Monday, June 15, 2009

Cheese Pricing Fundamentals are Improving

Milk prices in the Federal Milk Orders are primarily dependent on cheese prices. Cheese prices have been near support levels for months and milk prices have suffered as a result. While production and inventories remain high, there are some trends that indicate the situation is starting to change.

In 2008, cheese exports were abnormally high as a result of the very weak U.S. dollar (USD). Toward the end of 2008, the dollar strengthened and cheese exports returned to more normal levels. In 2009, the level of cheese exports has remained relatively constant.

Exports by country continue to be similar to the historic averages, with Mexico being the largest customer. Exports to Saudi Arabia and Australia have evaporated in 2009. However, in total, export volumes remain stable.

Imports of cheese have, however, hit new five year lows. That is very good because it helps to absorb the excess volume of cheese in the U.S. In a sense, the low imports should not be a surprise with cheese as cheap as it is in the U.S.

Imports of commodity cheese from New Zealand have been very erratic and, at times, extremely high. The month of April was very low and, so far, no data has been posted for May. If May remains low, it could signal a real turning point. Imports of commodity cheese from Australia and Argentina have come off the highs of late 2008.

One major factor that made 2008 a really great year was favorable exchange rates. The weak USD made U.S. cheese cheap on the global market. The significant strengthening of the USD in late 2008 and early 2009 had exactly the opposite impact.

Finally, the USD (as measured by the USD Index against six other currencies) shows that the USD is weakening. While this can cause a lot of other problems, it is very positive news for cheese exports and cheese prices. The very high deficit spending and potential inflation the U.S. may be facing could further weaken the USD and, thereby improve U.S. cheese demand and prices.

Of particular interest is the New Zealand Dollar compared to the USD. As explored in a previous post to this blog, New Zealand is the global competition. The New Zealand dollar continues to strengthen vs. the USD. As of this date, the change is quite significant and shows recovery halfway to the mid 2008 levels. A continuance of this trend, could have a significant impact on the health of the U.S. dairy industry.

Positive signs of recovery are starting to appear. These signs will be monitored closely in upcoming posts to this blog.

No comments:

Post a Comment