It is going to be an interesting year for the US cheese market.

We are starting the year with new processing capacity coming online that is depressing prices, and there are even bigger increases in capacity that are slated to come online in Q4 and early 2025 that will have a significant impact on cheese supply and milk demand.

2023 in review

First, let’s review 2023 a little. Growth in cheese consumption slowed in 2023 as consumers were squeezed by inflation. All of the data isn’t available yet, but it looks like domestic cheese consumption was only up 0.8% in 2023 compared to average long-run growth around 2.5%.

Cheese exports in 2023 were also weak as European exporters undercut US prices early in the year, meaning cheese demand was on the weak side. Processors responded by limiting cheese production and largely balanced the weak demand and kept inventories mostly flat compared to 2022.

Late in 2023, a medium-sized cheese plant in Texas started up. Capacity at that plant is reportedly around 90 million pounds of American style cheese per year, although plants often start up at half-capacity or less while they work the kinks out. This increase in production is coming up against weak demand and cheese prices trending lower with the CME spot market in the $1.40s in late December 2023.

The market usually adjusts when new capacity comes online. The new plants are typically larger and more efficient and will undercut existing plants, which might reduce production or close. The lower cheese prices also generate more demand, which helps to balance the market, but this process can take months to play out.

New facilities

The interesting dynamics are going to happen in the fourth quarter. A large American-style cheese plant is scheduled to start up in Dodge City, Kan., with capacity around 300 million pounds of cheese a year. Plus, a large mozzarella plant in Lubbock, Texas, also with capacity near 300 mil. lbs. will be starting up in Q4.

There will also be a couple of medium-sized plants or expansions in the Upper Midwest and New York that will come online in late 2024 or the first half of 2025. This might be the largest increase in cheese processing capacity that we’ve ever seen in an 18-month window.

These companies are making large investments in these plants, with the Dodge City plant reportedly costing $650 million and the Lubbock plant reportedly around $1 billion. Once the plants are built, they represent a huge fixed cost and there will be an incentive to run milk through them to try and start to recover those costs.

One big issue will be milk availability. US milk production has been weak and farmers in the South Central/Western US have been cutting cows during 2023. With interest rates high and farm level margins below average, there doesn’t seem to be much interest in expanding milk production to fill these new cheese plants, causing more buyers competing for the same amount of milk, which suggests over order premiums are probably going to increase in the South Central region.

The US cheese market is currently dealing with a medium-sized increase in processing capacity which has pushed prices lower, but the aggregate supply and demand data doesn’t look heavy and the relatively high prices on the world market should help to pull US cheese prices up into the $1.70s in coming months. But new capacity coming online in Q4 or early 2025 could push prices back down again.

Editor’s note: This material should be construed as market commentary, merely observing economic, political and/or market conditions.

– Nate Donnay is the Director of Dairy Market Insight at StoneX Financial Inc.