Largest U.S. Cheese Stockpile for 100 Years Weighs Down on Prices

Spend Matters welcomes this guest post from George Duke, analyst at Mintec.

The U.S. is once again experiencing an oversupply of dairy. Cheddar barrel prices are currently at their lowest levels since 2010, with 1.39 billion pounds of cheese stored in U.S. warehouses weighing down on prices. The current stockpile of cheese is the largest since records began in 1917.

We wrote about U.S. cheese prices in April 2017, when good pasture conditions and a healthy dairy herd had encouraged high production from cheese manufacturers, bursting the cheese price bubble. This time round, trade tensions and rising European exports to a vast milk glut in the U.S. have added their share to the sinking cheese prices.

Favorable weather and pasture conditions, as well as the seasonally high production rates of the spring flush this year, have led to the current milk glut in the U.S. Milk producers in the Northeast, Midwest and Mountain states have benefitted from reasonable precipitation and warm temperatures since April to maintain healthy pastures and keep cows outside longer.

The increased milk production has led processors to churn their milk into cheese so that it can be stored for longer. Ultimately, in this bid to avoid losses, 1.39 billion pounds of cheese have been accumulated in cold storage. To put this into perspective, that’s just over 900,000 cubic yards of cheese. As a result, prices in July are down 22% compared with a year ago.

The U.S. has encountered similar cheese surpluses in the past, but with global trade tensions rising amidst the Trump administration’s protectionist tariff policy, there are concerns over demand for U.S. cheese.

Mexico, the U.S.’s largest market for cheese, consuming 28% of exports, have retaliated to U.S. tariffs on Mexican steel and aluminium by implementing duties of their own on a list of U.S. goods, including cheese. In 2017, the U.S. exported $391 million worth of cheese into Mexico. The tariffs came into fruition on July 5 and triggered a 25% duty on fresh cheese and a 20% duty on all other types. As a result, U.S. processors are having to adjust contractual prices downward in order to retain buyers, while some Mexican buyers are cancelling their contracts altogether.

Furthermore, increasing European exports are attracting demand away from U.S. cheese. A weakened Euro has made European goods cheaper but, perhaps more important, a new free trade deal agreed between the European Union and Mexico has diminished the U.S. market share further. The E.U.-Mexico free trade deal, agreed in April 2018, has cut Mexican tariffs of up to 20% on European products, including cheeses such as gorgonzola. As a result, Mexico are reducing their reliance on imports of U.S. cheese causing the U.S. cheese stockpile to continue to grow.

When the U.S. last faced a huge cheese surplus, the U.S. Department of Agriculture (USDA) intervened and bought $20 million worth of cheddar stocks to support prices. Whether similar action will be taken this time amidst global trade tensions remains to be seen. For now, the cheese stockpile and dairy farmers’ concerns continue to escalate.