July 13, 2016

Speculation on Cheese Price Run Up Appears to be Off Base

 |  By: Fran Howard

Dairy markets are uncertain to say the least, particularly when it comes to dissecting the demand numbers. That could explain why inaccurate rumors are circulating through the industry.

“Borrowing a quote from Alice in Wonderland, the U.S. dairy markets are ‘curiouser and curiouser.’ This insight of Alice’s seems appropriate because U.S. dairy markets appear to have fallen down a rabbit hole with a series of twists, turns, and sidetracks that have taken milk and dairy product prices to a place that few would have expected for this point in the year,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle. 

Some in the industry are citing McDonald’s new all-day breakfast and promotions at several fast-food restaurants as the main drivers supporting the run-up in CME spot cheese and futures markets.

“The speculation is that consumers are running out in droves to pick up breakfast sandwiches and burgers smothered in American cheese,” notes Dorland. “Anecdotal reports indicate that supplies of American cheese, especially barrel cheese, are tight for this time of year, which helps to explain the recent price run into the $1.60s on CME spot markets.”

However, Dorland notes that USDA data do not appear to support that theory. “The latest commercial disappearance numbers tell a completely different story,” she says.

Last year, U.S. commercial disappearance of American cheese, excluding exports, was 3.4% more than in 2014, according to Dorland, and that impressive figure could be difficult to repeat this year. Demand excluding exports for Italian-style cheeses, which was 3.6% higher last year, was equally as impressive

Dorland and the other Daily Dairy Report analysts used USDA’s calculation methodology estimate year-over-year domestic commercial disappearance from January through May of this year The result: Demand for American cheese in the first five months of the year was down 0.15% on a daily average basis, commercial disappearance of other cheese, excluding exports, was 7.5% ahead of the comparable period in the previous year.

“Our calculations contrast starkly with the current rumors circulating through markets. It appears Mozzarella, hard Italian, and other cheese could be driving stronger commercial disappearance,” states Dorland.

She warns against becoming complacent, though. Last year, first-half 2015 domestic commercial disappearance was 5.6% ahead of the same period in 2014. However, a significant slowdown occurred in the second half of the year, and 2015 calendar-year commercial disappearance, excluding exports, was 3.4% stronger than in 2014.

“A demand slowdown, particularly for American cheese, in the second half of this year would be troubling,” she adds.