At the risk of oversimplifying the pre- fall sell-off, the fundamental reason behind crashing cheese prices in August and September is waning domestic cheese demand.
The reality of higher cheese pricing has had an impact on cheese sales. Export demand is now falling back and domestic consumption is showing substantial recovery as wholesale and retail prices ease lower, pushing a mixed picture for fall pricing.
As a result, fall pricing will be demand driven. The direction depends on the following factors:
After a four-month 1.6% to 3.3% falloff in cheese disappearance, July is poised to become the first month of near-even demand due to falling prices. The first six months showed a 35.2-million-pound decline in disappearance through June, which is roughly twice where cold storage stood in excess on July 31 (+15.1 million pounds). With output relatively steady (+1.5% in July, comparable to year-to-date output of 1.1%) and demand taking a positive turn, balance has turned tighter, with not that big of a hurdle to clear lifted storage figures.
- Nobody is calling for demand resurgence, but sales do not require much more than par to a 0.5% lift to put the squeeze on stocks. Based on preliminary July disappearance turnaround, there are definitely reasons to believe that there will be upward price pressure on cheese through the fall. How high will depend on where exports trend.
- A pessimistic mood around powder sales has quelled the outlook for stronger fall pricing as export sales pulled back on waning worldwide demand and a stronger U.S. dollar. Of particular note were July export sales, up 55%. While positive for the month, this represents a fair pullback from the year-to-date trend of +85% through June. July powder stocks were also higher, storing 140.5 million pounds, near the 151.8-million-pound peak in March.
- While sales are far from squeamish, there is a sharp change in exports and lackluster domestic sales thanks to little demand for cheese vat fortification. Worldwide powder demand has fallen with a shift toward yet cheaper whey proteins. With scant upward pressure on powder prices, U.S. powder remains competitive internationally. Powder price recovery from the $1.30s will require a surge in cheese vat fortification, and that will be dependant on a strong fall demand surge.
Milk-to-feed price spreads indicate that there will be severe financial pressure in the fourth quarter. Despite the drop in corn and protein prices from the summer spike, milk prices have fallen further in comparison.
A spike in dairy cow slaughter (+16.1% in July) and continued high production costs indicate continued liquidity pressure in the coming months. Prudent feed buys and a wait-and-see approach to milk marketing are suggested if feed has not already been purchased.
Demand looks good for longer-term milk pricing for cheese, in particular. But based on the current trade price retrenchment, expect a couple of painful months starting with the dreaded October feed-price contract rollover.
- Click here for chart showing monthly dairy slaughter.
- Click here for chart of NFDM exports by month.