DoJ Examining Role Of CME In Dairy-Price Volatility
June 25 2010 - 2:32PM
Dow Jones News
Multiple U.S. regulators are examining the role of derivative
markets run by CME Group (CME) in fostering volatility in dairy
prices, Assistant Attorney General Christine Varney said
Friday.
Dairy farmers have long blamed the derivatives markets for
distorting prices and are becoming increasingly vocal about the
effect of big retailers on competition in the sector.
Varney said at a workshop examining dairy market trends that the
Department of Justice, the Department of Agriculture and the
Commodity Futures Trading Commission would have "a conversation"
about the CME "and how that's working."
The Chicago exchange operator lists a range of contracts
encompassing dry and fluid milk, butter and cheese.
"Whenever you have a market that's as thinly traded as this
appears to be, it's certainly something you want to think about,"
Varney said.
The federal government has looked at the spot cheese market in
the past, including a 2007 Government Accountability Office report
that noted despite the limited number of participants in the CME
market, it still had a significant role in milk pricing.
The USDA's survey of cheddar cheese prices is highly correlated
to CME prices, the report said, because the CME prices are used to
set long-term contracts, "which are then captured by the (USDA)
survey of cheese prices--a significant commodity component in
USDA's minimum milk pricing formulas."
The workshop is the third of five multi-agency hearings being
held this year to examine competition in agriculture. The role of
the CME's markets was a recurrent theme in a morning session
featuring several farmers from around the country.
"All volatility in the dairy industry is caused by the CME,"
said Joel Greeno, a dairy farmer in Kendall, Wis.
Varney and USDA secretary Tom Vilsack didn't say that CME
trading is a problem, only that it was an issue that needed further
examination.
"I guarantee you that within a couple hours, folks at the
CME...are going to be asking themselves 'what do we have to do to
educate people?'," said Vilsack.
CME declined to comment.
Union representatives at the workshop also called on regulators
to examine the role of retailers in driving the sector's volatility
and poor financial performance, not just farmers and
processors.
Retailers regularly use milk as a "loss leader" to drive store
traffic.
-By Ian Berry, Dow Jones Newswires; 312-341-5778;
ian.berry@dowjones.com
(Jacob Bunge contributed to this article.)
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