`Got Bucks?' Dairy pricing has history of manipulation
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By Andrew Martin Tribune national
correspondent
December 30, 2004
Dairy producers have carefully
crafted a wholesome, all-American image, exemplified by the ubiquitous "Got
Milk?" milk-mustache ad campaign. But the dairy pricing system has a long
history of price manipulation and scandal.
Cheese dealers in Wisconsin
were accused of price-fixing in 1911. A decade later, meatpackers were fingered
for pushing up the cheese price in hopes that consumers would buy more
meat.
The dairy industry was even embroiled in Watergate for giving the
Nixon administration $2 million in campaign contributions in exchange for
boosting federal price supports for milk. Among the contributors to the Nixon
campaign was Mid-America Dairymen, whose executive vice president, Gary Hanman,
was questioned by Watergate prosecutors but not charged, records
show.
Cheese exchanges haven't fared much better. The first cheese
exchange opened in 1918 in Plymouth, Wis., where industry leaders came to a
tacit understanding that they could determine a fair price for dairy products
nationwide.
Ever since, there have been constant allegations that the
market was fixed. That's because the cheese exchange has always been what is
called a "thin market," meaning there are a small number of trades relative to
the total number of outside transactions that are based on the market's
prices.
The most recent scandal came in the mid-1990s when Kraft Foods
was accused of manipulating the prices lower at the National Cheese Exchange
when it was located in Green Bay. But Kraft wasn't the only one accused of
wrongdoing.
Hanman, then the head of Mid-America Dairymen and chief of
Dairy Farmers of America, was suspended from trading for two months in 1988 for
bragging to his members about boosting the cheese price.
Hanman's claim
"was obviously damaging to the reputation of the Exchange in that it implied
that its members can use the facilities of the Exchange for illegal price-fixing
purposes," according to minutes of the exchange's board. When the Green Bay
exchange was closed and the trading was moved to the Chicago Mercantile Exchange
in 1997, industry officials promised that the Merc had better
oversight.
But the system for pricing milk and cheese has changed little.
The exchange is now open every day, instead of once a week, and the trades are
confidential, instead of posted publicly as they were in Green Bay. But it
remains a thin market where one player can push prices up or down, experts
said.
The cheese exchange is a "clearing market" where institutional
users can sell when they have too much and buy when they don't have enough. It
also gives traders current price information so they can assess the risk of
contracts in the much larger futures market for milk.
Unlike many futures
trades, where only paper is really traded, traders at the cheese exchange buy
and sell actual 40,000-pound loads of fresh cheddar cheese. The cheese is
delivered either in 40-pound blocks or 500-pound barrels. Blocks are typically
cut up into cheese that is sold in grocery stores; barrels are used in processed
food.
The cheese exchange was never intended as a means to set dairy
prices, said John Harangody, director of agricultural commodity products at the
Merc. "People have done that on their own," he said.
The federal
government tried to reform dairy pricing in 1997, when the cheese exchange moved
to Chicago. Instead of using the cheese exchange to determine the minimum price
for raw milk, the Agriculture Department now surveys dairy manufacturers once a
week to determine how much they are charging.
But because dairy
manufacturers still look to the Merc to determine how much to charge customers,
the survey price is almost always the same as the Merc's.
