Spend Matters welcomes this guest article by Michael Liberty of Mintec.
The US is the largest producer of cheese in the world, accounting for 28% of global production at 5.1m tonnes in 2014. The average American consumes around 15 kilos of cheese per year, placing them as the highest cheese consumer outside of Europe. Cheddar is the second most produced cheese in the US, accounting for 27% of total cheese production at 1.4m tonnes, just sitting behind mozzarella that accounts for 31% of production at 1.6m tonnes. Wisconsin is the biggest cheddar producing state in the US, producing 19% at 259,000 tonnes.
Cheddar prices in the US hit a 3-year low in January, down 35% year-over-year to $1.47/lbs. High dairy exports in the first half of 2014 had US milk prices soaring to a 10-year high in mid 2014. This encouraged dairy farmers to produce more milk and cheese, helped by good pasture conditions. This growth in milk production was also seen in Europe – the largest milk-producing region in the world –and New Zealand. However, the resulting high global dairy inventories led to a reduced demand for US exports, leading to increased cheddar supplies in the US, putting pressure on prices. The volatility of the market has also deterred bulk buyers from purchasing dairy products until the price stabilizes, further decreasing the demand.
Pasture-fed cows produce milk with higher casein content, a key protein in cheese production. This allows cheese manufacturers to produce more cheese from the same volume of milk and speeds up the manufacturing process due to faster clotting times. More milk, therefore, tends to be bought by cheese manufacturers in the spring and summer months when cows are moved from feed to pasture, known as the spring flush, increasing demand in this period.
Cheddar can be both produced as mild cheddar, to react to volatile changes in the milk price, and be stored as mature cheddar if the price of milk is too low, increasing its value. Mature cheddar is generally matured for 9-18 months, increasing flavor and adding a premium to the price. Cheddar, which has been maturing through 2014, is likely to return a poor margin if sold at the current low prices. This is leading producers to hold onto their supply where possible until margins improve.
Milk by-products in the US are currently in uncertainty as price drops are seen in butter, milk powders and case in markets. If cheddar and other dairy prices remain weak, could we see an increase in cow culling’s and a drop in US beef prices next?