A Better Cheddar Benchmark? A Daily Cheese Auction Is Going Electronic

Cheese joins auctions for butter and nonfat dry milk in the new electronic format

By Alexander Osipovich and  Benjamin Parkin Updated June 23, 2017 8:43 p.m. ET

People wearing colored jackets in Chicago were shouting at each other about cheese for the final time on Friday.

A daily 10-minute auction in Chicago that helps set the national price of cheese will go electronic on Monday, after being held in a traditional open-outcry format for decades. CME Group Inc., CME 0.05% the exchange operator that oversees the auction, ran it Friday in its old form for the last time.

“We’re all going to miss the yelling and the screaming,” said Dean Kinnas, a dairy options trader at the CME-owned Chicago Board of Trade, or CBOT, exchange.

The “spot call” cheese auction is among the smaller and more obscure markets in CME’s empire. Until Friday, it was held in a corner of the CBOT trading floor in downtown Chicago each weekday at 10:45 a.m. Central time. There are often only a handful of trades—each representing a “carload” of 40,000 to 44,000 pounds of cheddar—executed each day by a small group of dairy brokers.

CME hopes the electronic platform will boost participation, with companies able to access the auction and monitor prices from anywhere in the world.

Earlier this year, CME shifted similar auctions for butter and nonfat dry milk to the new format, and it said participation has increased.

Increasing volumes could also bolster confidence in the benchmark cheese price that is determined by the auction. The cheese benchmark has been dogged by allegations of market manipulation over its centurylong history.

Last year, around 50 million pounds of cheese were traded in the auction, less than 1% of total U.S. cheese production, dairy-market observers say. Despite the relatively small volumes, the daily spot price from the auction is widely used in the U.S. cheese business.

More than 80% of the wholesale cheese transactions in the U.S. are priced off the CME spot cheddar price, said Dave Kurzawski, a senior dairy broker at INTL FCStone Inc.

Other types of cheese are typically bought and sold at a premium or discount to cheddar. For instance, a dairy-plant operator might agree to sell mozzarella for 10 cents a pound above the average price of CME spot cheddar from the previous week.

“Cheddar is kind of the lowest common denominator of cheeses,” Mr. Kurzawski said.

The number of open-outcry trading floors has dwindled amid the inexorable shift to electronic markets. In December, CME shut down the trading floor of the New York Mercantile Exchange in Manhattan, the longtime home of pits for oil and gold futures, following a long decline in open-outcry volumes.

At the spot cheese auction on Thursday, some 20 brokers barked and haggled, phones pressed to their ears as they relayed orders from customers such as dairy plants and food processors.

Factors that could affect the price include demand from food processors for cheese, as well as the cost of milk.

Cheese at the auction is traded in both barrels and blocks at different prices. Both have fallen this year. A barrel of cheddar, which is used primarily for processing, rose 2.2% to $1.37 a pound on Friday but was down 14% for the year. A block of cheddar, used for cutting, fell 0.3% to $1.54 a pound, down 7% for the year so far.

Pete Turk, a co-owner of Rice Dairy LLC who has been a broker at the cheese auction since 2005, said that going electronic would deprive the market of the emotional buzz that comes with face-to-face trading. “You can’t feel a screen,” he said on the sidelines of the auction on Thursday. “People like to see and feel that emotion to understand what’s going on.”

The cheese auction traces its history back to the founding of the Wisconsin Cheese Exchange in 1918. Later renamed the National Cheese Exchange, it was based for decades in Green Bay, Wis. In 1997, it closed down, and the market shifted to Chicago.

Rumors of market manipulation tarnished the reputation of the National Cheese Exchange, with dairy farmers accusing Kraft Foods Inc. and other big food companies of using it to keep prices artificially low. Multiple lawsuits filed by farmers against Kraft in the late 1990s were all eventually thrown out, and regulators never filed charges against the food company, which denied the accusations.

Moving the market to Chicago put the cheese auction under CME’s surveillance and regulation, but that didn’t end concerns about possible manipulation. In 2008, the Dairy Farmers of America Inc. and two of its former executives paid $12 million to settle allegations by the Commodity Futures Trading Commission that they had attempted to manipulate the price of milk futures by repeatedly buying cheddar in the auction. DFA, a nationwide farmers’ cooperative, neither admitted nor denied wrongdoing.

Write to Alexander Osipovich at alexander.osipovich@dowjones.com

Appeared in the June 24, 2017, print edition as 'Chicago Traders Are Blue Over Cheese.'


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