March 22, 2020
Monthly, the USDA issues a report on cheese production, cheese imports and exports. cheese disappearance, and the month end inventory of cheese in cold storage. Because the Class III price is very tightly tied to cheese prices, which in turn is tied to cheese inventories, this data can provide a very helpful analysis of the evolving health of the Class III price. The data below will cover the following:
-Cheese Production, which is down
-Cheese Exports and Imports expressed as Net Exports
-Cheese Disappearance from cold storage, which is down
-Cheese Prices, which were up, but are starting to trend down
-Cheese Inventories, which are again growing
Most of the data reviewed will be based on 12 month moving averages. This eliminates seasonal variations and short-term fluctuations.
Cheese production has significantly slowed. When there is too much milk available it is typically used for cheese production because cheese has a longer shelf life than most other dairy products. During 2017 and early 2018, there was excess milk that was channeled to cheese. The annual growth of cheese production reached four percent. The 12-month moving average of cheese production is now down to an annual growth of just .6 percent (Chart I).
CHEESE NET EXPORTS
Cheese exports and imports were covered in detail in a recent post. While cheese net exports were up slightly in 2019 over 2018, the growth rate was way down from prior years (Chart II). Much of this had to do with trade agreement negotiations, primarily with Mexico, Canada, and China. The current rates of growth mean that there is no significant relief from cold storage inventories via net exports.
The cheese disappearance is based on reductions from cold storage. Chart III shows the rate of decline in cheese disappearance. This is not consumption, but withdrawals of cheese from the cheese makers cold storage. Lower withdrawals cause a growth in cheese inventories, which in turn reduces the wholesale price of cheese.
IMPACT OF WHOLESALE CHEESE PRICES ON INVENTORIES
Chart IV below shows the relationship between the price of cheese and the domestic cheese disappearance shown in Chart III above. Clearly the cheese price, shown in red, has an inverse relationship with the domestic cheese disappearance shown in blue. The price elasticity of demand is very clear, as the price goes up, the disappearance goes down. The most recent cheese prices indicate a decrease in the price of cheese beginning at the end of 2019 and continuing for the first two months of 2020. Chart IV is based on available data for the full year of 2019. The price of cheese reached a high of $2.17/lb. in November 2019. Since then the price of cheese has dropped every month and as of February 2020 was down to $1.79/lb., an 18 percent drop.
DAYS INVENTORY OF CHEESE
The important point of all this is that with a higher cheese price, which causes lower disappearance, cheese inventories are growing. With decreased disappearance, inventories of cheese in cold storage are again starting to grow. In December 2019, the inventory of cheese had grown to 36 days as shown in Chart V below.
WHAT DOES ALL THIS MEAN? The cycles of supply and demand are again working to level the needed supply to meet the demand. In economic terms, this is known as the price elasticity of demand. When supplies are low, prices rise and when supplies are high, prices fall. The days of inventory reached a low in October 2019 and started growing in November 2019. With that growth, cheese prices have dropped and so has the Class III price. The decline in the Class III price started in November 2019 and has continued to drop every month through February 2020, the most recent month of Class III milk prices. With the rise in cheese inventories, Class III milk prices will continue to fall. These trends will continue to be followed in the blog.