Jerry Dryer is the president of Dairy & Food Market Analyst Inc.
CHICAGO -- Pizzeria operators have been experiencing relatively low cheese prices for the past 18 months and it looks like more of the same is in store.
Two forces have pushed cheese prices to the current low levels and both forces are poised to remain in effect.
1. Triggered by the very high prices of 2001, milk production has increased each month since February of 2002.
2. Meanwhile, the economy has been struggling, and that has translated into slower growth in demand for milk and milk-based foods.
Bottom line: Much lower dairy product prices. The price of block cheese at the Chicago Mercantile Exchange
had a monthly average of less than $1.25 during 11 of 12 months last year. In fact, it was below $1.20 four months during 2002 and hasn't crossed the buck-twenty mark this year.
If Mother Nature doesn't misbehave, the cheese price won't move above $1.20 for several months. This winter has been relatively mild, so cows have kept cranking out the milk. With low milk prices, farmers are adding cows to cash flow their business. More cows and more milk per cow means lots more milk.
It will take an extremely hot summer or a major resurgence in the economy to have any immediate impact on milk and cheese prices. I'm not a weather forecaster, but a quick economic recovery doesn't seem likely.
Short-term, a modest recovery in demand will have a very modest impact in the marketplace. Why? Because inventories of product have been building since the current supply/demand imbalance began. There are huge inventories of butter and skim milk powder.
Granted, you don't make pizza out of butter and dry milk, but the vast amount of those products in the pipeline only adds to the overall dairy surplus. As demand for cheese increases, the milk supply will be shifted from butter and powder production to cheese production. Thus, it will help keep a lid on cheese prices.
The U.S. Department of Agriculture just published an analysis that concluded: "Significant recovery in milk prices does not seem likely in 2003." Let me translate the USDA statement into pizza talk: A significant increase in cheese prices does not seem likely in 2003. I agree with USDA's conclusion.
The flipside of the coin looks like this: Remember the cheese prices of the summer of 2001? They averaged more than $1.60 for five consecutive months -- May through September. Those days could return in 2004.
Low cheese prices mean low milk prices. Milk prices at current levels are unprofitable for some milk producers. Eventually, they will exit the business.
Just about the time low milk prices start to trim milk production a strong economy may be driving demand higher.
Boom! There will be a quick, and possibly unexpected, jump in cheese prices. As Yogi Berra was fond of saying: It will be déjà vu all over again. The prices of the summer of 2001 will reappear in 2004.
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.