Spot Cheese Market
Market Oversight Has Increased, but Concerns Remain about Potential Manipulation
Gao ID: GAO-07-707 June 21, 2007
The Chicago Mercantile Exchange (CME) is home to the spot cheddar cheese market, which impacts the prices of virtually all cheese traded in the United States, producer milk prices, and milk futures contracts. The spot cheese market, formerly the National Cheese Exchange (NCE) in Wisconsin, has been and continues to be the subject of concerns about price manipulation. GAO was asked to examine (1) the market's structure and ongoing concerns about price manipulation; (2) market oversight and efforts to address potential manipulation; and (3) how the market impacts federal milk pricing. In response, GAO compared the markets at NCE and CME, analyzed trading data, collected information about the Commodity Futures Trading Commission's (CFTC) oversight, and met with industry participants, academics, and agency officials.
Because the CMEspot cheese market remains a market in which few daily trades occur and a small number of traders account for the majority of trades, questions exist about this market's susceptibility to potential price manipulation. The structure and operations of the CME spot cheese market are comparable to NCE's, including trading rules, products traded, and market participants. However, there are differences, including daily trading at CME versus once-a-week trading at NCE. CFTC and CME provide oversight of the CME spot cheese market that did not occur on NCE. Both engage in activities that may detect and deter potential price manipulation at this market. CFTC, as part of its responsibility for regulation of commodity futures markets, monitors cash markets, including the spot cheese market, and can act on indications of manipulative activity. In addition, CME conducts daily surveillance and regularly reviews trading data and market trends. According to CFTC and CME officials, they have both made efforts to address allegations of the potential for price manipulation by examining the activities of participants in the spot cheese market. As of June 2007, none of these reviews have led to an instance of CFTC taking legal action against a market participant. CME's spot cheese market impacts federal minimum milk pricing through the NASS survey of cheddar cheese prices, which as shown below are highly correlated to the CME cheese prices. CME spot cheese prices are used to set long-term contracts, which are then captured by the NASS survey of cheese prices--a significant commodity component in USDA's minimum milk pricing formulas. According to USDA, the agency uses the survey, in part, because it captures more transactions than occur at the CME spot cheese market. However, in addition to largely capturing CME price data, it introduces a 1- to 2-week time lag between when data are reported by NASS and when certain transactions captured in the survey occur. Moreover the survey is not currently audited to ensure the accuracy of the information. These factors may contribute to milk prices paid by dairy market participants that are either not completely accurate or not current.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
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GAO-07-707, Spot Cheese Market: Market Oversight Has Increased, but Concerns Remain about Potential Manipulation
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
June 2007:
Spot Cheese Market:
Market Oversight Has Increased, but Concerns Remain about Potential
Manipulation:
GAO-07-707:
GAO Highlights:
Highlights of GAO-07-707, a report to congressional requesters
Why GAO Did This Study:
The Chicago Mercantile Exchange (CME) is home to the spot cheddar
cheese market, which impacts the prices of virtually all cheese traded
in the United States, producer milk prices, and milk futures contracts.
The spot cheese market, formerly the National Cheese Exchange (NCE) in
Wisconsin, has been and continues to be the subject of concerns about
price manipulation. GAO was asked to examine (1) the market‘s structure
and ongoing concerns about price manipulation; (2) market oversight and
efforts to address potential manipulation; and (3) how the market
impacts federal milk pricing. In response, GAO compared the markets at
NCE and CME, analyzed trading data, collected information about the
Commodity Futures Trading Commission‘s (CFTC) oversight, and met with
industry participants, academics, and agency officials.
What GAO Found:
Because the CME spot cheese market remains a market in which few daily
trades occur and a small number of traders account for the majority of
trades, questions exist about this market‘s susceptibility to potential
price manipulation. The structure and operations of the CME spot cheese
market are comparable to NCE‘s, including trading rules, products
traded, and market participants. However, there are differences,
including daily trading at CME versus once-a-week trading at NCE.
CFTC and CME provide oversight of the CME spot cheese market that did
not occur on NCE. Both engage in activities that may detect and deter
potential price manipulation at this market. CFTC, as part of its
responsibility for regulation of commodity futures markets, monitors
cash markets, including the spot cheese market, and can act on
indications of manipulative activity. In addition, CME conducts daily
surveillance and regularly reviews trading data and market trends.
According to CFTC and CME officials, they have both made efforts to
address allegations of the potential for price manipulation by
examining the activities of participants in the spot cheese market. As
of June 2007, none of these reviews have led to an instance of CFTC
taking legal action against a market participant.
CME‘s spot cheese market impacts federal minimum milk pricing through
the NASS survey of cheddar cheese prices, which as shown below are
highly correlated to the CME cheese prices. CME spot cheese prices are
used to set long-term contracts, which are then captured by the NASS
survey of cheese prices”a significant commodity component in USDA‘s
minimum milk pricing formulas. According to USDA, the agency uses the
survey, in part, because it captures more transactions than occur at
the CME spot cheese market. However, in addition to largely capturing
CME price data, it introduces a 1- to 2-week time lag between when data
are reported by NASS and when certain transactions captured in the
survey occur. Moreover the survey is not currently audited to ensure
the accuracy of the information. These factors may contribute to milk
prices paid by dairy market participants that are either not completely
accurate or not current.
Figure: CME Spot Cheese Market and NASS Cheese Survey Block Cheese
Prices:
[See PDF for Image]
Source: USDA.
[End of figure]
What GAO Recommends:
GAO recommends that the U.S. Department of Agriculture (USDA) seriously
consider all industry proposals, including one to eliminate the
National Agricultural Statistical Service (NASS) survey of cheese
prices, in the minimum federal milk pricing formula. If USDA continues
to use the survey, GAO recommends that USDA audit the survey data. In
written comments, USDA agreed to audit the survey data. USDA did not
agree to proactively consider a proposal to eliminate the survey but
would give due consideration to all industry proposals.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-707].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Orice Williams at (202)
512-8678 or williamso@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Certain Structure and Operations of CME Spot Cheese Market Are Similar
to Those of NCE, and Certain Characteristics Result in Ongoing Concerns
about the Potential for Price Manipulation:
CFTC and CME Provide Increased Oversight of the CME Spot Cheese Market:
The USDA Survey of Cheddar Cheese Prices Largely Duplicates CME Cheese
Prices and Introduces a Time Lag into Some Milk Prices:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Agriculture:
Appendix III: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Average of Number of Transactions Per Trading Session by
Barrel and Block on the CME Spot Cheese Market, 1997-2006:
Figures:
Figure 1: Percentage of Trading, by Largest Block and Barrel Market
Participants, January 1, 1999, to February 2, 2007:
Figure 2: Influence of CME Spot Cheese Market Prices on Class III Milk
Pricing:
Figure 3: CME Spot Cheese Market and NASS Cheese Survey Block Cheese
Prices:
Abbreviations:
AMS: Agricultural Marketing Service:
CEA: Commodity Exchange Act:
CFTC: Commodity Futures Trading Commission:
CME: Chicago Mercantile Exchange:
DMO: Division of Market Oversight:
DOJ: Department of Justice:
FMMO: federal milk marketing order:
FTC: Federal Trade Commission:
NASS: National Agricultural Statistical Service:
NCE: National Cheese Exchange:
SRO: self-regulatory organization:
USDA: U.S. Department of Agriculture:
United States Government Accountability Office:
Washington, DC 20548:
June 21, 2007:
Congressional Requesters:
For almost a decade, the Chicago Mercantile Exchange (CME) has been
home to a spot cheese market, which impacts the prices of virtually all
cheese traded in the United States as well as producer milk prices and
milk futures contracts.[Footnote 1] This spot cheese market moved to
CME in 1997 amid allegations of price manipulation on the National
Cheese Exchange (NCE) in Green Bay, Wisconsin.[Footnote 2] NCE was a
nonprofit corporation established to be a market where surplus supplies
of cheese were bought and sold, and cheese had been traded there for
over two decades. Cheese producers generally use CME spot cheese market
prices to set their sales prices, according to industry participants.
In turn, minimum prices for raw farm milk bought by many cheese
manufacturers are set using a U.S. Department of Agriculture (USDA)
pricing formula whose most significant commodity component is the
weekly average of cheddar cheese prices drawn from a survey of large
cheese manufacturing plants.[Footnote 3] Futures contracts for milk
used in manufacturing cheese are also settled at expiration using the
minimum price for milk as determined by the pricing formula.
Some industry participants had hoped that moving the spot cheese market
would alleviate concerns about price manipulation. But during the last
few years, trade press articles have described ongoing concerns in the
dairy industry about potential price manipulation at the CME spot
cheese market and the potential effects on certain milk prices.
Generally, price manipulation is any planned operation, transaction, or
practice that intends to and causes or maintains an artificial price--
that is, a price that is higher or lower than it would have been if it
had reflected the forces of supply and demand. The Commodity Futures
Trading Commission (CFTC), which provides regulatory oversight of the
CME because of its futures markets and also has responsibility for
enforcing a federal prohibition against manipulating the price of any
commodity in interstate commerce, has received several complaints or
allegations from industry participants and others about price
manipulation on the CME spot cheese market. These concerns generally
involve observed price fluctuations on the CME spot cheese market and
the possibility that these fluctuations might result in prices that are
too high or too low. Such concerns have revived suspicions about the
market's susceptibility to manipulation and raised questions about the
effectiveness of the move from NCE in addressing concerns about price
manipulation and whether there is sufficient regulatory oversight of
the market.
