Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Alleged Manipulation of CME Cash Cheese Market

The cash cheese market at the Chicago Mercantile Exchange (CME) has
been in the news recently for
alleged price manipulation. (For example, “CME in cheese price fix
investigation”, Financial Times, August 17, 2006.). Six
senators including Hillary Clinton have demanded an investigation.

A decade ago, the cash cheese market used to be at the National Cheese
Market and one reason for moving the market to the CME was the hope
that oversight by the Commodities Futures Trading Commission (CFTC)
would clean up the market. It appears that the
political establishment is still not satisfied about the integrity of
the market.

On closer analysis, it is difficult to see how the integrity of
this market can ever be ensured as long as the US government manipulates
the US milk market with the Federal Milk Marketing Order (FMMO). FMMO
sets minimum prices paid to farmers for liquid milk based partly on
cheese prices. Essentially, FMO regards liquid milk as a combination
of butterfat, proteins and other solids. The weighted average price of
hard (cheddar) cheese, dry whey and butterfat determines the price of what
FMMO calls Class III milk. It then adds a price differential (varying
across regions) to this to get the price of liquid milk (Class I

relies on cheese prices reported from surveys by the National
Agricultural Statistical Service (NASS), but since practically all
large cheese transactions are based on CME prices, NASS reflects CME
prices with a lag. Thus by manipulating CME prices, the big diary
companies can affect prices determined under the FMMO.

This means that the big diary companies have every incentive to
manipulate CME cash cheese prices. Milkweed reported in
May 2006 that “A major focus of CFTC’s investigation centers
on Cheddar cash market activities by Dairy Farmers
of America – the nation’ largest dairy farmers’
cooperative” over the last five years. Complaints have also been
made against Kraft.

The best that the US senate can do to clean up the market is to get
rid of the depression era legislation that mandates government intervention
in the milk market.


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