Guest Editorial
What a difference a few months can make

by Dave Kurzawski

Dave Kurzawski is an account manager for Chicago-based Downes O’Neill LLC, a brokerage firm specializing in dairy market products. He contributes this column exclusively for Cheese Market News®.

Just as we were lighting sparklers to celebrate the anniversary of this great country’s independence, the price of milk was in a free fall from June’s high of more than $22.00 per hundredweight. But prices have rebounded as quickly as they declined, leaving cheesemakers and their customers grappling for explanations.

The word “typical” comes to mind as a justification many gave to the mid-summer — and more recently mid-September — price meltdown; cheese prices don’t stay high for long. After all, historically speaking we can look to 1998, 2001 and 2004 as examples of runaway milk prices that experienced a relatively quick departure from their perplexing highs. Sure, milk may have cost more for different reasons during those years, but the principle of the matter is the same: high prices cure high prices.

The problem with that saying is that it doesn’t tell us when high prices will cure high prices. During all of the “typical” market discussions starting in mid-summer and revived as late as last week, most of the industry neglected to ask whether the overall fundamental changed enough to warrant all the bearish talk. With milk production up 3.6 percent in August, we readjust our thinking and seek the cause(s) of what appears to be a strong bull market.

Rarely does a bull market have just one or two disruptions in the supply/demand equation for a given commodity and milk is no different. During the past two years, milk supply disruptions in Australia and New Zealand as well as recent policy changes in the European Union have made satisfying the world’s thirst for dairy proteins an ever-growing reality for the United States. This is old news. But what happens when you add American-type commodity cheese to the world’s wish list?

Ordinarily, cheese exports are so nominal that discussing them is hardly worth the effort. But this summer USDA’s Foreign Agricultural Service reported that, for the first five months of 2007, American-type cheese exports were up more than 75 percent over the same period in 2006, with total cheese exports being up in the neighborhood of 37 percent. While that is still a small number relative to other U.S. dairy exports, it may highlight a flaw in our “typical” price analysis — especially when pegged against what we’ve produced so far this year. American-type cheese production is down eight-tenths of 1 percent vs. the same time period last year.

It appears as though global demand just may be enough to absorb marginal domestic American-type cheese demand declines (at least for now). In other words, when our typical response to $2.00-plus cheese is to expect an almost guaranteed drop in demand that historically marks the beginning of the end for high prices, we are almost certainly ruling out the possibility that the world wants cheese — even the American variety.

Milk buyers are staring at an almost $16.00 average for January to December of 2008. Just as weak prices have a tendency to encourage milk production, this price strength is waking up milk and cheese buyers. Prices in 2008 may pull back 20 to 40 cents per hundredweight in the short term, but I think that would be a welcomed pull-back.

If you buy milk or sell cheese, 2007 will be a year for the history books; never before has milk cost so much as it has at certain times this year. Thankfully, our milk producers are working overtime to stave off supply disruptions on American soil lest we have perhaps $25 milk. But where does this leave you and your bottom line for 2008?

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.