The arguments were that the prices of the WCE represented collusive pricing between dealers, reflected a thin market and were an undue influence on the price of cheese and, therefore, milk.
In the early years of dairy in America, much of the milk produced on farms was converted to more shelf-stable products, such as butter and cheese, rather than sold as fluid milk. This was especially the case in rural areas distant from any fluid milk- consuming markets.
Wisconsin was such a market. Much of this cheese was made by farmers in farmstead cheese operations or small plants allied with farmers. Because what the farmers sold was cheese, not milk, the cheese price was the milk price.
In the latter part of the 19th Century, as cheese production grew in Wisconsin, middlemen or dealers would assemble the cheese from among the various farmers and then take it to the more distant markets. Concerned that individual, and fairly secretive, transactions were hurting prices, these farmer cheese factories created “call boards” throughout the state.
These call boards (as many as 19) limited transactions to factories within the county or surrounding areas.
In 1909, the Plymouth Central Call Board of Trade, originally only for Sheboygan County, Wisconsin, reorganized to allow any Wisconsin factory to participate through its board. This made it the dominant and, eventually, the only call board in the state.
In 1918, it became the Wisconsin Cheese Exchange. As the central pricing of cheese, these prices determined what prices producers would receive for their milk.
Another development occurred in pricing: With a central pricing board, rather than actually selling cheese through the call board, cheese processors and dealers began to enter into contracts that referenced the last accepted bid or adjusted their price sheets based upon those changes. Thus, through simple derivatives, a few bids on the call board became the price of cheese throughout the state.
It goes without saying that when prices were not enough, accusations flew that the call boards were “fixed” and intended to deflate prices. Some farmers formed associations to set the prices and replace the dealer-run WCE.
In response to the furor, cheese factories and producer co-ops in 1921 formed the Farmers Call Board, as referenced at the beginning of this article. Implied was that as a “farmers” call board, it could be trusted.
But it was all window dressing, changing nothing. The Farmers Call Board met after the WCE closed and merely repeated the exchange prices.
An investigation by the Wisconsin Attorney General came to the conclusion that the Farmers Call Board was formed not by farmers but by dealers, and was only made to look like farmers, not dealers, were setting the price. As criticism mounted, it was discontinued in 1941.
In 1954, the Wisconsin Cheese Exchange moved to Green Bay and, in 1974, changed its name to the National Cheese Exchange. Neither the move nor the name change satisfied producer angst over the exchange prices and the impact on producer prices.
Distrust with the exchanges grew again in the 1950s and 1960s. By occasional pickets and disruptions, and by nonstop speeches and editorials, producers raged at the exchange’s ability to set prices for cheese and, as a result, milk.
Later the USDA expanded the influence of the NCE prices beyond the Upper Midwest. In 1970, the USDA began reporting the monthly Minnesota-Wisconsin Manufacturing-Grade Milk Price Series, or M-W. The USDA used the M-W to set minimum prices in the FMMO system. This monthly price captured what plants in those two states paid producers for milk.
But what the Upper Midwest plants paid producers for milk depended on the market value of cheese. That market value was announced by the NCE every Friday. Lower cheese prices resulted in lower milk prices paid to Upper Midwest producers. Plants reported the lower values to the USDA; the USDA used those average prices to set national minimum prices for all classes of milk.
NCE supporters said all it was doing was clearing cheese at market prices and reporting that number, what others did with it was their concern. As to allegations they were deliberately lowering cheese prices to get cheaper milk, they asked, “Why would cheese processors allow cheese prices and the value of their inventory to drop unless the market demanded it?”
Nonetheless, allegations of bid rigging, trading against interest and other unseemly actions continued to grow. Political pressure and legal threats led to the members closing the NCE in 1997. The Chicago Mercantile Exchange stepped in with its own cheese exchange, mirroring in many ways the terms of contracts of the old NCE.
