Download CFTC Probing CME Cheese Cash Market Activities

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Milkweed
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Issue No. 322, May 2006
CFTC Probing CME Cheese Cash Market Activities
by Pete Hardin and John Bunting
The parties involved won’t, or can’t acknowledge. But the Commodities Futures Trading
Commission (CFTC) is actively investigating
alleged irregularities in cash Cheddar markets at the
Chicago Mercantile Exchange (CME).
CFTC’s specific angle is alleged manipulation
of cash Cheddar markets that may have influenced
settlement of futures and options contracts.
Sources in the cheese industry tell The
Milkweed that CFTC has been actively investigating
CME cash market activities for Cheddar for the past
two to three months.
When questioned, a media spokeswoman at
CME that she could not comment on an investigation, if there was one or not. She advised contacting CFTC directly.
CFTC was equally informative.
“The
Commission does not comment on what it is or is
not investigating,” an employee stated in response
to a question from The Milkweed.
Midwest cheese industry sources have been
more helpful—confirming visits from CFTC investigators out of the Commission’s regional office in
Kansas City, Missouri.
Beyond such helpful comments from CME
and CFTC, The Milkweed has learned that an active
CFTC probe of cash Cheddar markets and related
settlement of futures/options has been ongoing for
the past 60 to 90 days. A number of cheese industry participants have been interviewed by CFTC
investigators. It’s important to note that CFTC’s
investigatory powers extend only to matters involving manipulations of cash markets to influence resolution of futures/options.
One key target: DFA
A major focus of CFTC’s investigation centers
on Cheddar cash market activities by Dairy Farmers
of America—the nation’s largest dairy farmers’
cooperative. From summer 2000 until sometime in
spring 2005, when DFA’s cash flow constricted …
DFA had been the predominant purchaser of
Cheddar in cash market trading at CME.
DFA’s involvement CME Cheddar cash market “oddities” has occurred several times in the past
five-plus years.
*In August-September 2000, DFA drove up
the Cheddar cash markets by over 25 cents per
pound through purchases of hundreds of carloads of
Cheddar cheese (both 40-lb. blocks and 500-lb. barrels). Trouble was: DFA violated CME rules by
failing to pay for these mega-purchases on a timely
basis. The Milkweed’s editor filed a formal complaint with CFTC shortly thereafter, providing
investigators with an September 18, 2000 audio
tape of DFA CEO/President Gary Hanman bragging
about DFA’s strategy to drive up farm milk prices by
driving up CME Cheddar purchases through large
purchases. CFTC took no action against DFA,
although a person at the Commission acknowledged
it was unusual for a complaining party to provide an
audio tape detailing alleged misdeeds.
*In 2003 and 2004, various sharp run-ups in
CME cash Cheddar markets caused Class III milk
prices in the federal milk order program to eclipse
Class I (fluid) milk prices—resulting in a so-called
“price-inversion”. DFA and its marketing affiliates
then “depooled” the Class III milk for April-May
2004—pirating tens of millions of dollars in what
should have been revenue destined for dairy producers.
*Two other strange “interventions” by DFA in
the CME cash Cheddar markets occurred. In MayJune 2004, for weeks DFA maintained a flat-line
price of $1.80/lb. for block Cheddar. And then, in
late summer/early fall 2004, DFA’s purchases held
block Cheddar constantly at $1.60/lb., as the co-op
was negotiating a complex, major financial restructuring with insurance companies.
More than DFA, however …
Cheese industry sources state that CFTC’s
probe of CME Cheddar pricing antics may hook
more than DFA. Sources cite strange price antics in
November 2004 and January 2005, which saw one
trader almost single-handedly drive up CME
Cheddar prices to unduly high levels … and then
benefit on resolution of previously-contracted
futures/options positions. These antics were closely covered by The Milkweed in its February 2005
issue, in an article titled “CME Price Yo-Yo:
Futures-Based Manipulation?”
Specifically, a trader from Minnesota is
reportedly gaining CFTC’s focus for these trading
antics. He netted millions in settling futures positions, after driving up the cash Cheddar markets.
CFTC probe just the start
There is, an active CFTC investigation, let’s
hope CFTC staffers get it right. Manipulating
dairy’s most important pricing mechanism—CME
Cheddar cash markets—is wrong, whatever the
manipulators’ motives may be.
The complexity of dairy pricing…and the ability of certain parties to manipulate the system for
venal gain…merits thorough investigation far
beyond CFTC’s limited mandate.
April Class III: $10.93
The April 2006 Class III (cheese) milk price
for USDA’s federal milk order system is
$10.93/cwt. That price is down 19 cents per cwt.
from the March 2006 Class III price. Shockingly,
the April 2006 Class III price represents a drop of
$3.67/cwt. below the April 2005 Class III price.
We fear that similar Class III prices may be
registered for perhaps the next two months.
In calculating the April 2006 Class III price,
USDA used the following values (determined from
the monthly average of weekly dairy commodity
price surveys for Cheddar cheese, butter, whey and
nonfat dry milk):
Butterfat: $1.2343/lb.
Nonfat Solids: $.6959/lb.
Protein: $1.9238/lb.
Other solids: $.1508/lb.
The low level of Class III prices reflects current rock-bottom values for dairy commodities.
The Milkweed
5/06
Invest in your best source for dairy news and
analysis. Know what’s really going on!
New U.S. Law Restricting Producer-Handlers
Could Devastate California Fluid Quota Values
by John Bunting and Pete Hardin
One of the first lessons taught to kids learning to
shoot a .22 rifle is that the bullet can carry up to a mile,
well past the intended target. Thus, caution must be exercised to look beyond the immediate target and weigh all of
the potential targets within the full range of the projectile.
California Congressman Devin Nunes (R), author of
the “Milk Regulatory Equity Act of 2005”, may have shot
more victims in dairy than he intended, in his attempts to gun
down alleged competitive advantages enjoyed by nefarious
“producer-handlers” outside the federal milk regulation.
Trouble is: Nunes’ bill, which became Public Law
1090-215 on April 11, 2006, when signed by President
Bush, contains another provision, which exempts
Nevada from federal milk order regulation. And the
brand new, big fluid milk plant owned by Dean Foods in
Reno, Nevada is poised to deluge California with unregulated, packaged Class I milk.
The ultimate danger to California dairy producers
is losing several BILLION dollars of fluid quota which
they own. Under California’s state milk pricing program, dairy producers who own fluid milk quota share
in the higher receipts of the Class I market. Quota is
commonly bought, sold, traded … and used as collateral for loans … by California dairy producers.
Continued on page 7
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