US Cheese Price Bubble Could Be Set To Burst

cheddar Brent Hofacker/Adobe Stock

Spend Matters welcomes this guest post from Michael Liberty, market analyst at Mintec.

We last spoke about cheese prices in December, when the USDA purchased stocks of excess cheddar in November to help boost domestic prices, which resulted in a two-year peak in November. Fast-forward three months, and it’s deja vu; however, this time, the global markets are making their mark.

Good pasture conditions and a healthy dairy herd size in the U.S. has made milk supplies readily available for cheese manufacturers throughout the country. This has prompted the majority of cheese producers to run at a high capacity, churning out cheese by the barrel (quite literally, as they are sold on the CME in barrels). The U.S. cheese bubble had burst, with cheddar production rising 7% year-over-year in February.

Following the price bubble, which the USDA created through its market intervention, cheddar prices declined 43% between November and March. In March, U.S. cheese prices had fallen to their lowest level for nine months.

So, how do we solve a problem like oversupply in the dairy market? This is the burning question dairy producers have been asking themselves since 2015.

Similar to what the USDA tried in November, the E.U. took matters into its own hands after lifting their milk quotas two years ago. E.U. market intervention aimed to support dairy producers, while reducing milk yields and dairy herd sizes in an attempt to boost prices.

And looking at global dairy supplies over the past year, this has somewhat been a success. In the E.U., cheddar prices now track 27% above last year’s levels. Similarly in New Zealand, farmers reduced their dairy cow herd size. This, combined with poor pasture conditions in 2016, further limited milk supplies and pushed New Zealand prices up 33% y-o-y.

Rising international prices has given a sudden uptick in demand — both from international and domestic sources. In January alone, U.S. product trading at a discount boosted demand from Australia and South Korea, resulting in U.S. cheese exports increasing 3% y-o-y to 22,700 tons. Interestingly, in the same month, the E.U. reported an increase in their shipments to the U.S., which remained their main cheese export destination, showing the U.S. demand for specialist cheeses continues to grow.

So, with the global dairy shuffle taking place, where will this leave the U.S.? The U.S. will continue to compete with both New Zealand and E.U. exports, and while inventories remain high, producers have the option to offer discounts. However, the E.U.’s peak milk production in their April spring flush is round the corner, and with New Zealand’s Fonterra cooperative revising their milk production forecasts higher, high stocks in the U.S. could very quickly turn sour for producers. It’s deja vu all over again, as this bubble could be set to burst.

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