December 8, 2017

The Barrel-Block Flip Flop

 |  By: Mike Opperman

Most of the time Cheddar block prices are above Cheddar barrel prices as end users pay more for the more premium block product. On average, the price spread stays within the 3 to 5 cent range.

While economists at INTL FCStone say it’s not terribly unusual for the price of barrels to trade at a premium to blocks for short periods of time, those instances usually occur in the summer months when grilling season calls for higher processed cheese on burgers, spurring barrel demand. An inversion in December when folks go more for the good stuff (block cheese) isn’t that common. Or is it?

According to INTL FCStone, over the past 10 years, the price of barrel cheese has exceeded that of blocks five times during the month of December.

  • December 2015 - 11 of 22 sessions with barrels ranging 1.00 to 4.00 cents above blocks.
  • December 2011 - 2 of 21 sessions with barrels 1.75 cents above blocks.
  • December 2010 - 9 of 22 sessions with barrels ranging from 0.75 to 7.25 cents above blocks.
  • December 2008 - 11 of 21 sessions with barrels ranging from 1.00 to 8.00 cents above blocks.
  • December 2007 - 6 of 18 sessions with barrels ranging from 0.75 to 15.50 cents above blocks.

So what has caused the inversion this time around?

First, volume is up big, according to INTL FCStone economists. So far this year more than 63 million lbs. of barrel cheese has traded during spot calls vs. just over 31 million lbs. during 2016.

Secondly, barrel buyers built up large inventories this summer when the block market was 20-30 cents above barrels. Over the past several months, economists say they likely whittled down those inventories. And some of the excess barrel production over the summer has also likely dwindled. Perhaps the barrel bid here recently is a reflection of increased barrel demand following the August-October drawdown.

Inversions don’t usually last long, so expect blocks to be higher than barrels in short order. Let’s hope it’s because blocks take a jump rather than barrels take a fall.