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Jerry Dryer is the president of Dairy & Food Market Analyst Inc.
As cheese prices soared sky high just before Independence Day, industry watchers asked, "Will they explode and tumble back to Earth?"
If history is any indicator, it will be several months before that happens. In my estimation, they will continue rising for some time.
Here's a look at the last time cheese prices spiked:
Prices for block cheese (40 pound units) at the Chicago Mercantile Exchange last crossed the $1.50 threshold heading upward on Apr 26, 2001. After peaking at $1.78 on Aug. 24 (and spending three days there), block prices floated back down and crossed the $1.50 mark on Oct. 5, 2001, before finishing the year at $1.26.
That same year, prices for barrel cheese (500 pound units) traveled the same road, but they peaked and stayed at or above $1.68 for a month (Aug. 24 through Sept. 21, 2001). On Dec. 31, 2001, barrels nearly matched the block price, falling to $1.2550. (Typically, barrels are a nickle to a dime cheaper than blocks.)
Throughout 2002 and in the first part of 2003, block and barrel prices have seldom risen much higher than that; blocks even slipped to 99 cents a pound on Feb. 28. Bottom line: Low cheese prices translate into low milk prices. And for the past 18 months, when cheese prices remained below $1.15 for long periods, some milk producers couldn't afford to cover their cost of production and left the business.
The sad reality of this business is that such an exodus actually helps prices. That happened in May, when the USDA reported milk production dropped below year-earlier levels. Less milk means less cheese, which equates to higher prices for both.
USDA production estimates for May also showed total cheese production down 1.1 percent from a year ago. American cheese dropped 3.3 percent, though mozzarella production rose 1.5 percent.
Interestingly, April production estimates (released a month ago) were also revised lower for total cheese. And just as happened in May, the mozzarella cheese estimate was revised slightly upward.
Prices are rising because ...
Meanwhile, cheese demand is picking up a head of steam. Good foodservice sales data currently are not available, but grocery store cheese sales are running about 5 percent ahead of 2002 levels all of this year.
On the foodservice side of the equation, cheese suppliers and marketers tell me demand has been improving for the past several months. Estimates published by the USDA suggest that total cheese usage was above year-earlier levels throughout April.
Additionally, and perhaps most importantly for long-term prices, production estimates cited above suggest that earlier milk production estimates for April and May will be pushed lower when revisions (which are not only common in USDA reporting, but actually expected since data improves over time) are published later this month. In other words, the drop in production has gone on longer than once thought, which could show a smaller supply than thought and send prices climbing even higher.
It could take several months to reverse current dairy production trends, which means demand will continue to outpace supply. Assuming demand remains relatively strong, it looks like cheese prices won't retreat until near the end of the year. In fact, I believe they have some upside left.
In short, I expect cheese prices to approach $1.70 per pound during the fourth quarter.
Other articles by Jerry Dryer: