The chart of the week is the US CME block cheese and international cheese markets.  As one can tell from the chart, the two markets have trended fairly well together during the last eighteen months or so.  Why is this?  Well, the principal reason the surge in cheese prices started in the spring of 2007 and continued throughout most of 2008 is due to an increase in US cheese exports.  You may remember the scenario.  New Zealand, the world’s largest dairy exporting country, was in the midst of a two year drought which had caused their milk production to notably decline.  The EU, the world’s largest dairy exporting region, had stopped subsidizing dairy exports and their dairy cow herd was shrinking.  And, the US dollar was historically depressed.  You may notice that both markets have moved upward in recent weeks.  World dairy prices at the levels experienced during the spring of this year really aren’t sustainable with the existing feed cost structure in place.  Additionally, the value of the US dollar has declined 4% since August and is currently trading at fourteen month lows.  Further, the EU, the world’s largest cheese producing region, is reducing the size of their milk cow herd which could lead to a halt in cheese production growth.  That being said, the fundamentals may not support the intensity of the recent cheese market increases.

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