Given these ongoing questions and the importance of the CME spot cheese
market in setting cheese and minimum milk prices in the United States,
you asked us to review the market's operations, its susceptibility to
manipulation, and the role played by various oversight and enforcement
organizations in monitoring the spot cheese market. Specifically, we
examined (1) the structure and operations of the CME spot cheese market
compared to those of NCE and ongoing concerns about price manipulation
on the CME spot cheese market, (2) how the market is regulated and
efforts to address potential price manipulation, and (3) how the CME
spot cheese market impacts federal milk pricing.
To address these objectives, we reviewed industry and academic
literature regarding market operations and obtained information from
CFTC, CME, and market participants on the structure and operations of
the CME spot cheese market. We reviewed existing studies that assessed
market characteristics associated with price manipulation, examined
available trading data, and obtained officials' views on potential
manipulation. We did not attempt to determine whether manipulation had
occurred on the CME spot cheese market; instead, we identified the
characteristics of this market that were consistent with those of
markets considered susceptible to price manipulation. We obtained and
analyzed information about CFTC and other oversight and enforcement
organizations on their roles in monitoring the CME spot cheese market.
Finally, we obtained and reviewed relevant laws and regulations related
to milk pricing in the United States as well as interviewed various
agency and industry officials about the role of CME spot cheese market
prices in milk pricing. We conducted our work between September 2006
and June 2007 in Chicago; Washington, D.C; and two locations in
Wisconsin in accordance with generally accepted government auditing
standards.
Results in Brief:
Several aspects of the structure and operations of the CME spot cheese
market are comparable to those that existed at NCE, and certain market
conditions at the CME spot cheese market continue to raise questions
about the potential for price manipulation. For example, the CME spot
cheese market, which has technical, market-specific rules based in part
on NCE rules, offers trading in some of the same products and has many
of the same industry participants as NCE. The CME spot cheese market
involves daily anonymous trading, whereas NCE traded cheese once a week
and trader identities were publicly known. Certain factors that were
prevalent on NCE and that are often associated with the potential for
price manipulation still exist, such as low trading volume and a small
number of traders who make the majority of trades. Although the CME
spot cheese market averages only a few transactions per day, CME spot
cheese market prices are used by the dairy industry in establishing the
prices that are used to set long-term contracts between market
participants. While a significant portion of the cheese industry
participates in the CME spot cheese market, the majority of trading at
the CME spot cheese market is concentrated among a small number of
traders, primarily large companies and cooperatives in the cheese and
dairy industry. Therefore, certain participants may have the ability to
influence prices through transactions on the CME spot cheese market.
Factors such as daily trading may, though, decrease opportunities for a
sustained influence on prices. For example, unlike at NCE, where a
price would remain in effect for 1 week, trading on a daily basis at
CME provides more opportunities for market participants to counter any
trades that may be at prices above or below what they consider to be
market value.
The CME spot cheese market is not regulated by CFTC or USDA, but CFTC
and CME provide oversight and assess allegations of price manipulation.
The Commodity Exchange Act (CEA), which establishes the U.S. regulatory
scheme for commodity futures markets and is CFTC's enabling
legislation, prohibits manipulating the price of any commodity in
interstate commerce and provides CFTC with authority to enforce this
prohibition. Moreover, because cheese prices established on CME could
impact prices in a related futures market for milk, CFTC's Division of
Market Oversight (DMO) has a surveillance interest in the trading
activity on the CME spot cheese market. Accordingly, CFTC has examined
allegations of price manipulation in the CME spot cheese market.
Moreover, mainly because of the link between the CME spot cheese market
and milk futures contracts, CFTC surveillance staff regularly obtain
data on price movements and periodically review trends in the CME spot
cheese market to identify potential manipulative activity in related
futures contracts. In addition, CME conducts daily oversight of the
market and may take disciplinary actions to enforce its rules, which
include prohibiting price manipulation of the CME spot cheese market.
CME officials noted that CME has a network of surveillance and
investigative staff observing trading, reviewing activities of market
participants, and verifying the accuracy and completion of transactions
on the spot cheese market. Both CFTC DMO and CME officials told us that
they had examined activities of participants in the spot cheese market.
These examinations may be in response to complaints and unusual price
movements identified by staff members. To date, none of these
examinations have led to an instance of CFTC taking legal action
against a market participant.
The CME spot cheese market impacts federal minimum milk prices through
the USDA National Agricultural Statistics Service (NASS) survey of
cheddar cheese prices, which is highly correlated to CME cheese prices.
Prices obtained through the NASS survey of cheese prices are a major
commodity component in USDA's minimum milk pricing formulas. The
survey, as it was intended by USDA, captured more transactions than
those that occurred at NCE, and it currently captures more transactions
than occur on the CME. USDA officials told us that the agency still
uses the survey for this reason. However, the industry, which under
federal law, would need to approve any changes to the use of the NASS
survey of cheese prices in the milk pricing formulas, has recently
recommended alternative proposals including using CME spot cheese
prices instead in setting minimum milk prices. Although USDA's
Agricultural Marketing Service (AMS) is in the process of obtaining
industry input, ongoing reliance on the survey raises three issues.
First, USDA does not audit the data collected in the NASS survey of
cheese prices and therefore cannot ensure the accuracy of the data used
to calculate the minimum prices of certain types of milk. Second,
although the NASS survey of cheese prices is intended to capture more
transactions than those used in CME trading, industry participants said
they use CME cheddar cheese prices as the reference price for most of
the cheese they sell. As a result, the survey results and CME spot
cheese market prices rarely differ significantly. Third, the survey is
not particularly timely. One to 2 weeks can elapse between when some
transactions occur and when NASS survey results capturing those
transactions are released. This time lag can contribute to dairy market
participants paying minimum prices for certain milk that do not fully
reflect current market conditions.
As AMS continues to collect information and evaluate the proposals put
forth by the industry concerning the NASS cheese survey, it must
balance the interests of the industry and ensure that the information
captured is accurate. This report recommends that USDA, in conjunction
with the industry, take steps to reduce the redundancy that exists in
the NASS survey of cheese prices and improve the timeliness associated
with its survey of cheese prices. Specifically, we recommend that USDA
give serious consideration to all proposals, in consultation with the
industry, including the industry proposal to use the CME spot cheese
market prices instead of the NASS survey of cheese prices in the
minimum federal milk pricing formula. However, if USDA continues to use
the NASS survey of cheese prices, we recommend that USDA implement an
auditing program for the survey in a timely manner to ensure the
accuracy of the information provided. We provided a draft of this
report to CFTC, USDA, and CME. We received written comments from USDA,
which are discussed later in this report and reprinted in appendix II.
We also received technical comments from CFTC, USDA, and CME, which
have been incorporated where appropriate. In its response, USDA agreed
with our recommendation intended to ensure that AMS implements a
program to audit data reported to NASS in its survey of cheese prices.
However, the agency disagreed with our recommendation to proactively
consider, in consultation with the industry, the industry proposal to
use CME spot cheese market prices instead of NASS survey of cheese
prices in the minimum federal milk pricing formula. Specifically, USDA
stated that it is outside of its authority to proactively consider
proposals to change federal milk marketing order provisions. USDA
stated that it would give due consideration to a current proposal to
use CME spot cheese market prices. We were not and are not recommending
that USDA take action outside of its current authority and have,
therefore, clarified our recommendation. In addition, USDA stated that
the continued use of the NASS survey seems prudent given that concerns
remain about potential manipulation at the CME spot cheese market. As
we note in our report the NASS survey of cheese prices largely
duplicates prices from the CME spot cheese market and does not address
concerns about price manipulation.
Background:
At any given time, participants in the cheese industry may have an
interest in buying or selling cheese for immediate delivery.
Historically, they could do so by identifying a buyer or seller through
their contacts and relationships in the industry or by participating in
various centralized markets throughout the United States where industry
participants gathered to buy and sell cheese. From 1974 to 1997, NCE
was the central market of, and functioned as a surplus market for,
cheese.[Footnote 4] It also served as the primary price discovery
mechanism for cheese produced in the United States.[Footnote 5]
In general, before 1987 cheese prices on NCE experienced little
volatility, because USDA purchased cheese to ensure that cheese prices
did not fall below a certain level. After mid-1988, the volatility of
cheese prices increased sharply because of lower price supports for
milk, and NCE's role in price discovery took on additional importance
until it closed in 1997.[Footnote 6] While price volatility does not
indicate that manipulation is occurring, the increased volatility in
cheese prices, the corresponding effect on milk prices, and a perceived
lack of oversight of NCE raised concerns about potential price
manipulation. Following a series of investigations and congressional
hearings involving NCE, a joint committee composed of a dairy industry
trade group and NCE solicited proposals for a new site for the spot
cheese market. CME was selected and the spot cheese market began
operating there in May 1997. CME, the largest futures exchange in the
United States, is a publicly traded corporation that offers a
marketplace where various commodities such as dairy products are traded
through futures contracts or spot markets. Various financial
instruments are also traded on CME.
Like NCE, the CME spot cheese market functions as a surplus market for
cheddar cheese. Industry participants consider the CME spot cheese
market a public price discovery mechanism, and prices are published
daily. Contracts for the sale of all varieties of cheese in the United
States are generally set using the prices of cheddar cheese established
at CME as the reference price. For example, a contract may specify that
cheese will be sold based on the previous week's average price of
cheddar cheese set at the CME. The contracts often include a premium or
a discount on the current price of cheddar cheese on CME based on
factors such as the quality and type of cheese and other costs such as
transportation.
