Is Higher Cheese Inventory a Necessity?
Another cold storage report is behind us and factored into the market. After a slight decline in some categories of cheese during June, July inventories rebounded. This was considered bearish to the market due to the pattern suggested in the June report. But how bearish was it? The idea has been that inventories generally would increase during the first half of the year and then decline during the second half. However, this is not the usual and may be almost the exception. Over the past 37 years, total cheese inventory declined only 11 of those years from June to July. This indicates a decline is almost the exception rather than the usual. Inventory decline from July to August is a usual.
So what makes the July Cold Storage report bearish? Well for one, the decline of cheese inventory from May to June of 13 million pounds suggested demand was strong and inventory was being used to supplement fresh production to meet demand. So, it was anticipated inventory would decline or possible see little change. However, the increase of 58.4 million pounds was a surprise. This increase put inventory at 1.375 billion pounds. This is a record inventory for cheese for the month of July and the highest inventory of cheese ever. The bearish implication of this it that total cheese inventory is 8 percent above last year. At this rate, it is likely inventory will end the year above last year. This has been a pattern for quite some time.
There has been the idea that higher inventory is necessary due to an increase of population and increasing demand both domestically and internationally. It requires more to meet demand and a higher cushion of product is a comfort for the industry. However, that also needs to be put in perspective. Having more on hand does provide security. Having too much can become a burden. Domestic demand for cheese has been steadily increasing with per capita consumption steadily growing. International demand is increasing providing opportunities for export. Cheese exports the first half of this year are 24 percent above the same period last year with some countries increasing their cheese imports dramatically. This is all well and good for the dairy industry. However, we need to remember that even with these increases, inventory continues to build. The idea that growing inventory is not a problem and is necessary is not a valid assessment. One has to wonder if cheese inventory will just become too much and lower prices will be required in order to reduce inventory. It is possible the market could be nearing that stage now and prices will move lower to the end of the year to stimulate greater demand in order to balance the market.
Production is exceeding demand and the reason for increasing inventory. We can only hope that our export relationship with Canada and Mexico through NAFTA can be maintained and that it can be worked out acceptably for all. To lose export market share would be detrimental and would result in significant financial losses.