Cheese Inventories Are Unseasonably High
In a normal year the amount of dairy products in inventory at processing facilities across the U.S. goes down at the end of the year. That’s because folks need butter, cheese and other dairy products to make all of those delicious Holiday treats and meals.
Well, 2018 certainly hasn’t been a normal year, so the fact that cheese inventories are actually increasing shouldn’t come as a surprise.
According to the October USDA cold storage report, supplies of American-style cheese were up 43 million pounds over projections. According to Nate Donnay, director of dairy market insight at INTL FCStone, this is partly due to an 11.4 million pound upward revision to September numbers.
“What’s most concerning is that inventories counter-seasonally increased in September, and the counter-seasonally increased again in October,” Donnay says. The last time inventories took this kind of jump was in 2010, when stocks were flat during the second half of the year, Donnay says.
Sales were weaker than expected in September, and exports could be the blame. In an export analysis in September, the U.S. Dairy Export Council indicated that cheese exports drifted lower in the third quarter. September volume was 24,569 tons (-9%), a 20-month low. Cheese shipments to Mexico (5,952 tons, -10%) were lower for the third straight month. U.S. suppliers also saw slower sales to Australia (-36%), China (-63%), Japan (-22%) and the MENA region (-35%). The only notable gains were posted in sales to Southeast Asia (+99%) and South Korea (+18%).
“We have a lot more cheese laying around than we thought we had and the supply/demand balance was certainly out-of-whack in Q3,” Donnay says. “Given that CME blocks hit their lowest level in 2 ½ years this week, we have to argue the balance has remained out of whack into mid-November.”
So what does the future hold?
Retailers buy cheese from processors, and during the Holidays it’s a safe bet that their inventories get taxed. As that supply pipeline refills, given the current status of inventories, upside price potential could be limited, Donnay says.
If the past is any indication, look for price volatility ahead, Donnay says. After that counter-seasonal build in stocks in 2010, the cheese market rallied 70 cents in the first quarter of 2011 back up to $2.00 per pound. While analysts don’t see that kind of price in the future, Donnay says the next few months could be highly volatile.