One of the federal programs designed to assist dairy farmers is the
federal milk marketing order (FMMO) program, which is designed in part
to improve the income of dairy farmers by stabilizing market conditions
and establishing minimum milk prices.[Footnote 7] Under this program,
USDA uses national dairy market price information--including cheese
prices--to set the minimum prices that processors must pay for
unprocessed milk in specified marketing areas or orders. FMMOs
established a four-tier classified pricing system for setting minimum
milk prices on a monthly basis, based upon the intended use of the
milk. In general, FMMO class prices are determined by formulas that use
wholesale dairy product prices. For example, the Class III milk formula
uses monthly averages of weekly average butter, cheese, and dry whey
prices to set the minimum price of milk that is used in the production
of cheeses.[Footnote 8] According to one industry participant, pricing
a commodity based on the prices of products that the commodity is used
to produce is unusual. Prior to using the NASS survey as a component to
calculate minimum milk prices, USDA used cheese prices from NCE
directly as an input in its milk pricing formula. As concerns were
raised from industry sources and others about manipulation of cheese
prices at NCE, USDA developed the NASS survey of cheese prices as an
alternative to using NCE prices. In 1997, USDA stopped using NCE prices
in its minimum milk pricing formulas and began using data provided by
the NASS survey of cheese prices. USDA has continued to use the NASS
survey of cheese prices in certain milk pricing formulas as trading in
the spot cheese market occurred at the CME.
Certain Structure and Operations of CME Spot Cheese Market Are Similar
to Those of NCE, and Certain Characteristics Result in Ongoing Concerns
about the Potential for Price Manipulation:
The CME spot cheese market shares a number of operational and
structural similarities with NCE and has certain characteristics that
could make the CME spot cheese market susceptible to price
manipulation. Like NCE, CME is primarily a surplus market where small
amounts of blocks and barrels of cheddar cheese meeting certain
technical specifications are traded. Many market participants that
traded at NCE also trade at the CME spot cheese market. Moreover,
certain market conditions at the CME spot cheese market, including a
small number of trades and a small number of traders who make a
majority of trades, continue to make this market particularly
susceptible to manipulation.
Some Operational Aspects of the CME Spot Cheese Market Resemble Those
at NCE:
NCE and CME share many similarities, including certain trading rules,
products traded, the volume of cheese traded, and market participants,
but there are differences. According to CME officials, technical rules
specific to the CME spot cheese market were developed from the rules
used to operate NCE and rules already established by CME for an
existing spot butter market. For example, CME trades the same cheese
products that were traded on NCE--carloads of 40-pound blocks and 500-
pound barrels of cheddar cheese. [Footnote 9] The CME spot cheese
market continues to be a surplus market for cheese on which relatively
small amounts of cheese are traded relative to the overall size of the
U.S. cheese market. Unlike some commodities, most cheese in the United
States is traded through long-term contracts, which generally use the
CME spot cheese market price as the reference price and previously used
the NCE price.
NCE had between 30 and 40 members, including major participants in the
cheese and dairy industry, such as large agricultural cooperatives,
cheese manufacturers, and processors of cheese. These members accounted
for the vast majority of cheese handled and processed in the United
States. Likewise, major cheese and dairy industry members participate
on CME, including many companies that traded cheese on NCE. CFTC
officials estimated that 13 of the 31 CME spot cheese market
participants accounted for 60 percent of all cheese produced,
processed, or marketed in the United States in 2004.[Footnote 10] These
participants in the spot cheese market represent diverse segments of
the cheese and dairy industries, including dairy cooperatives
representing many farmers and industry participants that produce,
manufacture, and process large quantities of cheese.
However, two differences exist between the CME spot cheese market and
NCE. First, the names of participants involved in NCE trading were made
public. Each member could designate up to five individuals as traders,
and the buyer and seller were reported for each trade. Trading at the
CME spot cheese market is conducted through a network of professional
brokers, the standard practice in many commodities, and the buyer and
seller are not publicly reported.[Footnote 11] However, according to
some dairy industry participants, they generally know which brokers
represent specific buyers and sellers. Second, trading on NCE occurred
only once a week for one 30-minute session. Trading takes place at the
CME spot cheese market every weekday for at least 2 minutes and up to
16 minutes, depending on the interest of market participants.
Thinness of the CME Spot Cheese Market, Combined with Other Factors,
Contributes to Questions about Possible Price Manipulation:
Despite the move to CME, the 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. A thin market generally has either few transactions;
transactions that represent only a small proportion of the total
transactions, including those that are priced off that market; or
both.[Footnote 12] CME and CFTC DMO officials, some market
participants, and academics generally agree that the CME spot cheese
market is a thin market. Little trading occurs on the CME spot cheese
market, and the trading that does take place consistently represents a
small proportion of the total volume of cheese produced in the United
States. According to CFTC officials, from 1998 to 2005, the volume of
cheese traded at CME generally represented less than 2 percent of all
cheddar cheese and less than 1 percent of all cheese produced in the
United States annually.[Footnote 13] This characteristic is not unique
to the CME spot cheese market, as other agricultural commodity markets,
such as the CME spot butter market, are also thinly traded. In
addition, as shown in table 1, on average only one or two transactions
were completed during each trading session in the barrel market, and
the average was less than one for most years, indicating that on some
days no cheese was traded. The one exception was 1997, when the average
number of transactions on the barrel market was more than eight,
because the market did not have daily trading at that time. Similarly,
on average, fewer than three trades during each trading session were
completed in the block market each year.
Table 1: Average of Number of Transactions Per Trading Session by
Barrel and Block on the CME Spot Cheese Market, 1997-2006:
Average barrel;
1997: 8.2;
1998: 1.8;
1999: 1.4;
2000: 2.2;
2001: 0.8;
2002: 0.8;
2003: 0.4;
2004: 0.9;
2005: 0.7;
2006: 0.7;
Total: 1.2.
Total barrel;
1997: 296;
1998: 216;
1999: 358;
2000: 566;
2001: 189;
2002: 191;
2003: 98;
2004: 229;
2005: 184;
2006: 170;
Total: 2,497.
Average block;
1997: 4.4;
1998: 3.3;
1999: 3.5;
2000: 2.3;
2001: 1.9;
2002: 2.5;
2003: 2.2;
2004: 2.9;
2005: 2.6;
2006: 1.4;
Total: 2.5.
Total block;
1997: 157;
1998: 383;
1999: 873;
2000: 599;
2001: 479;
2002: 626;
2003: 536;
2004: 728;
2005: 657;
2006: 348;
Total: 5,386.
Source: GAO analysis of CME data.
[End of table]
Academic analyses and cheese and dairy industry participants have
raised a number of concerns associated with thin markets being
susceptible to manipulation. These concerns 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.
As noted, thin markets raise concerns about the potential for
manipulation because of the small number of participants and
transactions involved in the market and the ease with which prices can
be impacted. For example, in thinly traded markets each individual
participant's activity tends to be more influential than it would be on
a market with more transactions and more participants. As a result, it
may be easier for a market participant to move prices in a preferred
direction over a short period of time with relatively few completed or
unfilled transactions. Further, individual transactions to buy and sell
cheese that set the market price may not accurately reflect supply and
demand.
Further, the CME spot cheese market has a small number of traders who
make the majority of trades, another factor that contributes to
questions about possible price manipulation. Relatively few market
participants account for the majority of trading at the CME spot cheese
market, as shown in figure 1. 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 purchased 56
percent of all barrel cheese, and two market participants sold 68
percent of all barrel cheese.
Figure 1: Percentage of Trading, by Largest Block and Barrel Market
Participants, January 1, 1999, to February 2, 2007:
[See PDF for image]
Source: GAO analysis of CME data.
[End of figure]
In addition, the CME spot cheese market's pricing structure, in
combination with a thinly traded market and a small number of traders
who comprise the majority of trading, contributes to questions about
the potential for price manipulation. As on many other financial
markets, prices at the CME spot cheese market are based on completed
transactions and on unfilled higher bids and uncovered lower offers
that are posted by market participants.[Footnote 14] During a trading
session an unfilled bid that is higher than the previous bid or
transaction price can result in a higher price. Similarly, an uncovered
offer that is lower than the previous offer or transaction price can
result in a lower price. For example, on the CME spot cheese market:
* Between January 1, 1999, and February 2, 2007, the closing price for
block cheese fluctuated based on unfilled bids and uncovered offers on
at least 17 percent of the trading days.[Footnote 15] During the same
time period, the barrel market closing price fluctuated based on
unfilled bids and uncovered offers 28 percent of trading days.
* Between March 1, 2004, and April 16, 2004, block cheese prices
increased from $1.49 to $2.20 per pound, or 48 percent, on the CME spot
cheese market based primarily on unfilled bids to buy cheese, with only
four carloads of block cheese bought or sold during this period.
* Between October 26, 2004, and November 19, 2004, block cheese prices
rose from $1.57 to $1.80 per pound, or 14 percent, with completed
transactions for only three carloads of cheese completed during this
period.
This pricing structure is not unique to the CME spot cheese market, and
price changes based on unfilled bids and uncovered offers may reflect
conditions consistent with supply and demand. However, this pricing
structure may increase opportunities to ultimately change the price of
milk without reference to the actual costs of buying and selling
cheese.
Finally, although there may be characteristics that raise concerns
about price manipulation, certain characteristics of the CME cash
cheese market may reduce the risk of price manipulation. According to
CME officials and industry participants, the risk of incurring the
expenses associated with the actual buying or selling of cheese may
deter some market participants from attempting to manipulate prices at
the CME spot cheese market. Any CME spot cheese market participant who
makes a bid or offer risks acceptance of that bid or offer and the
obligation to buy and accept delivery of cheese or to sell and make
delivery. Completed transactions for the purchase or sale of cheese can
involve a significant expense. While a relatively small number of
traders make the majority of trades, market participants represent a
significant amount of potential volume of trading. CFTC has found that
many large participants in the cheese and dairy industry with diverse
interests monitor the CME spot cheese market and are prepared to
participate in it. These large industry participants could, for
example, buy cheese on the CME spot cheese market if prices fell below
a company's manufacturing costs or sell it if prices rose to a
profitable level, potentially countering any attempted manipulation.
