• Cheese price falls 10 cents, analysts say it won't stop there

    Tags: Cheese

Sixty-two trading days.

That's how long the 40-pound block cheddar rate held at $1.60 on the Chicago Mercantile Exchange.

Until Oct. 28, when it fell by a penny.

Followed by a nickel the next day.

Which was followed by 4 cents the next.

The long-term logjam--nearly three calendar months--at $1.60 was unexpected and unprecedented according to dairy analyst Alan Levitt. That overextended stay at such lofty heights, according to Levitt and two other dairy watchers, caused not only the dime decline, but set in motion what is shaping up to be an extended decline in prices.

"The (milk) futures prices were anticipating the drop, so it was just a matter of when," said Levitt, who is based in Crystal Lake, Ill. "We all knew $1.60 couldn't last forever, and now, what goes up, must come down."

Brent Brown, director of foodservice for DCI Cheese said his company expected cheese prices to drop nearly four weeks ago, but too few suppliers and buyers stepped up to move the market, he said.

SNAPSHOT

  • Block cheese prices are falling quickly after holding three months at $1.60.
  • Analysts believe the the market bottom is $1.30—if prices descend gradually.
  • Restaurant industry demand for cheese is somewhat soft, which may keep prices down.

"It was like they said they were comfortable at that level and no one wanted to rock the boat," said Brown, who is based in Seattle. "By the end of September, it was probably time for the thing to head back down, but it never really did and it stagnated."

That stagnation, according to Elvin Hollon, director of fluid market analysis for Kansas City, Mo.-based Dairy Farmers of America, happened in part when smaller foodservice operators, such as independent pizza operators, chose to buy less cheese when prices were high. As a consequence, inventories increased on the supply side, which forced producers to move that product to the market, which began this week's price slide.

Supply and demand "market psychology," as Hollon called it, benefited producers in the late summer and fall, but now that supplies are high, buyers have the edge.

"Those who want to see lower cheese prices, the psychology is on their side now," Hollon said. "And the market tends to crumble until the (supply and demand) fundamentals kick back in and balance it. I'm expecting it'll drop some more."

Falling, falling, falling

If pizza operators are hoping for a return to government price support levels ($1.13 or below), Hollon warned them not to get their hopes up.

Block cheese prices are updated every business day on PizzaMarketplace's home page.

The market overall is better balanced than it was when it fell so sharply in late 2001, he said, and continued culling (sending dairy cattle to slaughter), Levitt added, will further tighten supplies.

Still, neither Levitt nor Brown is impressed by overall cheese demand in both the retail and commercial sectors, which makes them wonder just how far prices will fall.

To complicate matters, Brown said, outside influences such as grain prices and dairy exports also could influence prices in the near future.

"The problem is, if this market starts to decline further or quicker than everyone anticipated, we might see a panic situation with people dumping inventory," said Brown. "Demand isn't bad; it could be worse. But nobody's setting the world on fire, either."

Hollon, however, said his research shows solid demand. "We've seen good cheese numbers all around," adding that grocers are expecting good sales "for the Thanksgiving-to-Super Bowl season."

Despite their disagreement on demand, all three believe the Oct. 30 block price of $1.50 won't hold long. Expect blocks to fall to around $1.35 by at least the first quarter of 2004, they said.

"We work with futures contracts, and we recommend to our clients that they base the first quarter of next year on a $1.30 market," Brown said. "You hear some talk about a bullish first quarter, and some say we'll see $1.50. We don't think so. We think it's going down to $1.30 to $1.33."

Levitt agreed. "I'm still in the camp that says ... $1.30 is the number that it'll go to."

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