Cheese futures in Chicago have tumbled 14 percent in the past three weeks and may have further to fall, market analysts say, likely taking the milk market along for the ride.

As cheese traded at historically high levels above $2 a pound most of the summer, demand from major buyers appears to have eroded in recent weeks, analysts say. Cheese stockpiles have accumulated in cold storage over the summer, also indicating slower demand.

That suggests the cheese market has peaked for this year, and make sink as much as another 15 percent from current cash levels, according to Dave Kurzawski, a dairy broker with INTL FCStone in Chicago.

“Recently, we’ve seen what happens when price increases from the manufacturers of cheese get pushed through to buyers – demand deteriorates and prices fall,” Kurzawski said in an Aug. 31 e-mail.

While some cheese buyers make step up purchases with prices in the mid-$1.70s, clearing out some fresh product, the market is “a far cry from another run at $2,” Kurzawski said. “In fact, do not expect that to happen for the balance of 2011.”

Cheese is the major driver of milk prices in the U.S., according to University of Wisconsin economist Bob Cropp. About 47 percent of the nation’s milk is used for cheese production, with another 30 percent for beverage milk and the remainder for other dairy products, Cropp said. Nearly 90 percent of Wisconsin’s milk goes to cheese.

At Chicago-based CME Group, home to benchmark futures contracts based on Class III milk and cash-settled cheese, recent price patterns suggest both products have additional downside in coming weeks.

The CME contracts are “highly correlated,” Kurzawski said. “Any weakness in the cheese price will eventually flow through to futures,” and ultimately to prices for producers, he said.

In trading Aug. 31, cheese futures for delivery in September ended at $1.83 a pound, while October settled at $1.84. On Aug. 10, cheese futures reached $2.135, the highest price in at least a year, based on the closest-to-expiration contract.

September Class III milk futures fell 4 cents to $18.69 per hundred pounds, while October fell 1 cent to $18.62. Prices are down nearly 14 percent from a three-year high of $21.62 on Aug. 10.

Over the past year, CME cheese and milk prices have hit peaks followed by troughs on almost exactly the same dates, with declines ranging from 18 percent to 23 percent.

From an Oct. 29 peak of $1.759, cheese futures dropped 21 percent, to $1.382 on Dec. 27, before rising through early March. Over the same October-December period, Class III milk fell as much as 23 percent, from $16.92 to $13.10.

Some observers say cheese and milk prices have only limited downside in the weeks ahead. Based on current prices, CME traders expect cash-settled cheese to trade around $1.75 for most of 2012, only about 8 cents below prices at the close of August.

Alan Levitt, a consultant who writes the CME’s daily dairy report, said demand for the year-end holidays may support cheese prices. Additionally, soaring feed costs tied to record corn prices near $8 a bushel probably will keep milk prices elevated, he said.

“Since I don’t see corn coming down much, if at all, milk futures have to go up,” Levitt said. “If corn is $7 or $8, milk is going to have to be $20-plus. However, since global buyers are getting what they need at current price levels, there’s no impetus to bid the price higher.”

Even with recent declines, Class III milk futures are up about 41 percent since the end of 2010. For 2012, CME futures recently traded between $16.74 and $17.35. The U.S. Department of Agriculture’s all-milk price, another benchmark, reached a record $22 in August:

Kurzawski, the FCStone broker, said demand will be a key driver for cheese and milk markets in coming months.

“It wouldn’t surprise me to see a bit of an increase from current levels in the spot cheese markets, but there is a real vulnerability to the downside,” he said. “After some of the pipeline is filled at current levels… I expect to see another wave of selling in cheese to maybe as far as the $1.50 level.”