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Jerry Dryer is the president of Dairy & Food Market Analyst Inc.
With the block cheese price at the Chicago Mercantile Exchange (CME) well above $1.50 since early in July, the question I hear often is, "How long will cheese prices stay this high?"
Some people give current prices a life expectancy of three months or less. Others think prices may remain at or above $1.50 well into the first quarter of 2004.
If the block price doesn't move above $1.60, or at least not much above that mark for very long, there is a good possibility cheese prices will stay at or above $1.50 for at least six months.
Demand will remain at or above year-ago levels for the foreseeable future, certainly through the end of January -- which technically includes Super Bowl weekend, though the game falls on Feb. 1 -- when pizza and retail cheese sales spike.
I believe the market will head this way because American cheese -- whose trading on the CME largely sets the price for other cheeses-- production has slipped below year-ago levels and will slip further until at least year's end.
Despite U.S. Department of Agriculture estimates, milk production also has fallen below year-ago levels. Add to that the pending milking herd reduction program -- also known as CWT or Cooperatives Working Together -- being implemented by milk producers. As many as 35,000 additional cows will be culled from the nation's milking herd during October.
This supply-and-demand scenario spells higher prices, well above year-ago levels into the first quarter of next year.
On the other side of the coin, many argue that cheese production will recover despite a drop in milk production. At these (high cheese and low butter-powder) prices, manufacturers will shift milk from butter and skim milk powder production into cheese production. Such a shift would send cheese prices moving downward.
On the demand side of the equation, I'm told that as soon as private label retail prices get high enough so that the brands can regain market share, the branded player(s) will push the market lower to maximize their profits. That has happened several times in the past, so history supports this argument.
Current high prices will also take a toll on demand. Tighter margins make retailers and foodservice operators less likely to run promotions that sell a lot of cheese.
Whether cheese prices start to move lower in September or sometime between then and January, it still looks like there will not be a major price correction. Instead, most industry sources agree cheese prices will simply ease back and likely stay above $1.40 for an extended period of time.
Their reasoning: Milk production will be below year-ago levels until at least the end of the first quarter next year. Plant capacity limits put a lid on American cheese production. Meanwhile, the economy seems to be in recovery mode, which means relatively strong demand. If cheese prices get too high, demand will ease. However, both buyers and sellers seem to agree: $1.50 to $1.60 is an acceptable wholesale price range.
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