News

Expect cheese prices to fall gradually

Sorry, pizza operators. Though dairy analysts expected cheese prices to fall in September, a storm of factors converged to keep them steady.

September 30, 2004

If you're disappointed cheese prices didn't fall in September as expected, blame it on the weather.

Some of it, anyway.

After thrashing Florida, Hurricanes Charley, Frances and Ivan (and surely Jeanne's visit last weekend will worsen matters) dumped record rains in Georgia and the Carolinas. The storms left a sour taste in the mouths of millions by damaging dairy farms, killing a sizable share of cows and cutting power to many commercial and residential refrigerators.

"That created a little bit of a deficit situation on product in the upper Midwest," said Jeff DeGrand, a commodities broker with Chicago-based Downes-O'Neill, "because that's a lot of loads of milk that would have otherwise gone into cheese."

But the Hurricane Gang can't take all the blame. At the fluid level, two extremely successful kids' meal promotions at McDonald's and Wendy's have sucked a giant share of milk out of the pipeline. According the Wall Street Journal, before the launch of Wendy's more healthful kids' meals, the chain moved 65,000 units of milk weekly. That figure has mushroomed to 1 million units a week.

"We knew that was having an impact, but we didn't know it was that much," DeGrand said. Retail sales of cheese are strong right now as well, said industry watcher Jerry Dryer, editor of Dairy & Food Market Analyst newsletter.

"I've talked to many cheese makers and cheese converters — cut and wrap operations — and they've been extremely busy for the last three or four weeks now," said Dryer. "With those high prices we had earlier in the year, people were working off inventory. But now that's gone and they've got to get product in the pipeline if they're going to make it all happen for the holidays."

Market conditions

As was the case in the early summer, lots of cheese trades at the Chicago Mercantile Exchange in September did nothing to push prices downward. As of Sept. 27, the price for 40 pound cheddar blocks held firm at $1.56, marking the 15th straight session at that level. Over the past six sessions, nearly 60 loads (about 2.4 million pounds) changed hands on a market whose prices can soar or plummet based on the movement of just one load.

DeGrand said he thought the aggressive selling would drop prices, but the spending by willing buyers proves demand is real.

Dryer said strong demand also was evident in the USDA's recent Cold Storage Report.

"When production and inventories were up at the end of July, it had people thinking there might be some softness in the market," Dryer said. "But the draw down continued into September very strongly, and I see no reason why it won't continue."

In his newsletter, Dryer wrote that supply and demand for mozzarella isn't as strong as that for cheddar. "USDA estimates indicate that 'other cheese' inventories are at normal levels, but the grapevine says there are greater-than-usual volumes of mozzarella cheese in freezers."

Though Dryer said it wasn't clear whether that extra supply could be traced to slow pizza sales, he said none of his pizza industry contacts have said sales are booming. "I am hearing business is better, but that's just the business doing its seasonal thing."

Futures' clear

As far as what to expect in the coming months, both Dryer and DeGrand see prices headed down gradually, not suddenly. Both said milk futures prices pretty well indicate where cheese prices are headed, and in November and December, the arrow is pointing south. As of Sept. 24, November futures traded at $12.89 (approximately $1.41 cheese) while December futures sold for $12.44 (approximately $1.37 cheese).

This bull market has to turn bearish sometime, DeGrand said, and it looks like the turn is nigh.

"People know this has gone on for too long, so we know a drop is probably on the radar screen right now. We just don't know which month," he said. "Bull markets have a way of correcting themselves and in a pretty swift fashion."