Cheese inventory adds to pressure on dairy farmers


Issue Date: February 6, 2019
By Ching Lee

Americans may be eating more cheese than ever, but their growing appetite has not been enough to keep up with the nation's increasing cheese stocks that have been dragging down milk prices and farmer revenues.

Warehouses across the country continue to hold record volumes of cheese—peaking at nearly 1.4 billion pounds last fall, according to the U.S. Department of Agriculture—even as demand has been increasing at home and abroad.

"To deal with those stocks, Americans would need to eat more American cheese and exports would need to pick up," said Annie AcMoody, director of economic analysis for Western United Dairymen.

Dairy economists agree the growing surplus of cheese is driven by a combination of factors, but the underlying one is that much more cheese is being made than can be used.

"This has been an ongoing situation," said Joel Karlin, an economist and market analyst for Western Milling in Tulare County. "We've had record cheese stocks for at least three years now, and cheese inventories continue to build."

Even though Americans now consume more milk in the form of dairy products such as cheese—which saw per capita consumption rise by nearly 26 pounds since 1970—they have been drinking less fluid milk each year. That means more milk ends up in places other than the carton, AcMoody said.

"A lot of it has gone to cheese, but some has gone to butter and powder production," she added.

It's hard to pinpoint exactly when the nation's cheese surplus started to turn into a glut, but Sarina Sharp, a market analyst based in Michigan, noted that inventories have been building every year since October 2014.

The same has been true of the nation's milk supply. In fact, U.S. milk production has been on an upward trajectory for the last 10 years, rising 13 percent. Though production has slowed in recent months in the eastern part of the country, production in the West, including California, continues to rise.

"We've been making huge volumes of cheese because we've grown U.S. milk output relentlessly," Sharp said.

To keep pace with the growing milk supply, U.S. processors have added plant capacity, with some to make more cheese, she said. For example, Iowa cheddar cheese production jumped nearly 47 percent from a year ago, she noted, largely due to new capacity.

Usually when there is excess milk, more of it gets turned into powder than to cheese, as powder is more storable—though it is also the least valuable dairy commodity. However, despite stable or improved market prices for products such as butter, whey and powder, processors have continued to produce more cheese, even with prices continuing to drop, Karlin noted.

Karlin and Sharp agreed that the added processing capacity forms part of the reason. Cheese production—particularly cheddar in the form of 640-pound barrels used in processing and food service—remains the most efficient use of plant capacity, Sharp said.

"In the West, where milk remains oversupplied, many cheese processors are still trying to get as much milk through their plants as possible," she said.

Even though cheese consumption in the U.S. continues to rise, Karlin noted that the rate of growth has slowed recently. Typically, larger supply leads to lower prices, which then encourage more buying, allowing supplies to drop.

But, Sharp said, "It seems consumers have not been enticed by lower cheese prices to step up purchases appreciably."

Cheese sales did not improve much during the year-end holiday season either, and that's usually when consumption rises, Karlin said, noting that cheese inventory actually increased in the fall.

Lower prices for U.S. cheese have helped improve export demand, though. U.S. cheese exports rose 3 percent last year, according to the U.S. Dairy Export Council. Shipments to Mexico, the largest export market for U.S. cheese, grew 4 percent, despite an ongoing U.S.-Mexico trade dispute and retaliatory tariffs on U.S. cheese. USDEC said U.S. cheese exports to Mexico could have increased by 10 to 12 percent in 2018 if the tariffs were not in place.

On top of negative impacts from retaliatory tariffs and unresolved trade disputes, there's also growing concern that U.S. exports of cheese and other dairy products could further erode as competitors forge their own trade agreements without the U.S.

According to a new report from USDEC, new trade agreements between Japan and other countries will put U.S. dairy exports at a competitive disadvantage at a time when Japan is decreasing its own cheese production and expanding imports, especially from the U.S. and the European Union. Japan is currently California's fifth-largest dairy export market and the fourth-largest market destination for U.S. dairy products.

Australia and New Zealand—both major dairy exporters—are among the countries included in the multinational trade agreement that succeeded the Trans-Pacific Partnership, from which the U.S. pulled out in 2017. The revised agreement entered into force at the end of last year. Japan's trade agreement with the EU went into effect last week.

The USDEC study indicates implementation of the two trade agreements will result in lost U.S. dairy export sales of $5.4 billion during 21 years, with the cheese business feeling the most significant negative impact.

The council stressed that "without swift and effective action by the U.S. to secure a strong trade treaty with Japan that exceeds Japan's agreements with Australia, New Zealand and the European Union, the U.S. could see its market share drop in half over the next decade."

With U.S. dairy farmers facing economic hardships, Jim Mulhern, president and CEO of the National Milk Producers Federation, said "expanding opportunities overseas is the best way to counter that."

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.