On Dec. 20, 2013, the block cheese price at the Chicago Mercantile Exchange (CME)settled at $2 per pound, its highest level of the year.
What prompted this counter-seasonal price move for block cheese? And what triggered this record-high December price?
It all boils down to supply and demand. Let me explain.
Supply. Production was cruising right along through August. American cheese output was running 3.5% ahead of 2012, and other-than-American cheese production was up 2.1%. In fact, the American cheese production increase was well above the historic trend line.
By late July, all of the headlines in the dairy media were pointing to the record-shattering American cheese inventories: a whopping 711 million pounds at the end of June. By the end of July, other-than-American cheese inventories also established a new record high of 411 million pounds.
Oh. My. Gosh! There were more than one billion pounds of cheese sitting in coolers and freezers. The marketplace became so enamored with supply that it seemed to forget to think about …
Demand. My analysis of the market always includes a basic calculation aimed at putting inventories in perspective. If we use X pounds of cheese per day, how many days-worth of cheese do we have in storage?
On the 30th of June, the 711 million pounds of American cheese equated to 59 days of use versus the five-year average for that date of 55 days. Supplies were a bit long. But by the end of August, American cheese stocks were at 53.8 days versus the five-year average of 55.2 days. Demand had stepped ahead of supply.
Other-than-American cheese inventories were on the same track. By the end of September, there were just 20.1 days of cheese in coolers compared to a five-year average of 20.2 days.
Driven by a major uptick in exports, commercial disappearance of cheese had been building up a head of steam. During the second quarter, American cheese disappearance was up 2.1% year-over-year. Third quarter disappearance was up 5%.
Other-than-American cheese disappearance was strong all summer and fall: up 4% during the second quarter and up 3.7% in the third quarter year-over-year.
Milk production, however, was leveling off—up just 1.5% in the third quarter and lower in the fourth quarter. Cheese country in the Upper Midwest took the brunt of the slowdown.
The pizza business, here and abroad, kicked in and sent other-than-American cheese production up 3% to 4% in September and October. This left less milk for American cheese, the product traded at the CME. American cheese production was virtually unchanged from one year ago during September and October, the latest data available.
Bingo. The net result: A counter-seasonal and very welcome spike in the cheese price.