McCully Consulting

Block Barrel Spread – 2018

Over the last two years, there has been a lot of talk about the historically wide spread between Chicago Mercantile Exchange (CME) block and barrel cheese prices. Various reasons have been offered up, but the causes are rooted in several supply and demand factors. These include plant capacity, cheap surplus milk in the Midwest, export demand for blocks, and the long-term downtrend in process cheese demand. The barrel market has moved from oversupply to balanced back to over- supply in the last five years. Three barrel cheese plants closed in 2013-15 that produced 125-135 million pounds of barrel cheese per year. These plants were Kraft’s Bentonville, Arkansas, plant, DFA’s Monett, Missouri, plant, and Twin County in Iowa. After a year of relative balance and a narrow spread, around 100 million pounds of net capacity was added by 2017, largely as a result of two new plants. For blocks, there were several expansions with the largest being Hilmar’s Texas plant. However, quite a bit of the new capacity was in 640-pound blocks and not 40-pound blocks. In addition, 40-pound block production declined at several other plants. By 2018, relative to demand, 40-pound blocks have been tight while 640-pound blocks and barrels have been in surplus.

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