August market report


We’re in the thick of the summer doldrums. It’s expected during these mid-summer weeks that dairy markets do not move much. And they haven’t. But the doldrums don’t mean there’s nothing interesting going on. Dairy industry observers are intrigued by notably sluggish retail and consumer cheese sales even though summertime usually means those sales should be peaking.

Natural cheese sales have flattened. Processed cheese sales are declining. Restaurants haven’t had a good month since early last year. Americans are saving more. Those insights point to a possible trend affecting the entire American economy: Consumers are holding onto cash instead of spending it on meals out or at the grocery store.

Lackluster cheese sales

Right now, the top story in the industry is sluggish cheese sales at a time when that market usually sees a seasonal spike.

Here’s what we’re seeing:

  • Retail natural cheese sales are slowing. 12-month sales are up more than two percent, but in the last few months sales have gone flat.
  • Retail processed cheese sales have fallen over 4.5 percent in the last two to three months, even faster than the 3.5-percent decline reported over the last 12 months.

That second point is intriguing because processed cheese sales normally spike alongside summer grilling season. The numbers indicate that didn’t happen.

Observing increased production of other products is a good indicator there’s a problem, too:

  • Mozzarella production in the first half of this year is flat.
  • Cheddar production in that same time frame is up 7 percent.
  • There is around 20 percent more cheddar cheese —or around 250 million pounds— stored in warehouses this year compared to 2015.

The first point signals that mozzarella cheese sales have slumped, both for use at home and in restaurants. We infer that because mozzarella doesn’t store as well as other cheeses. Handlers treat it almost the same way they treat Class I and Class II products, usually only making it when they’re sure they can sell it.

The second and third points follow from the first: Cheddar can sit in warehouses far longer than mozzarella can. Its storability makes it a default for producers when milk supplies are long and Class I and Class II plants are already running at capacity.

Cheddar plants in Wisconsin are reporting big intakes of the regional oversupply of milk in the Upper Midwest and Mideast. That local oversupply, by the way, is due in part to the weather. June was relatively mild there, extending the spring flush.

Restaurant recession

Restaurant industry data suggest the inference we made about cheese sales might be accurate.

According to Business Insider, we’re in the midst of a restaurant industry recession. That’s plain to see based on the Black Box Intelligence snapshot published in June. According to that report, the industry hasn’t grown since February 2016.

Restaurants have long been a bellwether of the economy. So what’s happened in the last year and a half to explain that industry’s weakness?

Consumer spending

The economy is in good shape in general. The labor market is close to full employment.

But at-large improvements in the economy haven’t necessarily carried over to individuals. Consumer spending this year has so far been uneven, according to this Bloomberg report detailing sluggish retail sales.

For the last two years or so, optimism came easy as oil prices plunged and consumers saw their disposable income increase as a result.

Things are a bit different now. Oil prices aren’t going up, but they aren’t going down, either. Disposable income —and wage growth— are generally flat. What little wage growth has been reported in specific sectors hasn’t been funneled into the economy. Instead, we’re saving more.

What we’re watching

A breakout from the summer doldrums is possible depending on how dairy markets move in the coming weeks. A counter-seasonal decline in cheese inventories in May and June has sparked our interest.

Something also worth watching is butter and powder sales in the U.S. and how domestic churns react to a butter shortage in Europe.

We noted in the July market report that while international butter prices have surged in the face of that shortage, American producers in the midst of a butter rally of their own haven’t yet been tempted to export.

While that temptation grows stronger as international prices push further upward, it would have to outweigh the incentive to keep selling butter at higher prices in the U.S. That incentive seems strong: Wholesale whole milk sales are up almost 4.5 percent this year over last, which could strain the supply of butterfat normally headed for the churn.

Finally, we’re watching currency exchange rates closely. After very steady trading against the Euro over the last four to five years, the dollar this year has begun to weaken—a trend we think will continue. A weaker dollar often translates to bullish dairy markets. It could be a hint that stronger prices are on the way.

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