• CHEESE MARKET ANALYSIS Cheese prices may slip lower before reversing

    Tags: Cheese

Jerry Dryer is the president of Dairy & Food Market Analyst Inc.

In trading at the Chicago Mercantile Exchange, cheese prices have moved lower for the past several weeks.

Why?

The simple answer: Prices were too high for too long.

But there's more to the story.

At the close of business on Nov. 14, the price for 500-pound barrels had declined 27.5 cents during the previous four weeks, while 40-pound blocks slid 14 cents in the same period. Further declines are now expected.

A combination of forces have teamed up to drive the cheese market sharply lower. With the block market at $1.60 since the end of July, retail sales finally took a major hit during September. Here's the evidence: Through Oct. 18, year-to-date, cheese sales were up 4 percent. For the most recent 13 weeks (mid-July through mid-October), sales were up 2.9 percent.

Jerry Dryer
For the most recent four weeks (mid-September through mid-October), sales were up just 1.6 percent. For the week ending Oct 18, retail cheese sales were down 1.2 percent.

Earlier in the year, retail cheese sales were up as much as 6 percent. Natural cheese sales had been up more than 6 percent; but lackluster process cheese sales pulled the total lower.

Process cheese sales are also down in the foodservice sector; in some cases, sharply lower. With no end in sight to record-high beef prices, foodservice promotions for cheeseburgers are and will remain nil, thus taking a big bite out of already-suffering process cheese sales.

Bottom line: Cheese sales have fallen through the floor. But what about the supply side?

With the cash markets tilted heavily toward cheese, increasing volumes of milk have gone into the cheese vat rather than the butter churn. High cheese prices and low butterfat prices also prompted cheesemakers to fortify their vats with skim

What's Important

Cheese prices will continue to fall.

Expecting prices to fall, buyers will purchase only the inventory they need.

Prices should begin to rebound by the first quarter of 2004.

milk powder, which improves the fat-to-protein ratio in the vat and triggers higher cheese yeilds.

Block cheese supplies remained in relatively good balance with demand until recently. Barrel cheese supplies have been long for sometime.

Near-term outlook

Some cheese makers tell me they are still scrambling to fill orders between now and the end of the year. Others are turning away milk and trimming production schedules in hopes they don't accumulate expensive inventories in a declining market.

With the cheese price retreating, buyers are sitting on their hands and waiting for further price declines. Like cheesemakers, end users don't want to get caught with pricy inventory in a declining market.

Meanwhile, butter makers are in search of cream and supplies are relatively tight. Butter sales at retail are strong and planned holiday promotions are pulling more butter out of inventory. Foodservice sales are ticking higher seasonally.

Cream utilization in other products—eggnog, whipping cream and cream cheese—is seasonally high and ice cream production hasn't faded away seasonally as much as usual. Bottom line: Butter inventories are being pulled sharply lower. Given the seasonal nature of butter and high-cream product sales, however, any price gains for butter likely will be short-lived.

Still expect strength in the butter price and weakness in the cheese price will shift some milk back to the butter churn, especially late in the year as fresh cream product sales come off their holiday peak.

Look for the cheese market to return to relative balance early in the first quarter of next year. Regardless of how low the cheese price gets between now and the end of the year, there will be price recovery beginning in the first quarter of 2004.

Other commentaries and analysis by Jerry Dryer ...

* CHEESE MARKET ANALYSIS: Expect a smoother cheese market roller coaster ride
* CHEESE MARKET ANALYSIS: Weather, feed and culling to keep cheese prices high
* CHEESE MARKET ANALYSIS: Cheese prices: How high? How long?
CHEESE MARKET ANALYSIS: Cheese prices will retreat -- but when?
* Cheese prices to remain low for 2003
* CHEESE MARKET ANALYSIS: Cheese prices are on the way up

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