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CME – Corporate Auction Block for Global Free Trade
Ever wonder who really sets the “free market” price for your food?
Why would people in Brazil, South Africa, Japan, India, or Australia,
care so much about what a handful of traders are doing in Chicago?
What is the Chicago Mercantile Exchange (CME)?
This private not-for-profit corporation was founded in 1898, issued its own stock options in 2002, and is now the largest futures clearing house in the world. Each day an elite group gathers at the CME’s main office at 20 South Wacker Drive in downtown Chicago to swap futures in such products as cheese, butter, live cattle, pork bellies, timber, and fertilizer. Within seconds their trading activity is translated around the world, affecting the farm gate prices and grocery bills for billions of people. Beyond basic agricultural products, the CME directly influences the world economy in other major ways – such as by setting benchmark financial indicators through its trading of futures in Eurodollars, the S&P 500 Index, as well as the NASDAQ Index. In 2004 alone the CME handled a staggering 212 million contracts worth over $127 trillion.
CME – Insider Trading Cloaked in Secrecy
Because the CME is a private company, it is not subject to the same transparency and accountability rules governing other public agencies. While the CME often fondly invokes the public trust doctrine, its primary fiduciary responsibility is now to its investors. In this respect, the undemocratic character of the CME fits well with that of other global free trade entities such as the International Monetary Fund (IMF), World Bank, and the World Trade Organization (WTO) – all of which are run by unelected officials who ostensibly police themselves. According to the CME’s own mission statement, “Integrity and openness are critical. We expect the highest ethical standards from our employees and market participants. We rigorously regulate our markets.” Many of those who have been victimized by the CME would beg to differ.
The Commodity Futures Trading Commission (CFTC) is charged with overseeing the CME, but since much of the corruption problem involves commodity cash trading, it can only step in if this spot market affects futures trading. In spring 2004 the Dept. of Justice (Do J?), in conjunction with 23 State Attorney Generals, began its own anti-trust investigation of the largest dairy cooperative in the U.S., Dairy Farmers of America (DFA), for allegedly seeking to monopolize the fluid milk market in the U.S. Traders hired by DFA are well known within dairy industry circles for playing the CME cheddar market for all its worth. In July 2006 several U.S. Senators, led by Russ Feingold (D-WI) also called upon the U.S. Comptroller and the General Accounting Office (GAO) to investigate how the CME operates and to assess the economic impact of price manipulation upon farmers and consumers alike. For many dairy farmers, this all deja vu given what transpired in Green Bay, WI a decade ago....
Kraft Foods Caught Rigging Cheddar Prices in Green Bay
Contrary to popular belief, there is no free market for milk in the U.S. Milk prices are instead set through an archaic federal marketing order system, which determines a Basic Formula Price (BFP) for various milk classes (1-IV). Class III milk, which goes into cheese and accounts for 85-90% of the dairy market in states like WI, is the “prime mover” in the federal system, determining price differentials for everything else from drinking milk (Class 1) to butterfat (Class II), to nonfat dry milk (Class IV). And for decades, the Class III BFP was pegged to sales of 40 pound blocks and 500 lbs barrels of cheddar cheese traded at the National Cheese Exchange (NCE) in Green Bay, WI. Each Fri. at 10:00 am a small clique of cheddar traders would gather for a virtual auction lasting a mere 30 minutes.
According to a 1996 expose by two UW-Madison agricultural economists, between 1988 and 1993 this so-called “thin” trading at the NCE, involving less than 0.2% of all U.S. cheese, effectively set the price for the remainder of the U.S. cheese market. Of particular concern, was the fact that Kraft Foods, a major cheese buyer, was also one of the major cheese “sellers” at the NCE and was thus able to engineer massive windfalls for itself. The UW-Madison study estimated that for each penny that Kraft “dropped” the NCE “price” it took home over $10 million in extra profit. Even though the Federal Trade Commission exonerated Kraft of any wrong doing, the ensuing public scandal and farmer-led protests forced the state to close the NCE, and the cheddar traders packed their bags for the CME in Chicago. A class action lawsuit by dairy farmers against Kraft dragged on for years and was only thrown out by the WI Supreme Court on a tie vote (with one judge absent) in May 2002.
Dairy Farmers Still Paying the Price for CME Shenanigans
In response to these abuses at the NCE, the USDA in 1997 announced that it would begin calculating the Class III BFP from a weekly survey of corporate cheese processors done by the National Agricultural Statistics Service (NASS). Unfortunately, these “reference” prices reported to NASS are still being pegged to spot cash cheddar trading now done at the CME. Whereas before at the NCE cheddar traders were publicly identified, at the CME their identities are now kept secret. As few as four traders control up to half of the CME cheddar “market,” and an actual cheese exchange is not even needed to set the day’s price – posting a bid is enough. Worse yet, the fact that mozzarella, not cheddar, has become the major cheese made in the U.S. has had no bearing on the USDA formula or CME trading.
To see just how easily one can manipulate this “market,” one need only listen to Gary Hanman, CEO of DFA, speaking at a dairy industry meeting held in Syracuse, NY on Oct. 12, 2004: “The Chicago Mercantile Exchange is the tide that moves all hopes up or down... We were the main buyer of cheese on the CME trying to make a statement to the trade that we thought 1.80 was about the right price for a 40 pound block of cheddar cheese. About the 7th of June, we, DFA, bought 52 loads of cheese on that market that day, a record number of transactions. After we had bought the cheese that we needed for our market, for our customers, for our demand, we backed out, and when we did the market, you can see it fell to about 1.36.”
How Can We Bring Fair Trade to the Global Market?
Those concerned about fair trade and global justice are increasingly fed up with this type of criminal behavior occurring behind closed doors at places like the CME. Such insider trading only benefits wealthy elites, while stealing money from farmers and consumers. Genuine public oversight, diligent anti-trust enforcement, and a fair playing field are long overdue.
- Contact the Commodity Futures Trading Commission to demand a CME investigation:
1155 21st St. NW, Washington, DC 20581 tel. (202)418-5000 fax. (202) 418-5521
- Contact the Senate Judiciary Committee to demand a CME investigation: Arlen Specter (R-PA) and Russ Feingold (D-WI) - Congressional Switchboard #202-224-3121
