yet to be achieved in the region,” says USDA’s Dairy Market News. “Cool weather has continued to put a surplus of milk into cheese vats. It is getting to a point where milk handlers are aggressively seeking out destinations for notable volumes of milk. Contacts are hopeful that some heat in the forecast will begin to stanch the current flow of milk.”
Cheese demand varies from very busy to seasonally slower, Dairy Market News adds, noting block cheese inventories are growing in availability, and market tones have begun to signify supply increases.
“No matter what angle you look at cheese demand, it softened in May, and it softened at a time when not only is there plenty of milk in cheese-producing regions, but also plenty of interest in making cheese,” says Dave Kurzawski, team leader of dairy risk management consulting at StoneX, Chicago.
Kurzawski notes that, unlike last year, the relative stability and level of spot cheese prices earlier this year renewed a willingness to charge full steam ahead in making cheese.
“That mindset coincides with increased productive capacity,” he says. “The initial reopening demand story is likely behind us. That said, cheese prices adjusted lower in May, and we want to respect the potential for a demand response to price. We also want to respect that, like last year, supportive cheese demand may continue to come in unpredictable waves. But for now, we have inventory to clear. And the risk for the next several weeks is that prices need to fall to clear it.”
CME spot cheese futures show prices in the $1.70s-$1.80s later this summer, leading analysts to speculate that the futures market will decline, or the spot market will gain strength to align with the futures curve.
Peterson notes the new MWC plant in Michigan also is impacting the cheese market, with the facility processing nearly 8 million pounds of milk per day.
“I think even with new capacity it is possible to still see a decent run-up in cheese prices late in the summer,” he says. “If we look back to 2019, before COVID was even a thing, we topped out at about $2.25 cheese average during November. Again, this year we have added block capacity from a few companies; however, I think the nationwide full reopening we seem to be heading toward quickly will help to bolster dairy demand and could lead to higher prices than some might expect.”
Fuess notes one key risk is labor availability, with restaurant shutdowns or reduced speed of service a risk factor that could hurt overall sales and dairy demand.
He adds, however, that demand from Asia has been a critical price driver in recent months, especially as spring supplies were tighter than expected on a global basis, and further buying from China will keep prices, especially powders, supported.
“When this buying slows, global dairy values could see a setback,” Fuess says.
Meanwhile, analysts are keeping a close eye on feed/grain prices. Peterson says as they continue to trade at historically high levels, the market could see a bit of consolidation in the milk supply if margins aren’t kept at a profitable level on the farm.
“You’ve gotta watch feed costs,” Kurzawski agrees. “The expectation is that high feed costs will negatively impact producers and production. But the $64,000 question is: when? A less popular thought is that it may be more delayed than expected.
“The U.S. milk supply seems more insulated than you might ordinarily think due to profitability last year — especially for Class III producers — and substantial direct government payments,” he adds. “We can’t change the weather or the price of corn, but U.S. producers do seem to be in a very strong position heading into summer.”
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Source: Cheese Market News