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Perspective:
Dairy Markets

Both bullish and bearish influences compete to drive fall cheese prices

Lucas Fuess

Lucas Fuess is the director of dairy market intelligence at HighGround Dairy*, Chicago, a firm specializing in dairy hedging, risk management and market analysis services. He contributes this column exclusively for Cheese Market News®.

As summer slips away, school begins again and family vacations wind to a close for the season, attention has quickly turned to a variety of factors that are combining to influence cheese prices in the weeks ahead. As buyers prepare to stock up to ensure demand needs throughout the holidays are fulfilled, there are numerous bullish and bearish factors fighting for control of Chicago Mercantile Exchange (CME) spot block and barrel Cheddar values. In addition, some of these forces are developing into longer-term factors that the industry will need to consider when finalizing budgets for 2022 market prices as well. While price forecasting is never an exact science, the uncertainty introduced by the pandemic last year has not evaporated just yet, with risk factors on both sides attempting to drive prices throughout the coming months.

First, a look at recent fundamental data. Total July cheese output was higher versus the prior year, as expected, but the streak of several consecutive months of year-over-year gains was broken by a slight downward revision to the June data that saw this year’s output sink slightly lower versus the robust production seen in 2020. Still, the U.S. is on track for a record-breaking output year, driven by widespread milk availability coupled with the recent increases in processing capacity across several states. Surprisingly, Cheddar output slipped lower versus the prior year as processors focused on non-Cheddar American styles, hard Italian and Mozzarella cheese production into July. Still, Cheddar availability was not severely impacted with supplies still available and inventories leaning on the heavy side. Overall, recent production data is largely neutral to current cheese values.

July cheese exports were robust and set a new record high for the month, an encouraging sign that is supportive to prices. It is likely that exports will remain heavy into the coming months as product was likely booked throughout this summer when prices were weaker for delivery throughout this fall. It was Japan, not Mexico, that saw the sharpest year-over-year volume gain in July with total cheese shipments up 4.2 million pounds (+66%) versus the prior year. Heavy cheese exports will leave less product available for domestic needs and leans slightly bullish.

Ultimately though, it is less likely that this fundamental data will have the most significant impact on values. Instead, current issues that are rapidly evolving will drive sentiment and sales as autumn advances. These contemporary issues include the delta COVID-19 variant impact, the economy, labor availability, supply chain challenges and overall restaurant sales.

COVID-19’s spread through many states impacted restaurant demand into August. According to one restaurant analyst, while March through August restaurant sales were stronger versus the same period in 2019, the last week of August showed the slowest growth since early June with sales down 1.2% versus the prior week. While Hurricane Ida was a weighing factor on restaurant sales, it is expected that the pandemic will negatively impact foodservice outlets from fully returning to normal. The National Restaurant Association expects calendar year 2021 sales to be down 8.7% versus 2019. This will dent dairy demand, including cheese demand, because of the significant amount of product that is moved via foodservice outlets.

Labor availability remains an issue as well. After 18 months of expanded unemployment benefits, the increased payments expired nationwide over Labor Day weekend. The federal weekly supplement to state unemployment payments was $600 per week throughout summer 2020 and $300 per week since December 2020. More than 11 million people will be impacted by the reduction in payments. Simultaneously, there are a record 10 million job openings across the U.S. as businesses in a wide variety of sectors search desperately for workers. The end of expanded unemployment benefits is not expected to quickly solve the labor shortage though; in dozens of states that ended expanded benefits earlier this summer, there was not a substantial increase in job applicants in recent weeks. Many unemployed workers cite concerns about child care and the continuing pandemic in their hesitation to return to the workforce. Restaurants or other outlets that cannot find enough staff have implemented limited hours or limited capacity to allow workers to keep up with demand; these factors will also weigh on total restaurant sales and could hurt cheese demand and prices.

Where the pandemic, restaurant sales and labor issues take their toll, there is some positive news that will support cheese sales and prices. First, the U.S. economy remains strong. While many economic growth forecasts have been revised lower as the delta variant impacts trends, U.S. GDP growth is still expected to exceed 6% in 2021. Consumer confidence and retail sales are healthy. Inflation forecasts remain high as prices in certain sectors soar and supply chain challenges cause rate increases. This economic growth is supportive to commodity values, including agricultural commodities and dairy products.

Finally, milk production growth is slowing quickly. The U.S. herd size has peaked and is in contraction mode. Heat and drought have impacted volume across Western states, and the Midwest is finally seasonally slowing. High feed costs will cause farmers to cull cows and cut costs, impacting milk per cow as well. Less available spot milk flowing to cheese vats will tighten expected cheese supplies in the coming months.

So what does it all mean? HighGround Dairy expects largely rangebound cheese prices close to current levels in the near term. Some seasonal strength will likely emerge in the coming weeks as demand peaks and cheese output sinks, but sharply higher or lower prices are not expected. CME spot block values are currently close to the long-term average value and will likely remain in this range.

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

*These observations include information from sources believed to be reliable, but no independent verification has been made and therefore their accuracy and completeness cannot be guaranteed. Opinions and recommendations expressed are the opinion of the authors and are subject to change without notice. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition.

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