FEATURE-Small US cheese market slices out a trading niche
CHICAGO, July 19 (Reuters) - For Chicago Mercantile Exchange CME.N cheese traders, it's a good sign when people don't show up at your workplace dressed as cows.
A year ago, CME traders were confronted on the sidewalk outside their exchange by angry dairy farmers, including some decked out in bovine costumes, to protest the alleged manipulation of CME cheese prices by traders.
Cheese prices often influence milk prices, and a year ago at this time, dairy farmers were up in arms because they felt that milk and cheese prices were unnaturally low.
Shortly after the cow-costume protests, the government launched an investigation into whether CME traders were manipulating cheese prices. Earlier this month, a 10-month study by the Government Accountability Office found that CME cheese traders did nothing wrong.
For Bob Prosi, that was heartening news.
"I felt like the CME was vindicated. We have been working real hard to provide honest markets, both cash and futures. To be criticized that we were manipulated, we just thought was wrong," Prosi told Reuters.
Prosi was particularly relieved by the findings, because he was largely responsible for bringing the cheese market to Chicago 10 years ago.
Before 1997, cash cheese traded once a week at the National Cheese Exchange in Green Bay, Wisconsin. But that market closed amid accusations of price-fixing. Chicago and New York vied for the new trading site and Chicago won, said Prosi, who at the time was on the CME board of directors and helped persuade the exchange and the industry to relocate the cheese market in Chicago.
TELEPHONES AND PRICE BOARDS
Unlike the CME's other commodity and financial markets, where tens of thousands of contracts are traded daily via packed trading pits or computer keyboards, the cheese market is much slower-paced. And the traders like it that way.
For about 15 minutes each day, Prosi and a handful of other traders stand in a remote area at the back of the Chicago Mercantile Exchange, far from the noisy trading pits.
During a recent trading session Prosi held telephones to each ear as he waited for clients to bid or offer cheddar cheese. The clients are cheese company executives.
The bids, offers, or purchases are shouted to an exchange official, who writes them on a large board at the front of the trading area.
"Everybody in the cheese industry has access to this market," said Prosi, who claims the biggest cheese companies in the United States are frequent users.
Some days no cheese will trade, and on others only a few barrels or blocks may change hands. While the volume of trades may be small, the government, dairy industry, and CME traders still believe it is a valuable market.
HIGH PRICES QUELL PROTESTS
In contrast to last year's low prices which sparked the cow-costume protests, this year's cheese and milk prices are among the highest ever due to strong exports of dairy products and good domestic demand.
In CME trading, cheddar cheese in June topped $2 a lb, which helped send milk to a record $22.50 per hundred pounds.
"Certainly things are a whole lot better than they were a year ago," said Chris Galen, spokesman for the National Milk Producers Federation. "The big question now is, how long will prices stay high?"
This year's high milk and dairy prices have not entirely quieted arguments that the government needs to change its method of setting milk prices.
The Milk Producers Federation, like the government investigators, would like to see changes in the federal milk pricing system and it has a task force studying the issue.
"We have been looking at alternative pricing mechanisms, because the status quo isn't perfect," said Galen.
CHEESE MAY NOT GO ELECTRONIC
Amid all the fuss over this year's high prices and calls for changes in government price-setting, the CME cash cheese market has essentially gone about its business as it has for years.
As other commodity markets move to computer screens and trade around the clock, the cash cheese market's 15 minutes of trading a day are sufficient, according to CME traders.
It is the one-on-one contact between the traders and cheese company officials that has trader Kip Crook predicting cheese will not migrate to around-the-clock electronic trading.
"The people who do these cash markets are pretty high up in the organizations," said Crook. "They could not sit there and watch it all day."
((Reporting by Bob Burgdorfer; editing by Matthew Lewis; Reuters Messaging: bob.burgdorfer.reuters.com@reuters.net; 312-408-8723; bob.burgdorfer@reuters.com)) Keywords: CHEESE CHICAGO/
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