Agriculture Reference
In-Depth Information
market prices are determined by digital trading that takes place at lightning speed. The spot price of ched-
dar cheese at the CME is the basis for the federal government's milk price formulas. While this price set-
ting should be transparent, it tends to be secretive and understood only by insiders. The cheese commodity
futures trade occurs for half an hour a week, is estimated to involve forty or fewer traders working for half
a dozen firms, and covers 80 percent of the cheese marketed in the United States.
30
In 2008 the Dairy Farmers of America and two of its former executives were fined $12 million for at-
tempting to manipulate the price of fluid milk through cheddar cheese purchases at the CME (two other
executives paid smaller fines).
31
The very small number of traders representing huge dairy companies can actually influence the price of
cheese at the CME (and thus the price paid to farmers for their milk) by holding or selling cheese at stra-
tegic moments. The Government Accountability Office (GAO) determined that cheese prices at the CME
were prone to manipulation.
[T]he spot cheese market remains a thin market which in combination with the presence of a small number of
traders that make a majority of trades and the spot cheese market's pricing structure contributes to questions
about the potential for price manipulation. . . . Academic analyses and cheese and dairy industry participants
have raised a number of concerns associated with thin markets being susceptible to manipulation. These con-
cerns include the following: Dominant traders may be able to attempt to manipulate prices more easily in thin
markets. Prices in thin markets may not reflect supply and demand, even without manipulative behavior by
dominant traders.
32
As Joel Greeno explained:
The crisis in dairy is real. The problems in dairy are man made. . . . The Chicago Mercantile Exchange decides
everything in dairy prices. . . . The CME cheese trading is a highly leveraged, thinly traded market with few
players. Currently, two players mainly control CME block cheddar trading. . . . Two players do not make a mar-
ket, and at least not a true market indicator. All of the industry marches in lock step with CME prices. With a
history of price fixing, the CME block trading cannot be the deciding factor in milk pricing.
33
The GAO documented the small number of traders dominating the market. Between January 1, 1999,
and February 2, 2007, two market participants purchased 74 percent of all block cheese, and three market
participants sold 67 percent of all block cheese. During the same time period, four market participants pur-
chased 56 percent of all barrel cheese, and two market participants sold 68 percent of all barrel cheese.
34
John Bunting, an activist dairy farmer from Delhi, New York, explains that, before the 1980s, “farmers
were paid a price based on the cost of inputs plus profit.” He says that with the stroke of a pen, Reagan did
away with parity (fair pricing), and he removed resources from antitrust enforcement. Bunting has written
extensively on these issues. In his report “Dairy Farm Crisis 2009: A Look Beyond Conventional Analys-
is,” he writes: “Dairy markets are run by an oligarchy—a few elite players—with little or no governmental
oversight. As such, the current financial situation provides an opportunistic moment for key players to un-
duly depress farm milk prices and reap both profits and market power.”
35
Bunting has experienced firsthand the market power of the big players in the industry. DFA, the only
purchaser of milk in his area, will not buy from him. He says that “his politics put him on the wrong side”
of finding a market for his milk and he had to cull his herd. He has only a few cows now that produce milk
for his family, and the rest he feeds to the pigs.
He goes on to say that ever since the Reagan era, the price farmers are paid for milk has fallen almost
every year, but the price consumers pay for milk has continued to rise. Besides the manipulation on the
Search WWH ::
Custom Search