Several industry participants we interviewed said that they believed
that price manipulation on this market would be difficult to sustain,
given the number of competing interests. Additionally, the change from
once-a-week trading on the NCE market to daily trading on the CME spot
cheese market may make sustaining attempted price manipulation more
difficult because a trader may have to be active in the market on a
daily basis in order to influence prices. Despite allegations of price
manipulation, industry participants we interviewed stated that they
generally did not believe manipulation was occurring. In addition,
industry participants told us that they never stopped using the CME
price as a reference price in their long-term contacts.
CFTC and CME Provide Increased Oversight of the CME Spot Cheese Market:
Both CFTC and CME engage in activities that may detect or deter
potential price manipulation at the CME spot cheese market.[Footnote
16] Regular monitoring by CFTC DMO and CME represents a significant
change from the level of oversight of NCE, which had received limited
monitoring from CFTC and NCE staff. CFTC, as part of its responsibility
for the regulation of commodity futures markets, monitors cash markets
that affect futures markets, such as the CME spot cheese market. CFTC
surveillance staff review trading activities on the market for
manipulative activity, including manipulation that may impact the Class
III milk futures. Moreover, CFTC Division of Enforcement can act on
indications of manipulative activity through CFTC's authority to
enforce the CEA, which specifically prohibits the manipulation of
prices of physical commodities in interstate commerce.[Footnote 17] CME
conducts daily surveillance of the CME spot cheese market based on its
established rules and internal procedures. Both CFTC enforcement staff
and CME investigate and, if appropriate, can take enforcement actions
in response to potential manipulative conduct on the CME spot cheese
market. However, proving price manipulation is difficult.
CFTC Monitors Trading Activity to Identify and Address Potential Price
Manipulation on the CME Spot Cheese Market:
In recent years, CFTC DMO staff have monitored the CME spot cheese
market on a regular basis both to review that prices of related Class
III milk futures contracts are consistent with forces of supply and
demand and in response to complaints alleging manipulative conduct.
CFTC DMO is particularly concerned about manipulative activities in
cash markets when prices on those markets could affect the integrity of
futures contract prices. The price paid for a Class III milk futures
contract is based on the monthly Class III milk price released by USDA,
which is heavily influenced by the price of cheese at the CME spot
cheese market. Also, because the CEA prohibits manipulating the price
of any commodity in interstate commerce, CFTC can take action under its
enforcement authority to investigate price manipulation of any
commodity, regardless of whether it is related to a futures contract.
According to CFTC DMO officials, however, CFTC surveillance staff would
be unlikely to monitor commercial activities involving a commodity
without a related futures market.
CFTC surveillance staff regularly obtain and analyze data on the
activities of the CME spot cheese market participants to assist in the
detection and also prevention of price manipulation in related futures
markets. In 2005, CME began providing CFTC with daily trading data and
information on the CME spot cheese market on a monthly basis.[Footnote
18] CFTC monitors traders with large positions in Class III milk
futures and the trades that these large traders make in the CME spot
cheese market. As part of its monitoring, CFTC focuses on answering the
following questions:
1. Is the Class III milk futures price consistent with supply and
demand factors in the cheese industry?
2. How is the monthly Class III milk price released by USDA behaving
compared to the CME spot cheese market and other cash prices?
3. Are the largest Class III milk futures traders engaged in trades on
the CME spot cheese market that affect the monthly Class III milk price
released by USDA?
4. Do the Class III milk futures traders have an incentive to engage in
losing trades on the CME spot cheese market in order to benefit a large
futures position?
In its market surveillance activities, CFTC surveillance staff may use
many sources of daily market information. Some of this information is
publicly available, including data on the overall supply, demand, and
marketing of the underlying commodity; futures, option, and cash
prices; and data on trading volume and open contracts.[Footnote 19]
Some of the information is highly confidential, including data from
exchanges, intermediaries, and large traders. CFTC Chicago surveillance
staff generally review CME spot cheese market transactional data from
CME, which include the identities of buyers and sellers and timing of
trades, when they see unusual price movements and to summarize the data
for informational purposes. CFTC surveillance staff may also interview
industry participants, and interviews may include discussions about
basic market fundamentals, the traders' involvement in specific
commercial transactions, or the traders' observations about anything
unusual about the CME spot cheese market or other cash transactions.
CFTC DMO staff have prepared summary documents analyzing the market
four times since 1999, including analyses of participants, volume, and
price fluctuations. Generally, they have found that the majority of the
cheese industry is represented at the CME spot cheese market and that
trading on the market is concentrated among a small number of
participants. CFTC has filed no complaints related to price
manipulation on this market. These reviews represent another change
from NCE, which, according to CFTC officials, CFTC did not monitor
regularly. CFTC did review trading activities on NCE in 1997 prior to
approving a market for trading in certain milk futures. This review did
not identify significant deficiencies or suggest that the market was
susceptible to manipulation. In contrast, after a 4-year investigation
in which confidential and proprietary information was gathered,
University of Wisconsin economists found that the organization of NCE
appeared to facilitate market manipulation, but could not definitively
conclude that manipulation had occurred, and that NCE was not an
efficient price discovery mechanism between 1988 and 1993.[Footnote 20]
Market participants told us that CFTC monitoring of the CME spot cheese
market addressed some of their concerns about limited oversight of
trading at NCE.
In addition to identifying unusual activities or manipulative conduct
through its monitoring activities, CFTC also responds to complaints and
concerns raised by industry members and the public. CFTC surveillance
staff in Chicago collaborate with CME officials to examine trading
activities. Since 1999, CFTC Chicago DMO staff have done nine special
reviews of trading activity at the CME spot cheese market in response
to specific complaints or fluctuations in market prices. These
complaints dealt with issues including an allegation that a market
participant failed to pay in a timely manner for cheese purchased on
the CME spot cheese market, allegations of price manipulation on that
market, and concerns about price volatility on that market. According
to CFTC officials, the CFTC market surveillance analyst responsible for
the Class III milk futures market reviewed these complaints, analyzed
the time period or market participants involved in the allegation, and
responded to the party that complained. None of these reviews resulted
in any legal action taken by CFTC against a market participant.
According to trade press reports, CFTC is currently investigating the
trading activity of one participant in the CME spot cheese market for
potential manipulation of the market. Unless otherwise authorized, CFTC
regulations require enforcement investigations to be nonpublic.
Therefore, CFTC does not confirm, deny, or comment about possible
ongoing investigations.
According to CFTC DMO officials, CFTC generally would not take an
active role in oversight of the CME spot cheese market without a
related futures market because of its interpretation of its
responsibilities under CEA and limited resources. However, other
federal agencies have responsibilities relating to the manipulation of
cash cheese prices even in the absence of a related futures contract.
The U.S. Department of Justice (DOJ) has responsibility for
investigating possible violations of the antitrust laws and taking
appropriate legal action in the courts. DOJ's authority includes taking
action based on unreasonable restraints of trade such as price fixing
or manipulation. In addition, the Federal Trade Commission (FTC) is
charged by statute with preventing unfair methods of competition and
unfair or deceptive acts or practices in or affecting commerce. In
order to avoid duplicating efforts to pursue allegations of
anticompetitive behavior or price fixing, the two agencies developed
and maintained a liaison arrangement to determine who would take the
lead on any cases involving the CME spot cheese market.
Certain other federal and state agencies that observed or monitored
trading at NCE no longer do so at the CME spot cheese market. In the
past, USDA officials observed trading and published prices established
at NCE but do not observe CME spot cheese market trading. Prices are
now publicly reported. USDA officials did not provide oversight of NCE
and have no oversight role of CME. NCE was also subject to the
Wisconsin Department of Agriculture, Trade and Consumer Protection's
jurisdiction over unfair competition and trade practices. According to
CME officials, no state agency has a role in overseeing CME or the CME
spot cheese market.
In addition to monitoring trading in the futures markets and related
cash markets, CFTC has general authority, provided by the CEA, over
designated contract markets.[Footnote 21] CME, as a designated contract
market, must demonstrate to CFTC that it meets CEA criteria for the
prevention of market manipulation, fair and equitable trading, the
conduct of trading facilities, and the financial integrity of
transactions. In addition to providing market surveillance, CFTC DMO
approves and oversees the futures exchanges, including CME, and reviews
exchange rules.[Footnote 22] CFTC also assesses the effectiveness of
compliance and market surveillance capabilities and reviews new futures
contracts to assess their susceptibility to manipulation. To ensure the
market's financial integrity, CFTC Division of Clearing and
Intermediary Oversight reviews the audit and financial surveillance
activities of self-regulatory organizations (SRO), including
CME.[Footnote 23] According to CFTC officials, they have not approved
CME spot cheese market rules. However, CFTC conducted a rule
enforcement review of CME that covered the time period October 2004 to
October 2005.[Footnote 24] This review, which did not specifically
include the CME spot cheese market rules, included an examination of
the compliance of a number of CME's programs with CEA, including the
audit trail, trade practice surveillance, disciplinary, and dispute
resolution programs. CFTC did not make any recommendations for
improvements in these areas.
Proving actual or attempted price manipulation is difficult, according
to CFTC officials.[Footnote 25] They noted that CEA does not have a
specific definition of manipulation. Rather, it has been left to the
courts to develop the law through cases or decisions. Accordingly, as
established by federal courts and CFTC, proving manipulation requires
being able to show the following:
* The market participant had the ability to influence market prices.
