A Better Cheddar Benchmark? A Daily Cheese Auction Is Going Electronic
June 23 2017 - 8:29AM
Dow Jones News
By Alexander Osipovich and Benjamin Parkin
People wearing colored jackets in Chicago will be shouting at
each other about cheese for the final time on Friday.
A daily 10-minute auction in Chicago that helps set the national
price of cheese is going electronic next week, after being held in
a traditional open-outcry format for decades. CME Group, the
exchange giant that oversees the auction, will run it Friday in its
old form for the last time.
"We're all going to miss the yelling and the screaming," said
Dean Kinnas, a dairy options trader at the CME-owned Chicago Board
of Trade or CBOT exchange.
Held in a corner of the CBOT trading floor in downtown Chicago
each weekday at 10:45 a.m. Central time, the spot call cheese
auction is among the smaller and more obscure markets in CME's
empire. There are often only a handful of trades executed each day,
each representing a "carload" of 40,000 to 44,000 pounds of
cheddar.
CME hopes the electronic platform will boost participation, with
companies able to access the auction and monitor prices from
anywhere in the world. Earlier this year, CME shifted similar
auctions for butter and nonfat dry milk to the new format.
Increasing volumes could also bolster confidence in the
benchmark cheese price that is determined by the auction. The
cheese benchmark has been dogged by allegations of market
manipulation over its centurylong history.
Last year, around 50 million pounds of cheese were traded in the
auction, less than 1% of total U.S. cheese production, dairy-market
experts say. Despite the relatively small volumes, the daily spot
price from the auction is widely used in the U.S. cheese
business.
More than 80% of the wholesale cheese transactions in the U.S.
are priced off the CME spot cheddar price, said Dave Kurzawski, a
senior dairy broker at INTL FCStone Inc.
Other types of cheese are typically bought and sold at a premium
or discount to cheddar. For instance, a dairy plant might agree to
sell mozzarella for 10 cents a pound above the average price of CME
spot cheddar from the previous week.
"Cheddar is kind of the lowest common denominator of cheeses,"
Mr. Kurzawski said.
The number of open-outcry trading floors has dwindled amid the
inexorable shift to electronic markets. In December, CME shut down
the trading floor of the New York Mercantile Exchange in Manhattan,
following a long decline in open-outcry volumes.
At the spot cheese auction on Thursday, some 20 brokers barked
and haggled, phones pressed to their ears as they relayed orders
from customers, such as dairy plants and food processors.
Pete Turk, a broker and co-owner of Rice Dairy LLC, said going
electronic would deprive the market of the emotional buzz that
comes with face-to-face trading.
"You can't feel a screen," he said on the sidelines of the
auction. "People like to see and feel that emotion to understand
what's going on."
The cheese auction traces its history back to the founding of
the Wisconsin Cheese Exchange in 1918. Later renamed the National
Cheese Exchange, it was based for decades in Green Bay, Wis. In
1997 it closed down, and the market shifted to Chicago.
Rumors of market manipulation tarnished the reputation of the
National Cheese Exchange, with dairy farmers accusing Kraft Foods
Inc. and other big food companies of using it to keep prices
artificially low. Multiple lawsuits filed by farmers against Kraft
in the late 1990s were all eventually thrown out, and regulators
never filed charges against the food giant, which denied the
accusations.
Moving the market to Chicago put the cheese auction under CME's
surveillance and regulation, but that didn't end concerns about
possible manipulation.
In 2008, the Dairy Farmers of America Inc. and two of its former
executives paid $12 million to settle allegations by the Commodity
Futures Trading Commission that they had attempted to manipulate
the price of milk futures by repeatedly buying cheddar in the
auction. DFA, a nationwide farmers' cooperative, neither admitted
nor denied wrongdoing.
Write to Alexander Osipovich at
alexander.osipovich@dowjones.com
(END) Dow Jones Newswires
June 23, 2017 08:14 ET (12:14 GMT)
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