CHEESE MARKET ANALYSIS: Cheese prices are on the way up

June 4, 2003

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

Milk futures, the surrogate for cheese prices, are telling us cheese prices will be higher by July and sharply higher by September.

For the record, nine months ago I was predicting much higher cheese prices during the second quarter of this year. But the data finally convinced me that wasn't going to happen. And it didn't.

Milk production remained high. Cheese production remained high. Demand remained sluggish. Milk and cheese prices had been in doldrums for months and until very recently, it looked like more of the same was here to stay.

Change is afoot

During the past month,

Jerry Dryer

however, new data and new developments point to higher milk and cheese prices during the second half of 2003, and the Class III futures prices at the Chicago Mercantile Exchange have moved higher in response to these developments.

As of early June, the futures markets suggested that the 40-pound block price will top $1.20 per pound during July, approach $1.30 during August and climb above $1.35 during September, October and November.

I believe, however, that cheese prices could climb even higher. Here's why:

After several months of extemely low milk prices, milk production is now below year-ago levels. USDA has not reported this fact, but the government's estimates typically miss a trend reversal by two or three months. Recent USDA estimates, for example, claim production was up just a fraction of 1 percent during March and April.

USDA says American cheese production has been below year-ago levels since February. While not much American cheese ends up on top of a pie, American cheese prices are the driver for most other cheese prices.

One caveat, mozzarella cheese production finally moved above year-earlier levels during April, the latest data available. The big questions that remain: Is mozzarella cheese demand up, thus prompting more production? Or are two new huge plants in California simply making more cheese which is ending up in inventories?

Outside influence

On the demand side of the equation, retail cheese sales are booming. The best data I've seen indicate that cheese sales were up 5 percent during the first four months of this year. Foodservice sales of cheese, on the other hand, are significantly below year-ago levels, as the big pizza chains continue to report same-store sales well below one year ago. Folks I talk to, however, tell me "mom and pop" stores are doing well.

Lastly, word on the street is positive. I just returned from the International Dairy, Deli and Bakery Association show in Las Vegas. If half of the optimism present on the show floor turns into business later this year, cheese sales will be huge during the second half.

Reduced production and increased sales spell sharply higher cheese prices by August continuing to at least year's end.

In addition to his work as a consultant, Jerry Dryer edits and publishes Dairy & Food Market Analyst, a weekly newsletter for dairy processors, milk producers, marketers and end users -- retailers, restaurateurs, food manufacturers.

Other articles by Jerry Dryer:

* Cheese prices to remain low for 2003

Topics: Cheese

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