With a handful of brokers, Chicago Mercantile Exchange helps establish values


Capital Press

With milk prices down the tubes since late last year, concerns about how milk prices are set have escalated.

Some dairy producers claim processors have too much control and that milk prices shouldn't be based on limited trading on the Chicago Mercantile Exchange. Instead, they want the federal government to regulate the price based on production costs.

The nation's milk prices are based on the Chicago Mercantile Exchange's cheese prices. The exchange is a cash market, with brokers buying and selling cheese for their clients. The trading is done up to a maximum of 10 minutes a day, with anywhere from zero to a few trades made.

The limited trading and limited number of players has producers concerned that collusion and manipulation by processors may occur.

Peter Turk, a registered floor broker at the exchange, was willing to take the heat and explain CME trading at an Idaho Dairymen's Association meeting earlier this month.

Turk, managing partner for Rice Dairy, first pointed out that brokers are independent of the companies they represent.

CME consists of 20 to 25 floor brokers, representing a total of 30 to 35 clients, including co-ops, cheese companies, import-export companies, food services and others, he said. About half of those clients are on the call, a live feed during the trading, using the market. Ten to 15 participate actively on the exchange, with five to seven being very active.

Others on the call who are not participating may be listening in to follow what is going on during the session, Turk said.

They might use that session to determine what they need to do with actual cheese pricing, purchasing or hedging.

"So even though they are not using the market directly, they do use the pricing mechanism of the session to accomplish their buying, sales or hedging needs," he said.

In the first two minutes of trading, buyers and sellers can bid, offer or trade with other brokers. After that, an announcement is made and auction-style trading begins. All told, the session lasts a maximum of 10 minutes.

While cheese prices may be set on only a few trades a day, the majority of American cheese is represented on the exchange. Trades are transparent and representative of the industry, he added.

"Those players represent the gamut of the industry," Turk said. "Is the CME's cash market manipulated? I say no. I truly believe that."

Jon Davis, general manager of Jerome Cheese, said producers should understand it's a pretty small community of buyers.

"There are only about 10 core buyers," he said. "Just because all of it doesn't physically go through the Merc doesn't mean it doesn't matter; 99.9 percent is priced off this market."

With cheese traded on the exchange, the cash market is monitored much more closely and with greater transparency, versus the over-the-counter markets, which have no oversight, Turk said.

"There's fairly good policing from both sides. Though there's a potential for manipulation, there's that policing," he said.

The fact that there are multiple brokers is another factor that would inhibit collusion, Turk added.

"The market gets to a certain point, it's going to trade," he said. "Markets are going to go where they need to go, and no one person or company is bigger than the market. I truly believe this."

Staff writer Carol Ryan Dumas is based in Twin Falls, Idaho. E-mail: crdumas@capitalpress.com.

Cheese-milk connection

In unregulated milk-producing areas such as Idaho, processors use the average monthly Chicago Mercantile Exchange price in a cheese yield formula to calculate the price they pay for milk, according to Phil Plourd, president of Billing and Associates.

Technically, the CME price isn't used for milk pricing in areas with federal milk marketing orders. The USDA National Agricultural Statistics Service survey price, based on the average price buyers paid for cheese a week earlier, is plugged into the federal formula.

As a practical matter, that's going to be the CME price.


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