Record-High Cheese Prices Could Spur Expansion
CME block cheddar prices have been setting new record highs all month, driven primarily by tight supplies of fresh cheese, says Betty Berning, analyst with the Daily Dairy Report.
“Demand for fresh cheese has been strong, as USDA’s food box program competes with restaurant openings and strong retail sales,” Berning says. “In addition, milk supplies have tightened.”
On June 22, CME cheddar blocks climbed 5.25¢ to close at an all-time high of $2.7025/lb., breaking a string of highs set earlier this month. Prior to June 2020, the last time CME block prices set a record high was in 2014, when they hit $2.45/lb.
Cheese plants along the East Coast have been running at full capacity, and on the West Coast, some manufacturers are reportedly running at 125 percent of capacity to keep up with demand. “But fresh cheddar supplies are reportedly improving, and some cheese processors are concerned that markets could be due for a correction,” Berning notes.
Last week, USDA announced it would buy an additional $1.16 billion in fresh food products, which could include milk and cheese, for the Farmers to Families Food Box program. These purchases, which will occur in July and August, are on top of the $1.2 billion USDA agreed to purchase between May 15 and June 30.
“USDA has the option to purchase up to $3 billion under this program, so it’s possible that another wave of buying could come after this one,” Berning says. “Continued demand from the food box program could help to replace some of the ongoing loss of demand from the foodservice sector.”
In a recent report, Rabobank estimated that foodservice sales would not return to pre-Covid-19 levels until mid-to-late 2022.
According to the National Milk Producers Federation, producer income will get a boost of $6.20/cwt. from federal direct payments for first quarter milk production. While strong milk prices and record-high cheese prices are, no doubt, welcome news for producers, the recent spike in prices could come at a cost.
“U.S. cheese prices are now the most expensive in the world, and that could negatively impact export business,” says Berning. “If U.S. cheese prices remain at a premium to prices in Oceania and Europe, domestic demand will have to make up for lost export business to sustain current prices.”
Already, demand for first-quarter 2020 was slowing, with domestic commercial use on a total solids basis 2 percent below first-quarter 2019 and exports of butter and total cheese down 15 percent and 12 percent, respectively.
When demand plunged as restaurants and schools closed in March, dairy producers responded to processors requests that they slow milk production or face a penalty. May’s year-over-year milk production dropped 1.1% as producers culled their herds and made changes to rations.
“Slaughter rates, however, have slowed along with increasing milk prices, indicating that producers could be done cutting milk production for now,” Berning notes. “Higher milk prices are currently signaling dairy producers to step up production, especially in cheese-producing regions. However, after several tough years, producers have a lot of debt to retire before they can expand, and many could have lost their appetite for expansion altogether.”