Regulators take look at deals in Mercantile's cheese market
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By Andrew Martin
Tribune national correspondent
April 19, 2005
Amid allegations that the market is manipulated by a handful of powerful insiders, the Commodity Futures Trading Commission has reportedly requested documents on trading in the cheddar cheese pit at the Chicago Mercantile Exchange.
Officials with the exchange on Monday told a group of dairy farmers that the CFTC had requested documents on trading in recent months, according to several of the participants.
"They told us the CFTC had recently requested information about . . . severe aberrations in the marketplace," said Joe Logan, president of the Ohio Farmers Union and a former dairy farmer who participated in the meeting.
Officials at the mercantile exchange declined to comment about the meeting.
A spokesman for the CFTC, David Gary, said the agency's enforcement division occasionally requests documents from the mercantile exchange pertaining to the cash market for cheese to determine such things as who the major players are and how trading impacts the futures market for cheese. The futures market uses the cash market for cheese as its price basis.
But Gary would not say when and why such requests had been made. He said the exchange has cooperated with the requests.
Meanwhile, about 20 protesters--some of them wearing cow suits--stood outside the exchange Monday to voice displeasure with the cheese exchange. The price of cheddar cheese at the exchange is the basis for determining how much dairy farmers are paid for raw milk.
The protesters, including dairy farmers and farm activists, said the secrecy and instability of the market has made it difficult for them to project how much money they will make for their milk. They called for stricter enforcement of trading rules at the cheese exchange and more transparency in trading, which is now confidential.
"We don't feel that [the mercantile exchange] is enforcing the trading rules strictly enough," said Paul Rozwadowski, a 50-year-old Wisconsin dairy farmer who serves as chairman of National Family Farm Coalition's Dairy Subcommittee. The lack of enforcement, he said, allows the nation's largest dairy cooperative, the Dairy Farmers of America, and others to manipulate prices on the cheese exchange.
The cash market for cheese at the mercantile exchange sells less than 1 percent of the nation's cheddar cheese and is open for 15 minutes or less a day. But it is the basis for pricing raw milk and consequently nearly all dairy products that contain milk, from pizza and ice cream to milk gallons in the grocery.
Despite its enormous influence, it is virtually unregulated by the government. The CFTC normally regulates only futures markets, but the agency occasionally will investigate a cash market--which acts like a live auction where products are bought and sold--if it negatively impacts a futures market.
The Tribune reported in December that the Dairy Farmers of America strategically timed its purchases of cheddar cheese at the mercantile exchange to boost the prices its members were paid for raw milk. The cooperative is able to move the market, at least temporarily, because it is the dominant buyer of cheddar cheese at the mercantile exchange and there are only a handful of other traders.
While DFA's chief executive officer, Gary Hanman, has boasted that the strategy puts more money in dairy farmers' pockets, several protesters on Monday said it has only created more volatility in the market. Boosting cheese prices at the mercantile exchange could also push up prices for consumers. "What goes up must come down, and what goes up 20 cents goes down 40 cents," said Ken Dibbell, 71, a recently retired dairy farmer from New York.
The mercantile exchange released a statement Monday, saying it "believes strongly in the integrity of all its markets, including the spot dairy market.
"The exchange devotes significant resources, through our regulation department, to maintaining this integrity and closely monitors all our markets," the statement read.
John Bunting, a New York dairy farmer who attended the meeting, said five protesters met with nine executives from the exchange for slightly more than an hour.
The protesters also met with representatives of the Illinois attorney general's office and requested an investigation into alleged price manipulation at the exchange. Officials at the attorney general's office declined to comment about the meeting.
