A Better Cheddar Benchmark? A Daily Cheese Auction Is Going Electronic

By Alexander Osipovich and Benjamin Parkin Features Dow Jones Newswires

People wearing colored jackets in Chicago will be shouting at each other about cheese for the final time on Friday.

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A daily 10-minute auction in Chicago that helps set the national price of cheese is going electronic next week, after being held in a traditional open-outcry format for decades. CME Group, the exchange giant that oversees the auction, will run 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.

Held in a corner of the CBOT trading floor in downtown Chicago each weekday at 10:45 a.m. Central time, the spot call cheese auction is among the smaller and more obscure markets in CME's empire. There are often only a handful of trades executed each day, each representing a "carload" of 40,000 to 44,000 pounds of cheddar.

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.

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.

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Last year, around 50 million pounds of cheese were traded in the auction, less than 1% of total U.S. cheese production, dairy-market experts 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 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, 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.

Pete Turk, a broker and co-owner of Rice Dairy LLC, said 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. "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 giant, 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

(END) Dow Jones Newswires

June 23, 2017 08:14 ET (12:14 GMT)