Market Watch Dairy: More cheese, please

Jerry Dryer is the editor of Dairy & Food Market Analyst, www.dairymarketanalyst.com. You can contact him at jdryer@dairymarketanalyst.com.

Increased global demand for cheese is good news for U.S. dairy farmers.

With the increase of cheese consumption around the world, it seems more people than ever are saying, "Cheese, please."

This is good news for U.S. dairy farmers, as more than 40% of all milk produced in the U.S. is used for cheese. Every time the cheese price moves up a penny, the Class III milk price moves up a dime.

During 2011, each American, on average, consumed 33.5 lb. of cheese. The per capita consumption number has increased by 4 lb. to 5 lb. for each of the past four decades. This sales growth is the envy of everyone in the food business.

While most segments of the dairy business are consolidating, the U.S. cheese business is expanding. Today, more than 300 companies and cooperatives operate 524 cheesemaking plants. That’s 30 more plants than just two years ago.

Last year, these plants produced about 10.7 billion pounds of cheese. That’s the equivalent of nearly 107 billion pounds of milk being poured into cheese vats coast-to-coast. Equally important, that volume of milk turned into nearly $40 billion worth of cheese and whey products.

Cheese moves through many channels on its way to the consumer. Reliable data is hard to come by, but my experience and analysis suggests about 35% moves through retailers and 35% reaches the consumer via a restaurant meal, give or take five percentage points on either side for both of these estimates.

In 2012, export shipments accounted for slightly more than 5% of cheese production. The rest was used as an ingredient in other foods, such as frozen pizza and boxed macaroni and cheese.

Only one segment, albeit a large one, is suffering losses. Processed cheese has fallen out of favor. Retail sales data show 3% to 4% sales declines month after month for the past several years. Anecdotal evidence indicates processed sales are also slipping in the restaurant channel.

This cloud, however, has a silver lining. In the backyards of America, grillers are shelving processed cheese for slices of natural cheese. Last year, grocery stores sold more than 800 million pounds of sliced cheese, putting its sales right up beside those of shredded cheese.

The same trend is evident in the foodservice segment. My analysis and input from others points to a significant shift away from processed American cheese in restaurants.

Cheeseburgers are now adorned with Swiss, Gorgonzola or Muenster in the fastest of fast-food joints. Turning to the "fast casual" side of the restaurant business (think Panera Bread), a full range of sandwich meats demands a full range of sliced, natural cheeses.

Meanwhile, emerging economies around the world are welcoming McDonald’s, Burger King, Pizza Hut, Domino’s and all manner of American-made food. I call the menus at these restaurants "cheese-friendly," for obvious reasons.

Bottom line: More than 40% of the U.S. milk supply will be headed to the cheese vat for a long time to come. That’s good news for all U.S. milk producers.