cheese
August 26, 2019

Is There A Normal Block and Barrel Spread?

 |  By: Robin Schmahl

The market was not kind to Class III milk futures last week. Cheese prices showed weakness, especially in the barrel market. Supply of barrel cheese is more burdensome than blocks resulting in more product being offered in the daily spot market. 

There has always been the observation made over the block/barrel spread and it's impact on the cheese market. Historically, a normal spread between blocks and barrels was 3 to 4 cents. If the spread widened further, plants would switch from the production of barrel cheese to block production and vise versa. Production moved to where the greatest return was realized. 

However, this seems to have changed over the years as the block/barrel spread has been unusually wide for extended periods of time. Cheese plant operations have changed with fewer of them having the ability to switch from blocks to barrels and back again. Operations work more efficiently when production continues to flow without making substantial changes. There are some that have that ability to produce one or the other, but the switching of production does not seem to be done as readily as it may have in the past. Thus, prices remain unusually wide or even inverted for extended periods of time.

In fact, since 2015 there have been few times during which the block/barrel spread has been at the historically normal 3-4 cents where the industry functioned efficiently. There were few times it was less than 5 cents. The spread has remained wide to extremely wide for quite a few times and for extended periods of time. The majority of time barrels have remained below blocks by a wide margin with an extreme reaching 32 3/4 cent on October 1, 2018. Recently, there the assessment has been made that a normal block/barrel spread is now 10 cents. This is likely due to how the spread has moved over the past few years. 

There have been a few times when barrels have been higher than blocks, but that has been the exception and has lasted a varying length of time. However, there were four times during which barrel prices remained above blocks for nearly a month or more. These four times were in April to mid-May 2015; December 2015/January 2016; April all the way into August. 2016; and November/December 2017.

chart

There is always a feeling that weakness in barrels may pull block price lower or strong blocks will pull barrels higher. To some extent this is correct as many times they move in similar directions. However, just because barrel price declines and the spread widens, it does not mean that it may snap back anytime soon, at least not until the heavier supply is reduced and the market is realigned with supply and demand. 

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