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Surprise! Cheese prices snap back, hit $1.51 ... <B>updated</B>

Pizza operators won't find much solace in analysts' claims that recent cheese price swings are the product of, well, nothing in particular.

October 19, 2004

Despite last week's collapse of cheese prices — followed by their sharp rebound this week, dairy analysts say nothing in the market clearly explains the flip-flop.

Not a change in the milk supply, milk futures, cheese demand ... nothing?

Nothing in particular, said Al Levitt.

"I don't think the fundamentals changed at all, really," said Levitt, a dairy market analyst. "The balance between supply and demand hasn't changed. It's still in the same place it was a couple of days ago" when the market crashed.

Ah, those were the days, eh, pizza operators? On Oct. 6, the price of cheddar blocks sank 8 cents, followed by an even sharper drop of 12 cents the next day to settle at $1.37 (read also Cheese market crashes again). When block prices fell another quarter cent on Oct. 8, market watchers sensed the bottom was near, but no one, said analyst Jerry Dryer, expected it would have climbed nearly a dime higher three trading sessions later. "I'd have thought more like a dime in three weeks!"

Dryer, author of Dairy & Food Market Analyst newsletter, described the current cheese market schizophrenia in simple terms: "It was too high for too long and then it went too low. ... This market is just struggling to figure out where it belongs."

Downes-O'Neill dairy broker Jeff DeGrand said October's wild ride was expected by everyone — just no one knew when it would take off. Like Levitt, he saw buyers pulling out when cheese was at $1.56 and anticipating a crash. When it happened, they stepped back in quickly to scoop up the bargains.

"When cheese got down to the $1.30s, it found buying support. And as it approaches $1.50, you'll see sellers respond," DeGrand said. "You'll probably see the price float somewhere in the middle for some time until it settles down."

Levitt said this latest crash marked the second time price declines have flirted with the Cooperatives Working Together "psychological" price floor — the point at which price subsidies kick in. (CWT was established in 2003 to help dairy farmers survive market crashes, like the one in 2002, by subsidizing excess cheese exports and herd culling in times of surplus. The subsidy is funded by dairy farmers themselves, who pay 5 cents into the fund for every 100 pounds of milk sold.) When cheese traded at $1.30 as recently as January, CWT was there to keep it from falling further.

"Market psychology plays a pretty big role in this," said Levitt. The supply and demand fundamentals, he added, aren't signaling a pressing need for CWT's help. "Buyers felt a floor had been reached, they believed there was little downside risk and started ordering again. That, in turn, has driven prices higher for the time being."

Historically, said Dryer, when the market starts hiccupping like it is, buyers try to snap up deals ahead of another up-tick, and that pushes prices higher. But when demand and supply are in balance, as they are now, price spikes scare buyers away, "the damn thing turns the other way and then collapses again."

Just a crazy year

Asked whether he'd ever seen such an up-down-year in the cheese market, Levitt asked, "When is it not strange?"

The wide swings, Dryer said, haven't amazed him as much as how long the peaks have lasted.

"It's one thing to see it go to $2.20, but to see it stay at $1.80 for as long as it did was something," he said. "It gets more difficult to explain every day."

DeGrand said the growing number of speculators (traders whose interests lie in making a profit rather than buying or selling dairy products) in the market is pushing prices back and forth as well.

"We saw speculator buyers early last week, and now they've flip-flopped to the sell side," said DeGrand. "They just have an opinion on where the prices are going in the long term, and I think they're just playing the ranges right now."

A perceived lack of information can make the market skittish, too, Dryer said. In an info-overloaded world, any absence of data creates a pseudo-vacuum that drives people to guess in areas where they maybe needn't, he said.

"The market actually anticipated a lot of this," he said. "If you look at the futures, they already had BST (a bovine milk production stimulator) increases factored in and a cheese price crash factored in."

And yet, prices crashed — and bounced back — anyway, which makes Dryer chuckle.

"There are so many things that could be going on right now, and all or none of them are," he said. "Everyone seems to have a little different reading on it, that's all."