Just the year before, the USDA had incorporated the NCE cheese price in its Basic Formula Price (BFP) – a replacement to the M-W. Rather than incorporate another exchange price and move the dispute from Green Bay to Chicago, the USDA replaced exchange prices with a nationwide survey of cheese plants which sold cheddar cheese. This was the beginning of the NASS Cheddar Cheese Survey Price or NASS Survey.
The theory behind the survey was that rather than a price set by a few carloads of cheese, almost one-fourth of the cheddar cheese sold would contribute to a weighted average price of actual sales. There would be no need for a cheese exchange to price milk.
In 2000, when Federal Order reform took place, the competitive price in the BFP was replaced by end-product pricing using the NASS survey of product prices. In reality, the FMMO end-product pricing formulas geometrically enhanced the importance of exchange prices to the point that the cheese and butter prices actually set the minimum prices of milk.
The difference between the NASS survey block cheese price since 1997 with the average CME block prices averages six-tenths of a cent, or less than half of 1 percent. The CDFA openly uses the CME in its pricing formulas.
The USDA, using its NASS survey of cheese prices, computes the milk price in a formula specifically designed to provide a plant with reasonable yields and a positive margin for that month.
Because plant margin can be projected off of the CME price, it makes sense that cheese plants, regardless of variety, sell off of the CME to ensure a margin. (The growing influence of dry whey in the formula has unmistakably added new risks to producers and processors.)
Because of this elimination of risk enjoyed by all cheese manufacturers, cheese plants are reluctant to enter into other pricing arrangements either with producers or buyers. Cooperative efforts between producers and processors to move into different pricing arrangements, bringing greater opportunity, market and profits, are effectively eliminated in this system because the risks taken compared to competitors is too high.
The USDA says producers should not be concerned because these are “minimum,” not “maximum” prices. The USDA is wrong in this regard. The only extra value potentially available to a cheese plant to pay more comes from having higher yields or lower costs. That is a very narrow range.
Use of the survey prices removes the ability to enhance cheese income for premium payments and, thus, money to its producers by raising prices, as this is captured in the survey.
So instead of replacing or eliminating the government interference in the market, some groups lobbied Congress to “improve” the survey by taking it online. Congress required the Dairy Division of the USDA to do the survey online and report it 48 hours earlier than the current method. The USDA has just announced that decision.
Until then, component prices under the order use the National Agricultural Statistics Service (NASS) surveys of producers and sellers of specified cheddar cheeses, NFDM, dry whey and butter reported every Friday. These NASS survey prices will be replaced by the AMS survey prices announced on Wednesday.
Under the AMS collection, plants will post the information on a web portal and algorithms will check for outliers. The AMS office will review the data and release it by noon on Wednesday. For all intents and purposes, stakeholders in the FMMO system will see no change.
Because it is the same population and same criteria, even the numbers should be identical to those issued by NASS. The rule is at 77 Federal Register 8717 and will be effective April 1, 2012.
The switch to the AMS series will benefit those who use the FMMO in some ways. The modern Web replaces faxes. Fewer people are needed to do it, and prices will come out sooner. Producers will know 48 hours sooner what their milk prices will be.
A platform has been created where in the future other product prices, even producer prices, can be surveyed and reported in a timely fashion. But this change brings no more money to producers.
The pricing dynamo will continue to be the CME. Producers cannot participate in the cheese market like they can in the milk exchange. A hundred years ago, producers sold their cheese – today they sell milk.
Like the Farmers Call Board mirrored the dealers’ prices at the WCE, the AMS survey price just as the NASS survey will repeat the CME from the week before. To get really dynamic prices that provide plants and producers profits means the setting of the milk price must begin with bargaining for milk, not cheese, whether on the exchange or in the bargaining room.
To do that means an end to the FMMO setting minimum prices for milk. Rather than exchange one report of cheese prices with another, we need to exchange cheese pricing with milk pricing. PD