Dairy Processing -March/April 2022 - 58

COMMODITIES OUTLOOK
Slow climb
T
by Nate Donnay | Nate.Donnay@stonex.com
he US cheese market is the most bearish dairy market
we have, but it also has the most upside risk for prices.
It's a strange line to be walking. While high feed and
other input costs have hit dairy farmers hard, resulting in the
largest year-over-year drop in milk production in 18 years,
cheese production is still growing. The tighter milk supply has
hit butter and nonfat dry milk (NFDM) production hard with
those prices up 89% and 67% from last year, respectively. With
the cheese supply still growing, the CME block Cheddar price
was only up 22% from last year in February.
The relatively strong cheese production has been driven
by a couple of factors. Most of the cheese processing capacity
is owned by commercial processors, not dairy co-operatives.
The co-operatives collect the milk from farmers, then sell
what they can to commercial plants and run the remaining
milk through their own plants. Co-operatives and commercial
plants often have agreements about how much milk will be
delivered each day or week, which means that, even if milk
production falls, the amount of milk showing up at the cheese
plants is relatively stable.
The reason commercial cheese makers want to contract
for steady deliveries is efficiency. It is expensive to build a
cheese plant, and the plant makes no money if milk isn't being
run through it, so there is a drive to keep profit-maximizing
plants running as close to capacity as possible. The value of
milk going into butter/NFDM is now well above the value
of milk going into cheese, which creates an incentive for
cooperatives to try and pull milk away from cheese when and
where possible and put it into butter/NFDM. So far it doesn't
look like a lot of milk has been shifted away from cheese, but
it remains an upside risk for cheese prices moving forward.
There are two other big upside risks for the cheese market.
The first is the very strong cheese prices in Europe and Oceania
(New Zealand/Australia). In early March, fresh Cheddar in
Europe was priced around $2.55 per pound while Oceania
Cheddar shot up to $2.90 at the Global Dairy Trade Auction, yet
58 MAR-APR 2022 | DAIRYPROCESSING.COM
fresh Cheddar on the CME spot market was still priced around
$2.00. Milk production has turned out weaker than expected
across all the major dairy exporters, either due to input costs
like feed, energy and labor, or due to weather problems. That
has pushed the prices of dairy products higher globally.
US cheese prices have been reluctant to follow the world
market higher as US cheese production has continued to
grow and logistics problems have made US cheese a little less
attractive to importers. But the price spread between the US
and the world market is getting historically wide and bargain
hunting buyers who can handle the shipping delays are going
to be sourcing from the United States, which will help tighten
up US supplies and likely push CME cheese prices higher.
The second big upside risk is feed costs. Hot and dry
weather in parts of South America, and now the war in Ukraine,
are tightening the global grain/oilseeds outlook. There is still
extreme uncertainty around what will happen with supply
coming out of Ukraine and Russia, but it is hard to see grain
movement returning to " normal " anytime soon. Wheat prices
in Europe have already hit new record highs and we have the
potential to push US feed prices to new record highs as well.
That would keep US milk production weak, and with butter/
NFDM stocks already tight, milk would eventually need to
come out of cheese which would push cheese prices higher.
While US cheese prices have been trending higher, the
increases have been mild compared to other dairy products,
cheese prices on the world market, and mild compared
to recent increases in feed costs. It's possible a bearish
development like a recession or sharp shift in demand could
push cheese prices lower, but there are a lot of factors that
would argue for higher US cheese prices moving forward.
Nate Donnay is the director of Dairy Market Insight
at StoneX and has been applying his interest in large
complicated systems and statistical analysis to the
international and US dairy markets since 2005.
While US cheese prices have been trending higher, the
increases have been mild compared to other dairy products.
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Dairy Processing -March/April 2022

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