* The market participant specifically intended to influence prices.
* Artificial prices existed.
* The market participant caused an artificial price.[Footnote 26]
Proof of an attempted manipulation requires sufficient evidence of (1)
an intent to affect the market price and (2) some overt act in
furtherance of that intent.[Footnote 27] Like the test for
manipulation, the test for attempted manipulation depends upon the
facts and circumstances of a particular market and its
participants.[Footnote 28] We did not find any studies or court cases
that have concluded that there has been manipulation on the CME spot
cheese market or NCE.
An intent to raise or lower CME spot cheese market prices could be
based on a variety of incentives. For example, farmers that produce
milk used to manufacture cheese benefit when the price of cheese on the
CME spot cheese market is high because the CME spot cheese market
influences a broad array of cheddar cheese prices that are included in
the pricing formula for Class III milk. Alternatively, a company that
largely sells cheese purchased from others could benefit from low CME
spot cheese market prices. This is because most cheese plants from
which it buys would be using the lower CME cheese prices to set their
contract price, but it would sell its cheese at a price not based on
CME prices. These factors alone do not imply that price manipulation
has occurred--in fact, price manipulation has not been proven--but
these incentives appear to contribute to ongoing questions about the
susceptibility of the market to manipulation relative to one with more
trading or more market participants comprising the majority of trades.
Further, identifying actual or attempted manipulation on the CME spot
cheese market can be difficult for a number of other reasons. First,
because the CME spot cheese market functions as a market to dispose of
excess supply or to fill temporary inventory needs, it may not always
reflect prices that are consistent with supply and demand in the
broader market as market participants attempt to manage short-term
inventory needs through the CME spot cheese market. For this reason,
determining what constitutes an artificial price can be difficult. In
addition, companies may attempt to influence prices without considering
their activity to be manipulative. For example, according to one
industry participant, traders may act to influence the spread between
the prices of barrel cheese and block cheese to keep it in line with
general historical trends. Finally, USDA officials and industry
participants told us that some market participants used the CME spot
cheese market as a forum to "register an opinion" on what they believed
cheese prices should be by making bids and offers with the intent to
change the price of cheese to more closely align with their opinions of
supply and demand conditions. Representatives of two market
participants we interviewed said that they did not believe that this
activity constituted manipulation on the CME spot cheese market.
However, CFTC enforcement officials disagreed and believe that the
types of behavior described above may constitute manipulative behavior.
CME Conducts Daily Surveillance of the CME Spot Cheese Market:
CME rules govern its oversight of the CME spot cheese market. CME, as
an SRO, is responsible for establishing and enforcing rules governing
member conduct and trading; providing for the prevention of market
manipulation, including monitoring trading activity; ensuring that
futures industry professionals meet qualifications; and examining
exchange members for financial strength and other regulatory purposes.
CME rules authorize the managing director of regulatory affairs to
enforce CME rules and gather all the information necessary to
investigate abuses of trading practices. Through this authority, CME
monitors trading activities, collects data on its markets, and inspects
the books and records of members. In addition, the managing director of
regulatory affairs may investigate and recommend institution of
disciplinary proceedings for alleged violations of CME rules.
CME conducts surveillance and investigations of the CME spot cheese
market through its market regulation division. CME's market regulation
division employs market surveillance analysts, one of whom is assigned
to monitor the CME spot cheese market, among others. According to CME
officials, the market surveillance analyst assigned to the CME spot
cheese market monitors daily trading, maintains familiarity with
traders and industry news and trends, and reviews large price changes
resulting from uncovered bids or offers and determines the identity of
market participants. The analyst reviews and analyzes spot call cheese
trade activity in relation to Class III milk futures positions. The
analyst, along with market regulation staff, handles inquiries and
complaints from market participants and firms, contributes to contract
specification changes and rule language updates, and regularly
participates in problematic delivery-related issues. The analyst
physically observes trading at the CME spot cheese market on average
three times a week. In addition, the analyst reviews the input of daily
trading data into a CME database to ensure that trades are properly
recorded and that clearing member firms verify their assigned
transactions and provide buyer and seller identification and relevant
delivery details.[Footnote 29]
In addition to employing market surveillance staff, CME assigns one
investigator to regularly review the CME spot cheese market to identify
potential violations of trading practices and determine if trader
activity is adversely affecting Class III milk futures. According to
CME officials, they have investigated trading activity related to
delivery of cheese sold on the CME spot cheese market and have
disciplined two traders. However, CME officials told us that CME has
only rarely opened formal investigations into traders on the spot
cheese market for rules violations. This surveillance is stricter than
at NCE, which had rules against manipulating prices but no staff to
oversee the market and generally did not investigate trading
activities.
According to CME officials, CME market regulation staff also review
traders' positions and activities in the CME spot cheese and Class III
milk futures markets to determine if a trader's futures positions would
benefit from price changes on the spot cheese market. For example, the
market surveillance analyst may look for trading activity on the CME
spot cheese market that might directly benefit a trader's futures
positions, such as selling cheese in order to lower prices and benefit
a short position in Class III milk futures. The market surveillance
analyst for the CME spot cheese market also reviews trading data from
both markets for large price changes and market trends.
Finally, CME annually provides a dairy forum for CME spot cheese market
participants to meet and discuss potential improvements to the spot
cheese market. Forum meetings have included discussion of such topics
as electronic trading, anonymous trading, daily limits on trading, and
technical specifications for products traded. Working committees have
been formed based on these meetings, and CME staff told us that they
would focus on potential improvements that received majority support as
expressed at the forum. According to market participants, regular
monitoring and oversight of the CME spot cheese market by CME officials
has addressed certain industry concerns about potential price
manipulation that existed when NCE operated the spot cheese market.
The USDA Survey of Cheddar Cheese Prices Largely Duplicates CME Cheese
Prices and Introduces a Time Lag into Some Milk Prices:
The NASS survey of cheese prices, which is a major determinant of some
FMMO minimum milk prices, is not currently audited by USDA, largely
duplicates reported CME cheese market prices, and introduces a 1-to 2-
week time lag between when data are reported by NASS and when
transactions captured in the survey occur.[Footnote 30] USDA used to
rely on the price of 40-pound blocks of cheddar determined on NCE in
pricing milk, but developed the NASS survey of cheese prices in
response to concerns, raised by industry and others, about a thin
market and the potential for price manipulation on NCE. As stated by
the Secretary of Agriculture at a hearing before a subcommittee of the
U.S. Senate Committee on Appropriations in March 1997, USDA began
conducting a national survey of cheddar cheese prices in response to
concerns about the accuracy of reported prices at NCE. The NASS survey
of cheese prices is intended to capture more transactions than those
occurring on the CME spot cheese market. According to USDA officials,
the NASS survey of cheese prices has continued to be used in the milk
pricing formula. However, USDA's ongoing reliance on the survey raises
three issues. First, USDA does not audit the data reported in the NASS
survey of cheese prices to ensure the accuracy of the prices reported.
Second, industry participants use the CME spot cheese market price as a
reference price, and survey results and CME spot cheese market prices
rarely differ significantly. Third, the timing of the survey introduces
into certain milk prices a 1-to 2-week time lag between when data are
reported by NASS and when transactions captured in the survey occur.
Figure 2 provides an overview of how CME spot cheese prices influence
milk pricing.
Figure 2: Influence of CME Spot Cheese Market Prices on Class III Milk
Pricing:
[See PDF for image]
Sources: GAO; Art Explosion (map).
[End of figure]
USDA began using NASS survey cheese data as an input into milk pricing
formulas after NCE closed. Since USDA began using data from the NASS
survey of cheese prices in its milk pricing formula, the agency has
held hearings in response to industry concerns about the pricing
formulas for Class III milk. Some industry participants have put forth
a number of proposals related to eliminating the use of the NASS survey
of cheese prices in milk pricing, including proposals in 2000 and 2006,
that recommended eliminating the use of the NASS survey and instead
using CME spot cheese market prices in the milk pricing
formulas.[Footnote 31] In 2000, in hearings on milk order reform,
industry opinions varied on the use of CME cheese prices instead of the
NASS survey of cheese prices, with some industry participants stating
that they preferred the use of the NASS survey of cheese prices. USDA
decided to continue to use the NASS survey of cheese prices, stating
that the NASS survey prices are based on a much greater volume than
using CME prices. As of June 2007, hearings were still being held
regarding the more recently submitted proposal, which recommended using
CME prices instead of NASS survey prices. A final regulation would be
subject to industry approval requirements contained in the
statute.[Footnote 32] USDA officials have told us that historically
there has been a lack of consensus in the industry to make this change.
Several milk producers and cheese manufacturers we interviewed stated
that they generally supported the idea of no longer using NASS survey
prices in the milk pricing formulas. In order to assess the potential
impact of current proposed changes to the Class III milk pricing
formulas, the USDA conducted preliminary economic analyses, which
analyzed the change to historical Class III milk prices if CME spot
cheese market prices had been used instead of the results of the NASS
survey of cheese prices.[Footnote 33] On the basis of this analysis,
USDA concluded that using the CME spot cheese market prices instead of
the NASS survey of cheese prices would lead to a difference of little
significance.
Under the milk marketing orders, NASS collects dairy market prices,
such as the NASS survey of cheese prices, for use in USDA's milk
pricing formulas, which raises three issues.[Footnote 34] First, USDA
does not currently audit responses provided by survey participants.
