Derivative probe promised in dairy volatility

By Dow Jones Newswires
Posted June 25, 2010 at 1:12 p.m.

Multiple U.S. regulators are examining the role of derivative markets run by CME Group (CME) in fostering volatility in dairy prices, Assistant Atty. Gen. Christine Varney said Friday.

Dairy farmers have long blamed the derivatives markets for distorting prices and are becoming increasingly vocal about the effect of big retailers on competition in the sector. Varney said at a workshop examining dairy market trends that the Department of Justice, the Department of Agriculture and the Commodity Futures Trading Commission would have “a conversation” about the CME “and how that’s working.”

The Chicago exchange operator lists a range of contracts encompassing dry and fluid milk, butter and cheese.

“Whenever you have a market that’s as thinly traded as this appears to be, it’s certainly something you want to think about,” Varney said.

The federal government has looked at the spot cheese market in the past, including a 2007 Government Accountability Office report that noted despite the limited number of participants in the CME market, it still had a significant role in milk pricing.

The USDA’s survey of cheddar cheese prices is highly correlated to CME prices, the report said, because the CME prices are used to set long-term contracts, “which are then captured by the (USDA) survey of cheese prices — a significant commodity component in USDA’s minimum milk pricing formulas.”

The workshop is the third of five multi-agency hearings being held this year to examine competition in agriculture. The role of the CME’s markets was a recurrent theme in a morning session with farmers from around the country.

“All volatility in the dairy industry is caused by the CME,” said Joel Greeno, a dairy farmer in Kendall, Wis.

Varney and USDA Secretary Tom Vilsack didn’t say that CME trading is a problem, only that it was an issue that needed further examination.

“I guarantee you that within a couple hours, folks at the CME … are going to be asking themselves … what do we have to do to educate people?’” said Vilsack.

CME declined to comment.

Union representatives at the workshop also called on regulators to examine the role of retailers in driving the sector’s volatility and poor financial performance, not just farmers and processors.

Retailers regularly use milk as a “loss leader” to drive store traffic.

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