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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