USDA has  continued to use the NASS survey of cheese prices in certain milk pricing  formulas as trading in the spot cheese market occurred at the CME. Certain Structure and Operations of CME Spot Cheese Market Are Similar to Those of NCE, and Certain Characteristics Result in Ongoing Concerns about the Potential for Price Manipulation

The CME spot cheese market shares a number of operational and  structural similarities with NCE and has certain characteristics that could  make the CME spot cheese market susceptible to price manipulation. Some Operational Aspects of the CME Spot Cheese Market Resemble Those at NCE

NCE and CME share many similarities, including certain trading rules,  products traded, the volume of cheese traded, and market participants, but  there are differences. Thinness of the CME Spot Cheese Market, Combined with Other Factors, Contributes to Questions about Possible Price Manipulation

Despite the move to CME, the spot cheese market remains a thin market,  which in combination with the presence of a small number of traders that  make a majority of trades and the spot cheese market’s pricing structure  contributes to questions about the potential for price manipulation. Relatively few market participants  account for the majority of trading at the CME spot cheese market, as  shown in figure 1. Additionally, the change from once-a-week  trading on the NCE market to daily trading on the CME spot cheese  market may make sustaining attempted price manipulation more difficult  because a trader may have to be active in the market on a daily basis in  order to influence prices. Despite allegations of price manipulation,  industry participants we interviewed stated that they generally did not  believe manipulation was occurring. CFTC and CME Provide Increased Oversight of the CME Spot Cheese Market

Both CFTC and CME engage in activities that may detect or deter potential  price manipulation at the CME spot cheese market. CFTC, as part of its responsibility for the regulation of  commodity futures markets, monitors cash markets that affect futures  markets, such as the CME spot cheese market. CFTC did review trading  activities on NCE in 1997 prior to approving a market for trading in certain  milk futures. None of these reviews resulted in any legal action taken by  CFTC against a market participant. According to CFTC officials, they have not approved  CME spot cheese market rules. The USDA Survey of Cheddar Cheese Prices Largely Duplicates CME Cheese Prices and Introduces a Time Lag into Some Milk Prices

The NASS survey of cheese prices, which is a major determinant of some  FMMO minimum milk prices, is not currently audited by USDA, largely  duplicates reported CME cheese market prices, and introduces a 1- to 2- week time lag between when data are reported by NASS and when  transactions captured in the survey occur. Auditing the transactions could help to ensure the accuracy  of the information used to establish minimum milk prices under the  FMMOs. The NASS survey of cheese prices  largely captures CME price data by surveying producers versus capturing  current data directly from CME. We compared this information to the National Cheese  Exchange’s (NCE) rules and procedures, as well as to federal and  academic analyses of the structure and operations of NCE.
Why GAO Did This Study

The Chicago Mercantile Exchange (CME) is home to the spot cheddar cheese market, which impacts the prices of virtually all cheese traded in the United States, producer milk prices, and milk futures contracts. The spot cheese market, formerly the National Cheese Exchange (NCE) in Wisconsin, has been and continues to be the subject of concerns about price manipulation. GAO was asked to examine (1) the market's structure and ongoing concerns about price manipulation; (2) market oversight and efforts to address potential manipulation; and (3) how the market impacts federal milk pricing. In response, GAO compared the markets at NCE and CME, analyzed trading data, collected information about the Commodity Futures Trading Commission's (CFTC) oversight, and met with industry participants, academics, and agency officials.

What GAO Found

Because the CMEspot cheese market remains a market in which few daily trades occur and a small number of traders account for the majority of trades, questions exist about this market's susceptibility to potential price manipulation. The structure and operations of the CME spot cheese market are comparable to NCE's, including trading rules, products traded, and market participants. However, there are differences, including daily trading at CME versus once-a-week trading at NCE. CFTC and CME provide oversight of the CME spot cheese market that did not occur on NCE. Both engage in activities that may detect and deter potential price manipulation at this market. CFTC, as part of its responsibility for regulation of commodity futures markets, monitors cash markets, including the spot cheese market, and can act on indications of manipulative activity. In addition, CME conducts daily surveillance and regularly reviews trading data and market trends. According to CFTC and CME officials, they have both made efforts to address allegations of the potential for price manipulation by examining the activities of participants in the spot cheese market. As of June 2007, none of these reviews have led to an instance of CFTC taking legal action against a market participant. CME's spot cheese market impacts federal minimum milk pricing through the NASS survey of cheddar cheese prices, which as shown below are highly correlated to the CME cheese prices. CME spot cheese prices are used to set long-term contracts, which are then captured by the NASS survey of cheese prices--a significant commodity component in USDA's minimum milk pricing formulas. According to USDA, the agency uses the survey, in part, because it captures more transactions than occur at the CME spot cheese market. However, in addition to largely capturing CME price data, it introduces a 1- to 2-week time lag between when data are reported by NASS and when certain transactions captured in the survey occur. Moreover the survey is not currently audited to ensure the accuracy of the information. These factors may contribute to milk prices paid by dairy market participants that are either not completely accurate or not current.