The cheese market is either doing pretty good or pretty terrible, depending on where you’re looking.

In the United States, cheese is primarily priced based on the Chicago Mercantile Exchange (CME) spot cheese market. The only cheese that trades on this exchange is fresh cheddar in 40-pound blocks and 500-pound barrels. Since November the spread between the two has widened out with the price of blocks holding up better than expected while barrels have been weak.

Blocks and barrels

The main difference between the blocks and barrels, other than package type, is that blocks are colored yellow while barrels are white. Blocks are typically used to make slices or shreds of natural cheese. Barrels are typically melted down to make processed cheese. While they are both cheddar cheese, they have different demand drivers. They also have different supply drivers.

There are only a few cheese plants in the country that can shift between producing blocks or barrels. There are also some processors that can move milk between different plants to try and shift some production between blocks and barrels, but for the most part, the supply side can’t adjust very quickly to the relative prices.

The widening spread over the past six months has likely been driven by more milk shifting into barrels. Exports are becoming an increasingly important part of the US cheese industry. US cheese exports went from absorbing 2.4% of production in 2009 to 7.2% of production in 2022. The US is the second largest cheese exporter in the world with Europe being the largest. While the US is increasingly building up a loyal and consistent demand base in the global market, relative prices between US, EU and Oceania supplies still factor into buying decisions.

European prices

Cheese prices in Europe have fallen faster and further than US prices have in late 2022 and early 2023. That has likely taken some export demand from the US. Processors who were exporting cheese have likely shifted some of the milk out of the varieties they were exporting and into cheddar barrels, which are pushing down the CME spot barrel price relative to blocks. The good news is cheese prices in Europe bounced a little higher during February and seem to have found some support.

The US cheese market looks relatively balanced, with the exception of the darkening outlook for exports in the second quarter. Cheese production growth has been on the mild side with production in December up 1.5% and January up 3.2%. Domestic cheese demand has been decent, up 1.1% in December and up an estimated 3.1% for January. That has kept cheese stocks in balance, which were actually down 0.3% from last year in January. The lower cheese prices over the past year, along with weaker prices for all dairy products, are pushing down milk prices for farmers, which is expected to slow milk production growth as we move through 2023. So the supply side is expected to stay restrained. The biggest bearish issue we can point to right now is exports.

We could still see cheese prices move a bit lower in the second quarter as the slowdown in exports leads to heavier stocks. But steady to higher cheese prices in Europe, along with slowing milk production growth in the US, should be supportive for cheese prices in the second half of the year and we could see both blocks and barrels of cheddar back above $2.00 a pound during the fourth quarter.

– Editor’s note: This material should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by the FCM Division of StoneX Financial Inc. (“SFI”) or StoneX Markets LLC (“SXM”). SFI and SXM are not responsible for any redistribution of this material by third parties, or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. Contact designated personnel from SFI or SXM for specific trading advice to meet your trading preferences. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by SFI or SXM.

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– Nate Donnay is the Director of Dairy Market Insight at StoneX Financial Inc. and has been applying his expertise in large complicated systems and statistical analysis to the international and US dairy markets since 2005.