Under the Dairy Market Enhancement Act of 2000, mandatory price
reporting requirements for dairy products used in setting milk prices
were established.[Footnote 35] Additionally, USDA was authorized to
conduct audits of transactions reported by survey
participants.[Footnote 36] Auditing the transactions could help to
ensure the accuracy of the information used to establish minimum milk
prices under the FMMOs. However, USDA does not currently audit these
transactions, which include transactions captured in the NASS survey of
cheese prices. Agency officials told us that they had developed a
proposed rule to conduct audits of the data. According to a USDA
official, the proposed rule is currently under review by the Office of
Management and Budget. Recently, USDA disclosed that there had been a
reporting error in the data included in its survey of nonfat dry milk
prices. According to USDA officials, this error affected milk prices
for farmers for at least 2 months and caused a market loss of at least
$6.4 million. Without auditing the data provided in the NASS survey of
cheese prices, USDA cannot ensure the accuracy of the data that are
used in the milk pricing formulas.
Second, although USDA officials told us that the NASS survey captured a
wider range of cheese prices than using prices from the CME spot cheese
market, the survey captures the weekly average CME spot cheese market
price because cheese manufacturers use the CME spot cheese market price
as a reference price plus or minus a premium or discount depending upon
the specifications of the cheese. As a result, price manipulation on
the CME spot cheese market, if reflected in the NASS survey, could lead
to certain federal order minimum milk prices being artificially high or
low. Despite surveying a broader range of transactions, the survey
provides limited additional information beyond what is already
available directly from the CME spot cheese market and results in a
high correlation between the NASS survey of cheese prices and CME spot
cheese market prices (see fig. 3). According to a University of
Wisconsin study, the NASS survey has a 98 percent correlation with CME
spot cheese market prices when adjusted to account for the difference
in timing between collecting price information and publishing survey
results.[Footnote 37] USDA has generally not analyzed differences
between the NASS survey prices and CME spot cheese market prices such
as those in figure 3. Additionally, while industry participants
recognize the role of the NASS survey of cheese prices in setting
certain minimum federal order milk prices, industry participants we
interviewed said the survey did not provide them with useful
information. Industry participants told us that small differences
between the two price series are likely due to premiums and discounts
negotiated into contract prices, such as for transportation costs.
Figure 3: CME Spot Cheese Market and NASS Cheese Survey Block Cheese
Prices:
[See PDF for image]
Source: USDA.
[End of figure]
The third issue raised by USDA's use of the NASS survey of cheese
prices is that the results are not released for 1 to 2 weeks after
certain transactions captured in the survey occur. California
Department of Food and Agriculture officials told us that California
does not participate in FMMOs. They also told us that California does
not rely on the NASS survey, in part because of concerns about the
timing of the survey. Additionally, although industry members we
interviewed stated that the effects of the time lag may balance out
over time, they said that the use of the NASS survey created short-term
problems in milk pricing because of the time lag. For example, one
industry member said that because of a timing lag that can occur during
periods of rapidly declining cheese prices at the CME spot cheese
market, USDA minimum milk prices may not fully reflect current milk
prices. As a result, cheese manufacturers may be buying milk based on
prices calculated using higher cheese prices from the preceding weeks
but selling cheese at current lower market prices. This is due in part
to the time lag in the NASS survey of cheese prices and could cause, in
the short term, losses for the manufacturer. However, dairy farmers may
benefit in this example. In periods of rapidly rising cheese prices,
the time lag could result in dairy producers receiving less for their
milk than if current market conditions were reflected in the minimum
milk prices. In this example, cheese manufacturers might benefit.
According to USDA officials, the effect of the time lag inherent in the
NASS survey of cheese prices on Class III milk prices is diminished by
two factors. First, USDA publishes the minimum Class III milk price on
a monthly basis, and according to USDA officials, this dilutes the
effect of the time lag on the Class III minimum milk price. Second,
according to USDA, 75 percent of milk is sold with a premium over the
Class III minimum milk price, and these "over-order" premiums reduce
the effect of the time lag in the Class III minimum milk
price.[Footnote 38] However, monthly Class III minimum milk prices can
sometimes be based on data that do not include a portion of or the
entire last week of NASS survey of cheese data for that month. This can
be compounded because industry participants sometimes base their cheese
prices on the prior week's CME spot cheese market price. As a result,
the effect of the time lag would be present in the monthly Class III
milk price. Moreover, according to some industry participants we
interviewed, the Class III minimum milk price is used by industry
participants as the base price onto which over-order premiums are
applied. This means that if the minimum milk price is too high or too
low because of the effect of the lag, the lag would be reflected in
milk prices set by industry participants who start with the minimum
price and add a premium. Therefore, the time lag may result in industry
members paying or receiving prices for milk that no longer fully
represent current market conditions.
Conclusions:
The move from NCE to CME changed little about the structure or function
of the spot cheese market but has increased oversight. The CME spot
cheese market continues to be a surplus market where a few large
participants buy and sell cheese and less than 1 percent of the cheese
produced in the United States is traded. In addition, market
participants continue to use CME spot cheese market prices to set most
cheese prices in the United States. As a result, concerns about price
manipulation will likely remain. However, monitoring of trading
activity by CFTC DMO and CME represents a substantial increase in the
level of oversight of the CME spot cheese market as compared to
oversight of NCE. This has addressed some concerns about potential
price manipulation on the CME spot cheese market. While not
guaranteeing that price manipulation will be detected or prevented,
regular and targeted reviews may help to ensure the integrity of and
confidence in the market.
The CME spot cheese market also impacts minimum milk prices through the
NASS survey of cheese prices, which largely captures the CME spot
cheese price but with a 1-to 2-week lag. USDA developed the NASS survey
of cheese prices, in part to address industry and other concerns about
a thin market and potential price manipulation. However, despite
surveying a broader range of transactions, the industry uses the CME
spot cheese market as the primary mechanism for price discovery and for
pricing the majority of cheese sold. As a result, the NASS survey
continues to capture largely redundant spot cheese market prices. Any
small difference between prices from the NASS survey and CME spot
cheese prices may be due to factors such as a time lag between data
collection and price reporting, premiums or discounts on the CME price,
or errors in data collected in the NASS survey of cheese prices. In
addition, the NASS survey data are not currently audited by USDA, and a
recent error in nonfat dry milk prices has raised questions about the
accuracy of the data reported. California, with one of the largest
dairy industries in the country, has chosen to use CME cheese prices
over NASS survey of cheese prices in its milk pricing formula because
officials believe they more accurately reflect current market
conditions. The NASS survey of cheese prices largely captures CME price
data by surveying producers versus capturing current data directly from
CME. A lag of 1 to 2 weeks exists in data collected in this survey. As
a result, industry participants may be paying prices for milk that may
not be current.
Recommendations for Executive Action:
As USDA continues to hold hearings on a variety of issues, including
the Class III milk pricing formula, we acknowledge that there may be a
variety of proposals to consider. To improve the timeliness of reported
cheese prices and reduce redundancy that exists in the NASS survey of
cheddar cheese, we recommend that the Secretary of USDA direct the
Administrator, Agricultural Marketing Service to give serious
consideration to all proposals, in consultation with the industry,
including the industry proposal to use the CME spot cheese market
prices instead of the NASS survey of cheese prices in the minimum
federal milk pricing formula.
If USDA continues to use the NASS survey of cheese prices, we recommend
that the Secretary of USDA direct the Administrator, AMS, to implement
in a timely manner a program to audit data reported to NASS in its
survey of cheese prices.
Agency Comments and Our Evaluation:
We provided a draft of this report to CFTC, USDA, and CME. We received
written comments from USDA, which are reprinted in appendix II. We also
received technical comments from CFTC, USDA, and CME, which have been
incorporated where appropriate. In written comments from the Under
Secretary of Marketing and Regulatory Programs, USDA agreed with our
recommendation intended to ensure that AMS implements a program to
audit data reported to NASS in its survey of cheese prices. However,
the agency disagreed with our recommendation to proactively consider,
in consultation with the industry, the industry proposal to use CME
spot cheese market prices instead of NASS survey of cheese prices in
the minimum federal milk pricing formula.
In response, USDA noted, as we do in the report, that it is in the
process of holding a hearing addressing proposed changes to the federal
milk marketing order minimum price formulas and that using the CME spot
cheese price is among the proposals. According to USDA, it is outside
of USDA's authority to "proactively consider" proposals to change
federal milk marketing order provisions. We have, therefore, clarified
our recommendation. We were not and are not recommending that USDA take
action outside of its current authority and we recognize that USDA must
follow its rules of practice and procedure when conducting proceedings
to amend marketing orders. Specifically, USDA states that proposals to
use the CME price will be given "due consideration, weighing both the
supporting and opposing testimony" in the hearing process. Our
recommendation is that USDA give serious consideration to all
proposals, in consultation with the industry, including the industry
proposal to use the CME spot cheese market prices instead of the NASS
survey of cheese prices in the minimum federal milk pricing formula.
USDA also stated that because concerns remain about potential
manipulation at the CME spot cheese market, "use of the NASS price to
set FMMO minimum prices seems prudent until an alternative is shown to
be clearly superior." While we recognize that there are potentially a
variety of ways to price Class III milk, the use of CME spot cheese
market prices has certain merits over using NASS prices. As stated in
our report, while concerns remain about price manipulation at the CME
spot cheese market, the NASS survey of cheese prices does not address
these concerns. The NASS survey of cheese prices largely duplicates CME
spot cheese market prices. Use of CME spot cheese market prices instead
of NASS survey of cheese prices could reduce redundancy. As USDA itself
has found, the long-term difference in using CME spot cheese prices
instead of NASS survey of cheese prices in milk pricing is close to
zero. This is because, as we note in our report, the cheese industry
uses CME spot cheese prices to set contract prices. As a result, CME
spot cheese market prices are captured by the NASS survey of cheese
prices. Further, industry participants that we interviewed stated that
they have not adjusted how they set contract prices due to concerns
about manipulation on the CME spot cheese market. Therefore, any
pricing concerns about CME would also be reflected in the NASS survey
prices.
