Dairy producers have carefully crafted a wholesome, all-American image, exemplified by the ubiquitous "Got Milk? " milk-mustache ad campaign...
CHICAGO — Dairy producers have carefully crafted a wholesome, all-American image, exemplified by the ubiquitous “Got Milk?” milk-mustache ad campaign. But the dairy pricing system has a long history of price manipulation and scandal.
Cheese dealers in Wisconsin were accused of price-fixing in 1911. A decade later, meatpackers were fingered for pushing up the cheese price in hopes that consumers would buy more meat.
The first cheese exchange opened in 1918 in Plymouth, Wis., where industry leaders came to a tacit understanding that they could determine a fair price for dairy products nationwide.
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Ever since, there have been constant allegations that the market was fixed. That’s because the cheese exchange executes a small number of trades relative to the total number of outside transactions that are based on the market’s prices.
The most recent scandal came in the mid-1990s when Kraft was accused of manipulating the prices lower at the National Cheese Exchange when it was located in Green Bay, Wis. But Kraft wasn’t the only one accused of wrongdoing.
Gary Hanman, then the head of Mid-America Dairymen, was suspended from trading for two months in 1988 for bragging to his members about boosting the cheese price.
The cheese exchange moved to the Chicago Mercantile Exchange in 1997 and is a “clearing market” where institutional users can sell when they have too much and buy when they don’t have enough. It also gives traders current price information so they can assess the risk of contracts in the much larger futures market for milk.
Unlike many futures trades, where only paper is really traded, traders at the cheese exchange buy and sell actual 40,000-pound trucks of fresh cheddar cheese. The cheese is delivered either in 40-pound blocks or 500-pound barrels. Blocks are typically cut up into cheese that is sold in grocery stores; barrels are used in processed food.
The cheese exchange was never intended as a means to set dairy prices, said John Harangody, director of agricultural commodity products at the Merc. “People have done that on their own,” he said.
The federal government tried to reform dairy pricing in 1997. Instead of using the cheese exchange to determine the minimum price for raw milk, USDA now surveys dairy manufacturers once a week to determine how much they are charging.
But since dairy manufacturers still look to the Merc to determine how much to charge customers, the survey price is almost always the same as the Merc’s.