More than half of U.S. milk is used for Cheese. Dairy farms supplying the cheese producers are paid primarily on the value of milk protein and butterfat components. As covered in prior posts, the farm revenue from milk protein and butterfat are currently low. The price of milk protein is based on the cheese price minus the butterfat price (paid for separately) shown in the formula below.
Protein Price = ((Cheese Price – 0.2519) × 1.383) + ((((Cheese Price – 0.2519) × 1.589) – Butterfat Price × 0.91) × 1.17)
The price per pound of cheese is currently very low and trending lower. This reduces the value of milk protein (Chart I). Why is the price of cheese at levels typical of the prices 10 years ago? The price of cheese is based on the wholesale price of Cheddar cheese. With one exception, all data in this post is based on 12-month moving averages to eliminate volatility.
Chart II follows the combined production of all cheeses. Cheese production is a well-managed part of the dairy industry. Production shows a smooth increase of 20% over 10 years.
Charts III and IV cover the domestic consumption of cheese. Chart III is based on 12-month moving averages and Chart IV reviews the data monthly. The trend lines show that there is no growth in cheese consumption. The growth in domestic consumption over the 10 years is only 13%.
So where does the cheese go if production is greater than domestic consumption? Chart V follows the growth in cheese exports. Over the 10 years covered in the post, the growth is over 200% and appears to be accelerating.
Table I below lists the annual cheese per capita consumption in the U.S. compared to five European countries. The U.S. cheese consumption is 30% lower than Demark. The growth of cheese consumption in the U.S. shown above in Charts III and IV indicates that the U.S. will not reach these European levels of per capita consumption.
SUMMARY
If the U.S. continues to increase cheese production, it will have to be exported. The increase in cheese production is linked to the current high milk production. In the last two years, there have been large investments in new cheese processing plants which increases production capacity.
The lack of increased domestic per capita consumption is linked to the current high inflation and a saturated cheese market.
Because of the transportation costs of exports, the price of cheese exported must be priced low to meet competitive prices from other countries.
Therefore, the balance between production and domestic demand will keep cheese prices low. Supply and demand controls prices for commodities. That in turn will keep milk protein prices low. If butterfat increases in value, milk protein prices will fall further.
