Dairymen call for new pricing system

SALEM, Ohio – Ohio dairyman Bryan Wolfe is sick of low milk prices so he, along with the National Family Farm Coalition, sent a letter straight to the top: to President Bush.
There’s “rampant corruption in the dairy industry,” they wrote, and the government is ignoring it.
The only way to deal with it is a thorough investigation into the industry, they said.
Trading. Critics say the problem is the Chicago Mercantile Exchange (CME).
Block and barrel cheddar cheese is bought and sold on the CME, and those trades set the milk prices for farmers across the country.
But there aren’t enough traders, Wolfe said. Just a handful of buyers and sellers can manipulate dairy prices either up or down, he said.
“This persistent, malicious manipulation … (causes) chaos for the dairy farmers,” the coalition wrote in its letter to Bush.
Getting a response? These complaints aren’t anything new.
In April 2005, dairymen met with CME executives and demanded more transparency into who is trading and how it’s affecting the prices. During the meeting, a small group rallied outside, some wearing cow costumes.
A second rally was held this spring.
But, still, nothing is happening, Wolfe said.
That may change. Not only did the National Family Farm Coalition take its concerns to Bush, but last month a group of six senators asked the U.S. Government Accountability Office to investigate the CME.
They asked for answers to 11 questions about price discovery, manipulation and oversight.
Those senators include Arlen Specter, R-Pa., Hillary Rodham Clinton, D-N.Y, and Russell Feingold, D-Wis.
So far, no response, according to Zach Lowe, Feingold’s press secretary.
Investigation. Although it wasn’t by the Government Accountability Office, an investigation was started in 2004.
The Department of Justice spent a year and a half looking into dairy pricing, but funding for the investigation was cut in October 2005, explained National Family Farm Coalition in its letter to the president.
This resulted in a price drop in dairy commodities cash trading, Wolfe said.
Cheddar cheese prices fell from $1.59 a pound to $1.12 a pound for 40-pound blocks. This meant the milk price paid to farmers also flattened – by $4 a hundredweight, according to National Family Farm Coalition.
These concerns about dairy price manipulation have been around for years.
A study in 1996 proved the National Cheese Exchange in Wisconsin was susceptible to manipulation. Because of this, it closed a year later and trading moved to Chicago.
Critics say the same questionable practices at the National Cheese Exchange also moved to the Chicago Mercantile Exchange.
Illegal? Like the CME, the national exchange was investigated when cheese prices dropped but there was never evidence of illegal activity, said Bob Cropp, dairy economist with the University of Wisconsin-Madison.
He guesses the same is true on the CME: There isn’t illegal trading, but the market can be manipulated.
The exchange’s role is to determine the cheese price that reflects the market, he said. As this type of market discovery mechanism, the CME is not perfect.
The proof, Cropp said, is when prices appear to be either too high or too low in the short run.
New system needed. The bottom line is there needs to be a new dairy pricing system based on regional production, according to New York dairyman John Bunting.
The current market isn’t the true balance of supply and demand that you learn about in economics class, he said. Instead, dairy and cheese are “thin” markets, meaning there are few traders.
Kraft and Dairy Farmers of America dominate block cheese trading on the CME and there’s a near-perfect correlation between that trading and the farm milk price, he said.
Several traders have 100 percent influence over raw milk prices, Bunting said. Instead, there needs to be a system where these traders have a voice in the market, but not the only voice, he said.
They’re only doing what comes naturally and what they need to do to make a profit, Bunting said; they aren’t the “bad guys.”
But government policy-makers are, he criticized. They aren’t enforcing anti-trust regulations or making policy in the public’s interests.
“We need a resilient food supply system,” Bunting said, adding that the public won’t get it with recent ag policy because it’s “twisted and distorted.”
Solution? Talk about a new system isn’t anything new, Cropp said.
One suggestion he’s heard about is to expand the CME to other cheeses, such as mozzarella. The problem is other cheeses aren’t a standardized product.
Another idea is to use the Class III futures market as price discovery but this also has received a lukewarm reception, he said.
Both these alternatives would allow more activity on the CME, meaning more buyers and sellers, but they also have drawbacks, he said.
“What is the alternative?” Cropp asked. “It’s not easy to come up with one.”