Spot Cheese Market:

Market Oversight Has Increased, but Concerns Remain about Potential Manipulation

GAO-07-707: Published: Jun 21, 2007. Publicly Released: Jul 5, 2007.

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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 for Executive Action

  1. Status: Closed - Implemented

    Comments: The Agricultural Marketing Service (AMS) of USDA issued a decision in June 2008 regarding various proposals that were brought forward at field hearings regarding the Class III milk pricing formula. These proposals included 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 the federal register, AMS described the information it considered for each of the proposals and why it made the decision that it did regarding each proposal.

    Recommendation: 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 National Agricultural Statistical Service (NASS) survey of cheddar cheese, the Secretary of USDA should direct the Administrator, Agricultural Marketing Service (AMS) 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.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: The Agricultural Marketing Service at USDA implemented a program to audit data reported to NASS in its survey of cheese prices. In particular, in a final rule documented in the federal register on June 17, 2008, USDA provided a description of the program including criteria for which reporting entities (those that provide the cheese price data) would be audited and what the audit would include.

    Recommendation: If USDA continues to use the NASS survey of cheese prices, the Secretary of USDA should 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 Affected: Department of Agriculture

 

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