CME barrel cheese prices have been higher than block prices for most of the year, creating issues for processors while raising the milk price for some dairy producers. This situation has persisted since April, an unusually long time, according to Betty Berning, analyst with the Daily Dairy Report. Historically, blocks have carried a price premium to barrels, but not this year, she added.
“While this is good for dairy producers in cheese-centric federal order pools, at least in the near term, it has been taxing for processors of block cheddar cheese,” Berning said. “The spread has been challenging for makers of blocks because their milk price is based on the average of CME block and barrel prices plus 3 cents, but their sale price is based on block prices, which on average have been cheaper than what processors have been paying for milk.”
For the past 45 trading sessions, the CME block-barrel price spread has been zero or negative. As of October 7, CME spot markets have traded 193 times in 2022, and in 113—nearly 60%—of those sessions, block prices have been priced the same as or cheaper than barrel cheese. Moreover, Berning’s analysis showed that 105 of those 113 sessions occurred since April.
Berning noted that from 2016 to 2021, the average CME price spread between block and barrel cheese was 12.4 cents, with blocks carrying the premium to barrels. So far this year, though, the block-barrel price spread has been a negative 1.15¢, and since the start of April, it’s averaged a negative 5.16¢, she said.
Even more astounding, Berning said, is that since August 1, the spread has averaged just shy of a negative 10 cents. If the trend continues, she added, 2022 will be the first year that barrel cheese has been more costly than block cheese.
“Cheddar blocks tend to be used in higher-end products such as natural cheese slices or shreds, while barrels are used to manufacture processed cheese, like American singles, but fresh barrels have been in short supply this year for a couple of reasons,” Berning said. “First, milk has been tight in some regions, with few truckloads offered below spot pricing. Typically, cheesemakers, who are willing to run overtime to manufacture additional cheese, mostly barrels, will buy excess milk sold at a discount. But this year, with little discounted milk available and persistent labor shortages, processors have opted not to purchase expensive milk or deal with the headache of finding labor for an overtime shift, and thus have not made many extra barrels.”
In addition, processors have been making more fresh Italian-style cheeses for use on pizzas as well as blocks for the export market. All these factors have caused Cheddar output, particularly fresh barrels, to drop, she said.
Also given inflation and its resulting decrease in purchasing power, many consumers have traded down. For example, instead of opting for a fine dining experience, which tends to include more high-end cheeses and butter, consumers are choosing to go to fast food restaurants, which tend to use more processed cheese. And with fall in full swing, Berning noted that football fans have likely increased their demand for processed cheese spreads and dips.
“However, with cheese stocks at all-time highs, total cheese production at record levels, and barrels being only a fraction of the total cheese market, high overall cheese prices could destroy some demand, causing cheese prices to decline,” she said. “Decreased cheese prices with record-high inventories could further drag on milk prices and processor margins.”
