In March 2016, USDA reported there were 1.19 billion pounds of cheese in cold storage. At the end of 1983 and into the early months of 1984, USDA and private inventories were at 1.2 billion pounds.
Back then, the burdensome inventories brought about nearly a decade of pain as the U.S. dairy industry resized and consumers slowly ate their way through to the back of those cheese caves.
But there are a couple of caveats before past-as-prelude prognostications can be made. In 1983, cheese consumption was about 20 lb. per person compared to 34 lb. today. There were also 88 million fewer Americans to eat cheese, pizzas and tacos.
In other words, the cheese inventory per person is a little different this time around. On a person basis, the inventory today is about 3,700 lb. In 1983, it was about 5,200, or 40% higher. Remember, too, cheese inventory levels soared to a billion pounds just five years ago, and they didn’t lead to a price calamity. In fact, the average All-Milk price in 2011 averaged over $20 per cwt, powered by growing consumer demand.
“But I think we are pushing the envelope this time,” says Robin Schmahl, a hedging specialist with AgDairy, Elkhart Lake, Wis., who Dairy Herd Management and MILK regularly tap for market advice. “We are increasing production and we are increasing demand, and we’re still building inventories. So we may be tipping the scales to the other side.”
Mark Stephenson, a University of Wisconsin dairy economist, tends to agree. The volumes might not indicate a price collapse, but inventories both here and around the world are high.
The other point is U.S. prices have been well above world prices in much of 2015 and all of 2016 to date. That means U.S. cheese exports have fallen as well. January through March cheese exports were down 18%, and exports in 2015 were 14% less than 2014. Between 2009 and 2014, U.S. cheese exports were growing 30% per year on average.
But there is hope the slide in exports could be changing. U.S. cheese prices in mid-May toppled below $1.30 per pound, and global prices are now within a dime or two of U.S. prices.
However, the time it takes to sign contracts, source the cheese to contract specifications and actually deliver it via ship can take three to six months or more, Schmahl says. “So even if we get our prices comparable to world prices, it will take a while,” he says.
Exports essential to growth
The future of the U.S. dairy industry, if it is to grow, is in those export markets, says Marin Bozic, a University of Minnesota dairy economist whose research focuses on growth opportunities for the Midwest.
The rule of thumb is one day of each week’s milk production ends up in export markets. But it’s even more important than that. “Exports have been absorbing most on the increased milk production in the U.S. over the past decade,” he says.
Cow productivity, he points out, has been averaging 1.5% per year over the past five years. The U.S. population has been growing at half that rate. And with more cows, that means two out of every three pounds of additional new milk production must find a home in foreign mouths.
The future of export markets, in turn, is largely about growing cheese consumption worldwide, says Marc Beck, executive vice president of strategy and insights for the U.S. Dairy Export Council (USDEC). For various reasons, New Zealand, Australia and South American competitors likely won’t be able to substantially grow their cheese exports.
But with European Union (EU) dairy farmers now untethered by milk quotas, a brave new world of competition is emerging between the EU and the U.S., he says.
“U.S. farm gate prices are competitive with most of the major cheese producing countries around the world,” Beck says. But exporters have to think in terms of finished product delivered to the customer. That’s where the U.S. loses some of its competitiveness, particularly to Europe.
U.S. processors tend to be large-scale, commodity-type cheese producers who aren’t all that nimble in delivering niche products customers want. European competitors focus on value-added cheeses and other dairy products that meet customer specifications.
Beck worries the window of opportunity for the U.S. is closing unless it quickly retools to better meet customer needs. USDEC and USDA estimate if present trends continue, there could be a 31 billion pound gap between the expected growth in U.S. milk production and domestic use by 2020 (see chart).
So while there is a lot of opportunity for growth in the next several years, there is also a significant downside risk if the U.S. doesn’t capture exports to support surging milk production. “The U.S.,” Beck says, “has a strategic imperative to export.”
