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CHEESE MARKET ANALYSIS: Cheers, pizza operators! Cheese prices heading down

After a brief price surge in mid-August, the price of cheddar blocks is on its way down heading into September.

September 2, 2004

What goes up, must come down.

In six words, that's the story of trading on the cheddar block market over the past two weeks.

After rising 10.25 cents in the third week of August, prices for 40-pound blocks tumbled 12.25 cents during the fourth week.

According to Downes-O'Neill commodities broker Jeff DeGrand, the slide should continue for at least the next few weeks as pressure from excess inventories of cheese in cold storage will deflate prices. Additionally, ideal milking weather throughout the nation's heartland has boosted milk production.

In short, supply is exceeding demand, which also appears soft.

"Demand is maybe not as encouraging as we'd like," said DeGrand. "Over the last two months, each report we've gotten -- whether it's cold storage, milk production or dairy production -- they've all pointed in the exact same direction. There are more products being produced, but more product sitting in inventory."

If so much dairy product is on hand, what caused the mid-August price increase? Believe it or not, DeGrand said some of the blame goes to Hurricane Charley.

"That wreaked a little bit of havoc over the last two weeks. We saw spot shipments of milk going to Florida from the upper Midwest -- two to three times what you typically see at this time of year. That tightened supplies just a bit and probably helped create that blip we saw in the cheese market."

All indicators say block prices will continue downward. Current prices for October milk futures forecast a block cheese price of $1.40, though DeGrand expects the bottom may be $1.35.

"This is not an exact calculation, but milk prices pretty much drop three times quicker than they go up," he said. "So I don't see this market reversing course at this point."

Other signals include more sellers showing up at the CME, and "they're seemingly very interested in moving some product. Typically you see one or two sellers, but you're seeing three or four coming now."

Dairy farmers are already moving to increase slaughter numbers to counter some of the product glut, but DeGrand said that won't impact prices much. Many of the cows slated for near-term slaughter were on their way to retirement anyway. More importantly, he said it takes a lot more than a small-scale slaughter to turn dairy prices in the other direction.

"I always equate the milk markets to an aircraft carrier turning around," he said. "It takes a lot of work to do it, but once the momentum's going in one direction, it's hard to jump back and forth."

* Side note: According to "Dairy & Food Market Analyst" editor Jerry Dryer, Kansas City, Mo.-based Dairy Farmers of America has received a letter from the U.S. Department of Justice confirming that it is under investigation for "anti-competitive conduct in the raw milk market." According to Dryer's newsletter, the actions in question are related to DFA transactions in the southern U.S.

As talk of the impending investigation brewed in recent weeks, dairy and pizza market watchers have wondered whether the D.O.J. would examine DFA's purchase of 412 loads (nearly 16.5 million pounds) of cheese at the CME in June. At this point, however, it appears those purchases are not an issue.