Cheese and Butter Prices Skyrocket. Is it Realistic? Maybe not!

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, the Coronavirus 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.

CHEDDAR CHEESE

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

MOZZARELLA

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 cheese and butter.  When there is new information that helps provide guidance it will be immediately covered in the blog.

Key Cold Storage Cheese Inventories Swell - When Will Inventory Levels Normalize?

The prior post was titled "EXCELLENT NEWS" as cheese inventories were still in line at the end of March and the USDA's had issued a plan to buy huge amounts of dairy products in the coming months.  The post ended with the phrase "As with everything about COVID-19, the future has uncertainties."  Inventories of cheese and butter for the end of April were released on May 21 and cheese and butter inventories had swelled to record highs and are no longer "in line."

High cheese inventories cause lower cheese prices and lower cheese prices reduce producer milk prices.

The huge dairy buying program included in the CFAP program is in place and requests for bids are open.  This will hopefully bring inventories back "in line", but there is still uncertainty as programs of this size have no history to relate to.  In the prior post, the CFAP was described as a "very rich" program.  It must be rich to bring relief to the devastating damage caused by the pandemic. 

The impact of the CFAP was modeled and indicates normal cheese inventories will not be reached until the end of 2020 or the beginning of 2021.

The charts below compare 2020 data to the prior four years.  In every chart, the year 2020 was a normal year until April numbers were published.  The CFAP program referenced in the prior post must now supply enough demand to reduce existing inventories in the upcoming months.

The increase in total cheese inventories are shown in Chart I.  Cheese inventories increased from 1373 to 1483 million pounds in April. This was the biggest monthly increase in history.  Butter inventories also grew to record highs and are covered in Chart IV below.

Some data like cheese production and disappearance for April is not yet available.  On the demand side, the most obvious culprit is the lack of demand by food service.  The restaurants that food service supplies were largely closed in April.  Therefore, the food service companies which provide about half of the demand for dairy products were cutting back on purchases.

Chart I - Total Cheese Inventories in Cold Storage

Cheese in cold storage is reported by the USDA as "American Cheese" and "Other Cheese."  Charts II and III report these inventories separately.  These charts allow a "drill down" to see more precisely where the major issues are.

"Other Cheese" inventories grew significantly in April.  "Other Cheeses" are mostly Italian cheeses lead by Mozzarella which accounts for 57 percent of the production of "Other Cheeses".  In March, the "Other Cheese" inventory was at a record level.

Chart II - Inventory of Other Cheese

"American Cheese" reached record highs in April as shown in Chart III.  Milk pricing is based on the price of cheddar cheese.  While cheddar cheese inventories are not reported separately, they do make up nearly three quarters of "American Cheese" production.  Therefore, if American Cheese inventories are high, cheddar cheese inventories are no doubt high as well.  Cheddar prices on the CME fell to a 20-year low in April.  NASS cheddar cheese prices that are used to set milk prices were not as low as the CME auction prices but were also near twenty-year lows.  This is the reason for the April Class III milk price of $13.07/cwt. which was a 10-year low.

Chart III - American Cheese Inventories in Cold Storage

Butter inventories in cold storage also hit a record high.  Butter inventories have been higher for all of 2020, but the April inventory level skyrocketed to a twenty-year high.  This decreased the butter price to a 10-year low.  This also contributed to the low Class III price for April 2020.

Restaurants use butter almost exclusively in food preparation and serving.  Households use a mix of plant-based spreads and butter.  This may have reduced the butter disappearance in April and might therefore continue to limit disappearance in May and June as restaurants begin to reopen.  As data is available, it will be reviewed here.

Chart IV - Butter Inventories in Cold Storage

When will cheese inventory levels return to normal?

Based on the CFAP program of Food Assistance which will begin buying cheese starting May 15, the excessive dairy inventories will likely start shrinking in June.  But the inventories will not normalize until near the end of 2020 or early 2021.  Data used in this model suggests that producer milk prices will likely drop in May and then slowly return to the levels of March 2020 through the remainder of the year and will extend into the early 2021.

Models are just as good as the assumptions made.  The extraordinary circumstances of the COVID-19 pandemic create uncertainty. The CFAP program and assumptions for this model are as follows:

• The CFAP as issued on May 8 will provide $1120 million for dairy purchases.  They are programed to spend $100 million a month starting May 15, 2020.  A supplemental program aimed at the third quarter of 2020 will provide an additional $120 million of dairy purchases.
• Because the CFAP provides dollars of purchases, a price per pound for cheese is needed to convert this into pounds of cheese purchases.  The prices used in two versions of the model are the average of the last 12 months of cheese prices, $1.82/lb. and the April low of $1.40/lb.
• The model assumes that 50 percent of the CFAP dairy purchases will go to cheese.  That is roughly the ratio of milk usage for cheese vs. other dairy products.
• Because the government cheese purchases will be given away, estimates of cannibalization of retail purchases are used in the model to reduce the impact of the purchases. The estimates used in the model assume a range of no cannibalization to 25 percent cannibalization of retail purchases.
• Normal cheese inventories are assumed to be the March 2020 ending inventory levels.  At that time the Class III price was $16.25/cwt.