Prices are always established by the natural forces of supply and demand. Of course, cheese makers are interested in high prices, so they have an incentive not to over-produce.
However, in the quest for market share and increased company sales there can be over-production in the short run. In the long run, no one will produce a commodity like cheese if there is not sufficient demand.
The demand side is made up of two distinctly different pieces - domestic consumption and exports.
US cheese consumption has been increasing over at least the last 40 years, but it is still well below the level of other affluent societies - so continued growth can be expected.
Domestic consumption makes up nearly 95% of the total cheese disappearance, so this is obviously a major factor.
Note the recent drop off from the long term trend line in the above graph. Cheese consumption does depend on pricing.
If cheese goes up in price, individuals and the food service industry find ways to reduce availability and consumption.
The retail price of cheese, which is illustrated in the chart below, has grown significantly since 2007, and while consumption has increased, it has increased at a slower rate than previously.
Exports of cheese currently make up a little over 5% of the demand for US cheese.
This is by far the most volatile part of cheese demand, as it is dependent on worldwide events and exchange rates.
Cheese exports have been increasing since 2006 - quadrupling since that time. However, the volatility is apparent in the chart below. The most obvious example of this is in the time frame from 2006 to 2008.
One of the big factors for this was the swing in exchange rates between the New Zealand dollar and the US dollar.
In early 2008, the New Zealand dollar was very strong versus the US dollar, so domestically-manufactured cheese was less expansive.
US exports increased in a matter of months to double the prior levels. Of course, cheese prices also increased as a result of the increased demand and Class III milk went to over $20 per hundredweight (cwt).
In 2009, the New Zealand dollar returned to a more normal level and US cheese became more expensive on the world market.
As a result, cheese exports fell by a third.
US-based John Geuss is the editor of US dairy commodities blog, MilkPrice.
For the next installment of John's four part special on the US milk payment system see DairyReporter.com next week.