CHEESE MARKET ANALYSIS: Expect a smoother cheese market roller coaster ride

Oct. 28, 2003

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

You may not be insane enough to jump on the rollercoaster when the carnival comes through town, but you ride one every day as a buyer of cheese.

The phrase, "like a roller coaster ride," is used often when describing the changes in cheese prices. For example, the 40-pound block price at the Chicago Mercantile Exchange averaged a solid $1.44 during 2001, but it plummeted to just $1.18 during 2002 and $1.15 in 2000. Through the first nine months of this year, it has averaged a very weak $1.28.

But the annual average price only tells part of the story. Since June this year, prices have been climbing. After averaging $1.11 during the first quarter and $1.15 during the second quarter, it shot

Jerry Dryer
up to $1.57 during the third quarter. The block price has stayed at $1.60 since July 31.

That's a remarkable change, especially compared to the old days, when cheese prices seldom moved more than a few cents in a year.

Plenty of questions

So has the cheese price roller coaster arrived at the crest of a slippery slope? If not, how long can the cheese price hold forth at this level?

If most forecasters are correct, it will have dropped by the time you read this. If I'm correct, it won't have declined very much; maybe not at all.

Though my mother once told me, "Never carry a crystal ball when you ride a roller coaster," I'm sorry, Mom. I'm going to have to disobey you this time and do just that.

Here's what I expect to happen over the next three quarters.

We've only seen a cheese price of $1.60 or more a couple of other times. Most recently, the price climbed to that level early in May of 2001. Undaunted by that height, it climbed to $1.72 by early August of that year before topping out at $1.7250 in late September. Then it left stomachs churning as it dropped like a rock.

What's clear is the demand side of the equation couldn't handle such rarified air. The same thing happened back in 1999; the price hit $1.60 in mid-July, peaked at $1.97 by mid-August but crashed to $1.12 by mid-November.

The lesson learned: A cheese price of more than $1.60 is too high.

Maybe $1.60 is too high.

Driven by market dynamics

Most retailers and foodservice operators seem to be in a hand-to-mouth mode when it comes to cheese purchases. They're buying smaller amounts of cheese more often in hopes of avoiding having too much inventory on hand when the rollercoaster takes its next plunge.

But, will it?

I think not.

Times have been tough down on the farm this year, and higher milk prices won't trigger an immediate production response that would push prices downward. That means adding more cows (which typically brings bankers into the mix, but they're not interested in the dairy business right now) isn't an option for many producers. If fact, cows will continue to exit the milking herd ... and producers will follow them. More than 2,000 dairy operators (and/or their bankers) said they wanted out this year by submitting bids to use the Cooperatives Working Together (CWT) program, which would pay them to exit the milk production business.

Only 300 bids were accepted, but interestingly, beef prices just hit a record high, and I think a goodly number of those 1,700 operations whose bids were rejected will take that route out of the dairy business over the next several months.

To make things worse, feed quality issues have sent a chill down the backs of producers in most regions of the country. Mother Nature was not very cooperative this past summer with crops dairy cattle like best, so expect production per cow will be in the doldrums for the next six to 10 months.

On the demand side of the equation, sales are very good, and most economic indicators suggest they will improve as we head into the retail holiday selling season, which extends from Halloween through Super Bowl Sunday.

Proof of the market's strength is in pizza sales. Those numbers have picked up steam this fall and will likely remain strong at least through the end of school year.

My final prediction: The cheese price will ease lower over the next several months -- gently round and down a curve this time rather than straight down the roller coaster slope like it did in late 2001. Even better news for pizza operators is this: The next hill isn't as steep and it isn't as long as those of 1999 and 2001.

Where's the bottom? My crystal ball foresees a low of $1.40, but not until late in the second quarter of next year.

Other commentaries and analysis by Jerry Dryer ...

* CHEESE MARKET ANALYSIS: Weather, feed and culling to keep cheese prices high
* CHEESE MARKET ANALYSIS: Cheese prices: How high? How long?
CHEESE MARKET ANALYSIS: Cheese prices will retreat -- but when?
* Cheese prices to remain low for 2003
* CHEESE MARKET ANALYSIS: Cheese prices are on the way up

Topics: Cheese

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