Will A Billion Pounds of Cheese Stink Up Markets?

April 28, 2010 07:00 PM

by Jim Dickrell, editor, Dairy Today
A billion pounds of cheese in storage is one heckuva lot of cheese.
Last Thursday, USDA released its March Cold Storage report, saying there are 601 million pounds of American cheese, 27 million pounds of Swiss cheese and 373 million pounds of other types of cheeses now sitting in warehouses across the country. The grand total: 1,000,778,000 pounds.
The last time cheese stocks hit 1 billion pounds was in 1984—back in the depths of another dairy recession/depression. With a billion pounds of cheese sitting in warehouses and Kansas City caves, manufacturing milk prices collapsed below $12 for a stretch of 18 months through 1985 and 1986. Like now, it was an ugly time for U.S. dairy farmers.
So now we're back to a billion pounds of cheese in storage. "It's troublesome to have this large of an inventory at this time of year,” says Bob Cropp, a University of Wisconsin dairy economist. "It's one reason we don't have $1.60 cheese right now.”
Traditionally, cheese production increases seasonally in May and June with the spring flush. But having stocks so large already doesn't bode well for late spring and early summer as milk production builds and schools let out. "Cheese stocks are going to stay high, and that is a cloud over strengthening milk prices,” says Cropp.
But a slightly contrarian view comes from Jerry Dryer, editor of Dairy and Food Market Analyst and chief market analyst for Rice Dairy, LLC. While a billion pounds of cheese is a stinking lot of cheese, it represents just four to five days more usage than our normal, more accustomed 48-day inventory. "I'm not sure how horrible it really is to have these kinds of inventory numbers,” he says.
Dryer cites three reasons why things are different now than in 1984:
• We're importing significantly less cheese than we have in the past (and our cheese exports are up). Instead, U.S. processors are making these specialty cheeses, many of them hard Italian and many of them aged. Because they have to be aged for months, they show up in inventory reports but are not necessarily burdensome to the market.
• U.S. consumers are eating more American-made aged cheddar. "This is an increasing percentage of our cheese utilization, and aged cheddar must be stored for one to two months and even longer,” he says. Again, they're inventory numbers—but can't be considered surplus.
• U.S. processors are learning to manage their inventories. Last fall, cheese buyers laid in cheese stocks at $1.15/lb. Carrying costs are low, interest rates almost nil. "A lot of the guys who put cheese away last fall are greedy. They bought the cheese to make money, and they're not going to bring it back on the market at $1.40/lb. They'll bring it back at $1.70, $1.80/lb.,” Dryer says.
Dryer sees other positives as well. McDonald's sales are up 4% in the first few months of 2010; Starbucks is up 10%. Higher-end sandwich chains like Subway and Panera Bread also report stronger 2010 sales, and pizza sales have also increased in the last six months.
There's one more factor to consider. Back in 1984, the U.S. population stood at 236 million. Today, it exceeds 300 million. That's 65 million more cheese eaters running around buying turkey and Swiss subs, cheese burgers and pizzas. As the economy continues to improve, this bodes well for cheese sales.
There is one thing both Cropp and Dryer agree on: More milk keeps coming to market. That, more than anything, will be a drag on cheese prices.
With so much milk flowing into vats, cheese buyers know they have a ready supply. They'll have little reason to bid up prices any time soon.  

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