USDA further stated that GAO has not demonstrated that there has been a
loss or benefit to cheese makers due to the time lag associated with
calculating a monthly average federal minimum milk price. However, the
report does include an example of a potential loss to cheese makers. As
stated in the report, one industry member we interviewed told us that
during periods of rapidly declining cheese prices at the CME spot
cheese market, the timing lag may result in USDA minimum milk prices
not fully reflecting current milk prices and may result in cheese
makers buying milk at prices higher than the prices at which the cheese
maker sell its cheese. Additionally, we clarified in the report that
industry participants we interviewed that told us the NASS survey made
their business more complicated were referring to short-term problems
in milk pricing due to the use of the NASS survey and the corresponding
time lag. Moreover, the time lag is one reason why California does not
rely on the NASS survey of cheese prices. Finally, USDA comments
included an overview of minimum milk prices and the manufacturing plant
relationship with the FMMO.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 14 days
from the report date. At that time, we will send copies of this report
to the appropriate committees. We will also send copies to the Chairman
of CFTC, the Secretary of Agriculture, and the Managing Director,
Regulatory Counsel of CME. We also will make copies available to others
upon request. In addition, the report will be available at no charge on
the GAO Web site at http://www.gao.gov.
If you or your staff have any questions concerning the report, please
contact me at (202) 512-8678 or williamso@gao.gov, or John Wanska,
Assistant Director, at (312) 220-7628 or wanskaj@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of the report. Key contributors to this
report are listed in appendix III.
Signed by:
Orice M. Williams:
Director, Financial Markets and Community Investment:
List of Congressional Requesters:
The Honorable Arlen Specter:
Ranking Member:
Committee on the Judiciary:
United States Senate:
The Honorable Hillary Rodham Clinton:
United States Senate:
The Honorable Russell D. Feingold:
United States Senate:
The Honorable Herb Kohl:
United States Senate:
The Honorable Charles E. Schumer:
United States Senate:
[End of section]
Appendix I: Scope and Methodology:
To review the structure and operations of the Chicago Mercantile
Exchange (CME) spot cheese market, we obtained and analyzed information
about CME, including internal rules and procedures that govern the
market. We compared this information to the National Cheese Exchange's
(NCE) rules and procedures, as well as to federal and academic analyses
of the structure and operations of NCE. We obtained and reviewed
industry and academic literature regarding market structure. To analyze
concerns about price manipulation, we reviewed existing studies that
assessed market characteristics associated with price manipulation. In
addition, we obtained and analyzed spot cheese market trading data
provided by CME. To assess the reliability of the CME data, we reviewed
the data and interviewed CME officials, and determined that the data
were sufficiently reliable for our purposes. Using the data provided,
we calculated summary statistics on volume of trading, number of market
participants, and the role of uncovered bids and unfilled offers. We
also obtained Commodity Futures Trading Commission (CFTC) and CME
officials' views as well as those of market participants and members of
the cheese and dairy industry on the potential for price manipulation
at the CME spot cheese market and NCE. We did not attempt to determine
whether manipulation has occurred on the CME spot cheese market;
instead, we identified the characteristics of this market that are
consistent with those of markets considered susceptible to price
manipulation.
As a part of our review of market monitoring and oversight, we obtained
and analyzed information about CFTC, CME, and other oversight and
enforcement organizations on their role in monitoring the CME spot
cheese market. In addition, we interviewed officials from CFTC's
Division of Market Oversight, Division of Enforcement, and Office of
General Counsel to obtain information about CFTC's role in the CME spot
cheese market. We also interviewed CME officials from its Legal and
Market Regulation Division, Corporate Development Division, and
Products and Services Division to discuss CME's oversight of the CME
spot cheese market.
To review how the CME spot cheese market impacts federal minimum milk
prices, we obtained and reviewed federal laws and United States
Department of Agriculture (USDA) regulations governing the federal milk
pricing formulas. We also reviewed academic analysis of the role the
spot cheese market has in milk pricing. In addition, we interviewed
officials from USDA's Agricultural Marketing Service and National
Agricultural Statistical Service as well as numerous academics who
study issues of dairy policy. We also interviewed market participants
and members of the cheese and dairy industry on the relationship
between the CME spot cheese market and minimum federal milk prices.
Members of the dairy and cheese industry included cheese manufacturers,
dairy cooperatives, processors of cheese, and milk producers.
[End of section]
Appendix II: Comments from the Department of Agriculture:
USDA:
United States Department of Agriculture:
Office of the Secretary Washington, D.C. 20250:
Jun 1 4 2007:
Executive Transmittal Memorandum:
To: Orice M. Williams:
Director, Financial Markets and Community Investment:
Government Accountability Office:
From: Bruce I. Knight:
Under Secretary:
Marketing and Regulatory Programs:
Subject: Response to GAO Audit Report:
Attached is the U.S. Department of Agriculture's response to the draft
report titled, "Spot Cheese Market: Market Oversight Has Improved but
Concerns Remain about Potential Manipulation." Thank you for the
opportunity to provide comments. If you have any questions, please
contact John Mengel at 202-720-4664 or Frank Woods at 202-720-8836.
Attachment:
U.S. Department of Agriculture Statement of Action on the U.S.
Government Accountability Office Final Report GAO-07-707, "Spot Cheese
Market: Market Oversight Has Increased But Concerns Remain About
Potential Manipulation."
June 15, 2007:
General Comments:
USDA disagrees with the recommendation made by GAO that USDA
"proactively consider" proposals to change Federal milk marketing order
provisions, which is outside of USDA's authority. However, USDA is
currently holding a hearing addressing proposed changes to Federal milk
marketing order minimum price formulas. Using the CME spot cheese
market price instead of the NASS cheese price in setting minimum milk
prices is among the proposals.
USDA concurs with the recommendation that an audit of NASS price data
be implemented in a timely manner, and USDA is currently in the
rulemaking process to do so.
GAO Recommendation:
To improve the timeliness of reported cheese prices and reduce the
redundancy that exists in the NASS survey of cheddar cheese, we (GAO)
recommend that the Secretary of USDA direct the Administrator,
Agricultural Marketing Service (AMS) to proactively consider, in
consultation with the industry, the industry proposal to use the CME
spot cheese market prices instead of the NASS survey of cheese prices
in the minimum federal milk pricing formula.
If USDA does not eliminate the NASS survey of cheese prices, we (GAO)
recommend that the Secretary of USDA direct the Administrator, AMS to
implement in a timely manner a program to audit data reported to NASS
in their survey of cheese prices.
USDA Response:
Summary:
GAO has not demonstrated that there has been a loss to cheese makers
associated with lags inherent in calculating a monthly average minimum
price. However, proposals to use the CME spot market cheese price in
the current hearing record will be given due consideration, weighing
both the supporting and opposing testimony. GAO is aware that the
proposed Mandatory Price Reporting docket is currently under
development, and that it will apply to cheese, nonfat dry milk, butter,
and whey.
Cheese makers are not required by regulation to participate in the FMMO
system. They do so at their own discretion, perhaps because they
generally draw revenues from the FMMO revenue pools. As cited by GAO,
AMS found that over a period of time including both price increases and
decreases, differences in minimum prices using the CME spot cheese and
using the NASS cheese price are likely to average close to zero.
Moreover, prices actually paid for milk used to make cheese are
generally higher than the Federal order minimum prices. Given GAO's
recognition, as reflected in the report title, that "concerns remain
about potential manipulation," the use of the NASS price to set FMMO
minimum prices seems to be prudent until an alternative is shown to be
clearly superior.
Federal Order Change Procedure:
The Agricultural Marketing Service amends Federal milk marketing orders
using the procedures specified under the Administrative Procedures Act,
unless otherwise directed by law such as with Federal order reform
implemented in 2000. These procedures require proponents for change in
an order to first make a case for a public hearing. If it is decided to
hold a hearing, proponents of the proposed changes must submit
proposals in time for interested parties to prepare questions and
testimony for the hearing. The content of the formal hearing record
defines the possible set of changes to the existing order.
A hearing concerning Class III and Class IV pricing is currently
underway, and there are proposals to incorporate the CME prices in the
Class III price formula. It would be helpful in this regard if GAO
would introduce for the record their study, including support for
replacing the NASS cheese price with the CME spot price, and stand for
cross-examination by interested parties.
NASS Price Auditing:
GAO is aware that the proposed Mandatory Price Reporting docket is
currently under development, and that it will apply to cheese, nonfat
dry milk, butter, and whey.
Minimum Milk Prices and Manufacturing Plant Relationship with the FMMO
FMMOs are established by producer referendum and regulate the exchange
of milk between farmers and first buyers of milk, especially fluid milk
processors. A key element of the system is setting a minimum price for
Class I or fluid milk that reflects the additional costs to market milk
for fluid uses, including those associated with transportation and
meeting fluid milk plants needs as scheduled. The FMMO system seeks to
set minimum prices for milk in manufacturing uses and fluid uses that
reflect milk supply and demand conditions, consistent with the value of
milk in manufacturing uses throughout the U.S. USDA uses the NASS
survey of prices for cheese, butter, nonfat dry milk, and dry whey to
set Federal order minimum prices for milk in manufacturing uses. These
prices are the bases upon which minimum prices for milk used in soft
manufactured products (Class II) and milk used in fluid milk products
(Class I) are set. It is generally the case that market prices paid for
milk are higher than the Federal order minimum prices.
