June 22, 2020
Wholesale prices for cheese and butter have been extremely volatile. Both the Chicago Mercantile Exchange (CME) and the National Agricultural Statistical Service (NASS) numbers have been volatile although sometimes in opposite directions with wide differences. The NASS price is used for milk pricing. The first section of this post will cover the volatility of cheese and butter prices as reported by NASS. NASS conducts weekly surveys from 89 entities and publishes them on Wednesday of the next week. These are used to set Federal Order milk prices. The price of Cheddar is used to represent the cheese price in the Federal Order pricing. This post will cover cheese and butter as they are key elements of Federal Order milk payments.
NASS cheese and butter pricing is shown below (Chart I and II). They follow the same pattern. In April, prices fell drastically. Cheese prices dropped by ⅓ in a matter of a few weeks. Butter prices had already started dropping but took another ⅓ drop as well. Cold storage inventories of butter and cheese were growing rapidly in April as food service usage was drastically reduced due to mandated restaurant closures. High inventories bring lower prices.
On May 8, theCoronavirus Food Assistance Program(CFAP) was published. By that time plans were in place to reopen the U.S. for business. The impact was immediate. Nothing had really changed at that time, but the speculation of recovery set-off significant price increases. Cheese prices shot up by 90 percent to $2.13 per pound and butter shot up by 64 percent to $1.83 per pound.
Typically cheese and butter inventories levels in cold storage have the greatest influence on wholesale prices. In this case, the increases appear to be fueled by an expectation of economic recovery and government stimulus.
Chart I - NASS Weekly Cheese Prices for 2020
Chart II - NASS Weekly Butter Prices for 2020
There have been press articles stating that cheese production is being ramped up to make cheese available for Coronavirus Food Assistance Program (CFAP). If this were the case, it would defeat one of the intents of the program which is to lower the bloated inventories and bring them back to normal levels and restore normal prices.
It has also been reported in the press that some cheese inventories are in tight supply. If that is true, it must be for just specific categories of cheese in specific locations. Expanded pizza sales during the quarantine period have undoubtedly put pressure on Mozzarella cheese inventories and may have caused tight inventories is some locations.
Chart III is for orientation purposes. The two cheeses, Cheddar and Mozzarella, make up 63 percent of total cheese production. Cheddar is especially important because it is used as the "cheese" price for Federal Order milk payment and Cheddar is also the quoted price for cheese on the CME. As seen in Chart I below, Cheddar makes up just 29 percent of total cheese production, but it is used as a barometer for all cheese prices.
Chart III - Cheese Production by Cheese Type
In the prior post, the end of April inventory levels for cheese and butter in cold storage were reviewed. Additional data impacting the April inventories was recently released which sheds more light on the moving target of the COVID-19 impact. The data for April now includes production, imports, exports, and disappearance. The term "disappearance" represents withdrawals from cold storage. Production of the two largest categories of cheese, Cheddar and Mozzarella, are publicly available and will be covered specifically. Inventory and disappearance levels for Cheddar and Mozzarella are not public but they do make-up the majority of cheese classified as American or "Other". Cheddar makes up 72 percent of American cheese production, and Mozzarella makes up 57 percent of the "Other" cheese production. In the following analysis, the inventory and disappearance of American cheese and "Other" cheese are used to represent inventory and disappearance of the two top cheeses, Cheddar and Mozzarella. This post was delayed for one day as new cold storage data for the end of May became available. Charts VI, IX, and XII have been updated to show the impact of May end cold storage inventories. No May data is yet available for production, imports, exports, or disappearance. The new cold storage data does not show significant inventory reductions that justify the NASS high cheese and butter prices. Butter inventories increased further in May from April and cheese inventories decreased only slightly. The analysis will be presented in three parts. Cheddar will be first because it is the most important, then Mozzarella, and then butter.
Production of Cheddar has not slowed down (Chart IV). If anything, it is up. Cheddar is not a growth product. However, in April 2020, Cheddar production reached a high just slightly below the record high that occurred in December 2019.
Chart IV - Production of American Cheese
Disappearance of Cheddar is represented in Chart V by the disappearance of American cheese from cold storage. Disappearance for the month of April 2020 was extremely low, down 9 percent from the average for the last three years for the month of April. With the significant reduction in food service, this is not surprising.
Chart V - Disappearance of American Cheese
Chart VI shows the impact of "high normal" production and low disappearance. April inventories of American cheese were up six percent to a record high 836 million pounds. This led to the huge fall in NASS pricing covered in Chart I. May cold storage inventories decreased by only two percent.
Chart VI - Inventory of American Cheese
April production of Mozzarella (Chart VII) was slightly down compared to the prior three years of April production. Mozzarella is a growth product with heavy use in pizza and Italian food. Mozzarella is held in cold storage for a much shorter time than Cheddar. The reduction in overall food service may have made this lower production necessary.
Chart VII - Production of Mozzarella Cheese
Disappearance of "Other" cheeses, primarily Mozzarella, was down nine percent from the prior three years of April (Chart VIII). Considering that Mozzarella is a growth product and the drop in disappearance is an unusual occurrence but it does follow the drop in production.
Chart VIII - Disappearance of "Other" Cheese
The inventory of "Other" cheese was at an April record high level of 647 million pounds. Disappearance was down much further than production decreases resulting in a significant increase of 16 percent in inventory (Chart IX). May cold storage inventories decreased by only two percent.
Chart IX - Cold Storage Inventors of "Other" Cheese
BUTTER Production of butter took a huge jump in April to a record high of 216 million pounds churned (Chart X).
Chart X - Production of Butter
Butter disappearance (Chart XI) was down from the prior month, but up significantly for the month of April 2020 compared to April in the prior three years. April butter disappearance increased 10 percent from April in the prior three years.
Chart XI - Disappearance of Butter
The record churning of butter exceeded disappearance leaving a record high April butter inventory as shown in Chart XII. The butter disappearance was better than the prior three years of April, but the rise in churning was exceptionally high and very significant. May cold storage inventories showed a further increase of three percent in butter inventory.
Chart XII - Inventory of Cold Storage Butter SUMMARY The price swings in cheese and butter are record setting and counter to the April data on production, disappearance, and inventories. The impact of COVID-19, closing of restaurants and quarantining, have created an impact never seen before. The May cold storage data released yesterday is noted in the above inventory charts. There does not appear to be sufficient changes in inventory levels to justify the NASS increased wholesale prices of butter and cheese. When there is new information that helps provide guidance it will be immediately covered in the blog.