Update on Butter and Cheese Inventories

As butter and cheese inventories increase, wholesale butter and cheese prices decline.  As butter prices decline, the value of butterfat declines.  As cheese prices decline, the value of milk protein and Class III milk decline.  This post will update the January 24, 2021 blog post.  As the COVID pandemic declines, more normal pricing relationships are returning to the dairy marketplace.  The next post will include a quarterly update of milk production, cows, component levels, and Somatic Cell Counts.  Together, these two posts provide insight into where producer milk prices are going. Together, the parameters covered in these two posts are a good predicator of future milk prices.

BUTTER

The relationship between butter inventories and butter prices is very precise.  As inventories increase, prices go down.  Chart I below is based on 12 month moving averages.  The moving averages reduce the impact of seasonal changes and monthly variations.  During 2018 and 2019 butter was above $2 per pound.  As inventories grew (the blue line) butter prices dropped (the red line).

Chart I - Inventory and Pricing of Butter

Butter production is currently well above domestic wholesale disappearance (Chart II).  This has led to the increased inventories in Chart I.  In the last few months, butter disappearance has increased, perhaps as more restaurants are reopening.

Chart II - Production and Disappearance 

Exports of butter remain small (Chart III), but with more available inventory, they have increased.  Most of these exports go to Canada.  However, this level of exports will not significantly impact butter inventories and butter prices.

Chart III - Butter Exports

If the recovery of restaurant dining continues, it may increase butter disappearance, but it will take some time to reduce inventories and improve butter (and therefore butterfat) prices. 

CHEESE

The parameter used for cheese pricing is the price of young Cheddar cheese.  While data on inventories of this specific cheese are not made public, Cheddar production does make up 70 percent of American cheese production (Chart IV). This post will therefore rely on data for American cheese as an indicator of Cheddar inventories.

Chart IV - Production of Cheddar cheese and "all other" American Cheeses 

For years, production of Cheddar cheese was stagnant.  However, in the last few years, production of Cheddar has seen some growth (Chart V).  Over the period of Chart V, Cheddar production has grown by more than five percent.

Chart V - Production of Cheddar - 12 Month Moving Average

The relationship between inventory levels and cheese pricing were mudded during the 2020 COVID pandemic.  However, in the more recent months in Chart VI, one can see the impact of lower cheese prices with larger American cheese inventories.  The "crazy" days of 2020 seem to be normalizing.  Chart VI below shows the correlation between inventories of American cheese and the Agricultural Marketing Service (AMS) prices for cheese.  During the last year, these inventories have grown by a little over two percent.

Chart VI - Inventory and Pricing of American Cheese

While Chart VI is somewhat concerning with growing inventories and lower cheese prices, the days' supply of American cheese shown in Chart VII below shows that the wholesale supply of cheese is in balance.  The difference between Charts VI above and Chart VII below is that the days' supply takes into consideration that American cheese production and disappearance is growing, and therefore inventories would be expected to grow as well.

Chart VII - Days of Inventory of American Cheese

 WHAT DOES IT ALL MEAN?

Changes in inventories bring changes in dairy producer milk prices.  Butter inventories are a little high and production is above wholesale disappearance.  Expect butter prices to remain low for the immediate future.

 Cheddar cheese used by AMS to price the value of "cheese" appears to be at reasonable levels.  There are minimal trends in Cheddar production that would influence major price changes.  Therefore, milk protein prices and the Class III milk price will probably be stable.

The next post will cover milk production, cow numbers and component trends.  All of these analytics are important because if milk protein and butterfat production is increasing faster than domestic consumption, inventories will increase, and prices will fall.