Plants that manufacture dairy products such as cheese, butter, and
nonfat dry milk are not required to be regulated by any FMMO. However,
manufacturing plants can choose to be regulated, allowing its
producers' milk to be pooled on the order and be eligible to receive
the FMMO minimum blend price. In choosing to participate in FMMO
system, manufacturing plants generally are required to divert a portion
of the milk from their own uses to fluid needs as required by the
orders in times of milk supply shortage. Participation in the FMMO
system enables manufacturing plants to pay producers a minimum milk
price that reflects a share of the fluid milk revenues in the order,
and allows them to better compete with regulated handlers for a milk
supply.
Generally, cheese makers draw money out of the FMMO revenue pool
because the minimum price for milk in cheese (Class III) is less than
the blend price, which reflects the higher minimum prices for milk in
Class I (fluid) and Class II (soft manufactured product) uses. If the
Class III price is expected to exceed the blend price, cheese makers
have the option to leave the Federal order system. In such a case,
cheese makers do not have to pay into the FMMO pool, and can use the
savings to pay higher prices to producers or increase its profits. (The
revenues from cheese sales less manufacturing costs, yields a milk
value that exceeds the blend price. Thus, cheese manufacturers are in
position to pay producers a price that reflects the higher of the blend
price or the value of the milk in cheese.) Market prices actually paid
for Class III milk generally include an over-order charge, thereby
exceeding the Federal order minimum Class III price. The over-order
payments and prices producers are paid reflect the market value of milk
at the plant location and the efficiency of the plants.
The GAO provided no analysis or example to demonstrate that the use of
the NASS cheese price to set minimum prices for milk has caused losses
for cheese makers, or on the other side, benefits for cheese makers.
Specifically, it has not been shown that there has been a loss or
benefit to cheese makers associated with a one-to-two week lag in
calculating a monthly average minimum price using the NASS cheese
price. To the contrary, GAO cites a 2007 AMS analysis in which, "USDA
concluded that using the CME spot cheese market prices instead of the
results of the NASS survey of cheese prices would lead to a difference
of little significance."
Proposals to use the CME spot market cheese price to establish Class
III minimum prices are currently part of a hearing process. Proponents
and opponents have the opportunity to testify under cross-examination
as to the merits of the proposed change. The record developed at that
hearing for the use of the CME cheese price will be given due
consideration.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO contact:
Orice Williams, (202) 512-8678, or williamso@gao.gov:
Staff Acknowledgments:
In addition to those individuals named above, John Wanska, Assistant
Director; Marta Chaffee; Emily Chalmers; Jay Cherlow; Alison Martin;
Marc Molino; Andy Pauline; and Paul Thompson made key contributions to
this report.
FOOTNOTES
[1] A futures contract is a highly standardized (as to quantity,
quality, location, and delivery terms) agreement to buy or sell a
commodity for delivery in the future and has as its purpose the offset
or management of risk rather than actual delivery of a product.
[2] Spot markets involve the payment and physical delivery of a
commodity. For cheese, this occurred at the NCE and now at the CME, in
addition to other locations. References to spot markets in this report
are only referring to the market at either NCE or CME.
[3] See 7 C.F.R. § 1000.50 (2007). Actual prices paid can exceed the
minimum price. Raw milk is milk that has not been processed
(pasteurized).
[4] The spot cheese market is commonly referred to as a surplus market.
A market with these characteristics can also be called a residual
market, which is defined as a market on which only a small proportion
of the total production or consumption of a product is actually traded
on the market.
[5] In the process of price discovery, buyers and sellers exchange bids
and offers based on information about supply and demand for the cash
commodity and agree upon, or discover, the current price.
[6] Volatility is a measure of the degree to which prices fluctuate
over time.
[7] 7 U.S.C. § 608c, as amended.
[8] Dry whey is a byproduct produced from the water and solid
components that remain when cheese is manufactured.
[9] Additionally, the NCE traded 640-pound blocks. A carload of cheese
is between 40,000 and 44,000 pounds.
[10] This study was undertaken at the initiative of CFTC surveillance
staff to review CME spot cheese market participants in 2004 and 2005.
The most recent year for which data were available is 2004.
[11] A commodity broker is an individual who is paid a fee for
executing an order to buy or sell a commodity for a customer.
[12] According to CFTC officials, not all markets in which transactions
represent a small proportion of all transactions would be considered
thin.
[13] In 1999 trading represented slightly more--less than 2.5 percent
of all cheddar produced in the United States.
[14] A completed transaction on the CME spot cheese market is an
agreement between a buyer and a seller for the purchase of a specific
quantity of cheese at a given price. An unfilled bid is an indication
of willingness to buy a specific quantity of cheese at a given price
that remains open and is not accepted by a seller. An uncovered offer
is an indication of willingness to sell a specific quantity of cheese
at a given price that remains open and is not accepted by a buyer.
[15] Additionally, there may have been days in which there were
completed transactions, but the closing price was based on an unfilled
bid or uncovered offer.
[16] CFTC DMO has regulatory responsibility, among other things, to
provide market surveillance for futures markets. As a part of this
responsibility, CFTC DMO monitors markets to identify situations that
could pose a threat of manipulation and initiate preventative actions.
[17] CFTC Division of Enforcement investigates and prosecutes alleged
violations of the CEA and CFTC regulations. The prohibition against
price manipulation in interstate commerce is set forth at 7 U.S.C. §
13b.
[18] Prior to 2005, CFTC made individual requests to CME for data on
the CME spot cheese market.
[19] An option is a contract that gives the buyer the right, but not
the obligation, to buy or sell a specified quantity of a commodity or
other instrument at a specific price within a specified period of time,
regardless of the market price of that instrument. Open contracts are
the total number of futures contracts long or short in a delivery month
or market that has been entered into and not yet liquidated by an
offsetting transaction or fulfilled by delivery. A short position on a
futures contract is taken by a trader who agrees to sell a commodity at
some point in the future. A long position on a futures contract is
taken by a trader who agrees to purchase a commodity at some point in
the future.
[20] Bruce Marion, Willard Mueller, et. al. "Cheese Pricing: A Study of
the National Cheese Exchange," University of Wisconsin (March 1996).
[21] A designated contract market is a market designated by CFTC to
trade futures and options under the CEA. See 7 U.S.C. § 7.
[22] See 7 U.S.C. § 7(b).
[23] Self regulatory organizations include exchanges and registered
futures associations that enforce financial and sales practice
requirements for their members.
[24] A rule enforcement review is an analysis of an exchange's overall
compliance capabilities.
[25] The prohibition against manipulation of prices of commodity
futures and commodities in interstate commerce is set forth in the CEA
at 7 U.S.C. § 13b.
[26] In re Cox, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH)
23,786 at 34,061 (CFTC July 15, 1987); see also Frey v. CFTC, 931 F.2d
1171 (7th Cir. 1991); CFTC v. Enron Corp., 2004 U.S. Dist. Lexis 28794
(S.D. Tex 2004).
[27] See In re Abrams, [1994-1996 Transfer Binder] Comm. Fut. L. Rep.
(CCH) ¶ 26,479 at 43,136 (CFTC) July 31, 1995). See also In re
Hohenberg Brothers, [1975-1977 Transfer Binder] Comm Fut. L. Rep. (CCH)
¶ 20,271 at 21,477 (CFTC Feb. 18, 1977).
[28] See Cargill v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971), cert.
denied, 406 U.S. 932 (1972) (Manipulation cases tend to be
characterized by fact-specific, case-by-case analysis, which examines
whether prices have been affected by factors other than the legitimate
forces of supply and demand.); see also Frey v. CFTC, 931 F.2d 1171,
1175 (7th Cir. 1991). Accord In re Indiana Farm Bureau Cooperative
Association, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶
21,796 at 27,281 (CFTC Dec. 17, 1982) (defining manipulation or
attempted manipulation "has fallen to case-by-case judicial
development")
[29] Clearing member firms are entities through which futures and other
transactions are cleared and settled. They are also charged with
ensuring the proper conduct of each contract's delivery procedures and
the adequate financing of trading.
[30] According to analyses by the University of Wisconsin, from January
2000 to January 2007, cheese prices have determined upward of 83
percent of the USDA price of Class III milk.
[31] CME spot cheese market prices could be used in federal minimum
milk pricing provided that the CME spot cheese market remains open for
trading.
[32] See the Agricultural Marketing Agreement Act of 1937, as amended,
7 U.S.C. § 608c (8), (18).
[33] USDA, Preliminary Economic Analysis Class III and Class IV Prices,
Agricultural Marketing Service, February 2007. In this economic
analysis, USDA uses an econometric model in which it substituted NASS
survey of cheese prices for CME spot cheese market prices and projected
the potential effect on milk prices.
[34] In a 2004 report, GAO provided information on various dairy policy
options. GAO, Dairy Industry: Information on Milk Prices, Factors
Affecting Prices, and Dairy Policy Options, GAO-05-50 (Washington,
D.C.: Dec. 29, 2004).
[35] Pub. L. No. 106-32 (Nov. 22, 2000).
[36] See 7 U.S.C. § 1637b(c)(3), as amended by Pub. L. No. 106-32 § 2.
[37] Ed Jesse, "Backcasting Formula-Based Federal Order Class Prices,"
University of Wisconsin (October 2004).
[38] Over-order premiums refer to charges that are negotiated by milk
sellers (individual farmers and cooperatives) and milk buyers (fluid
milk processors and dairy product manufacturers such as cheese makers)
that are above the minimum milk price.
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