United States Government Accountability Office

GAO Report to Congressional Requesters

SPOT CHEESE 

MARKET 

Market Oversight Has 

Increased, but 

Concerns Remain 

about Potential 

Manipulation 

June 2007 

 

GAO-07-707 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2007

SPOT CHEESE MARKET 

Market Oversight Has Increased, but 

Concerns Remain about Potential 

Manipulation 

Highlights of GAO-07-707, a report to 

congressional requesters 

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 Recommends

GAO recommends that the U.S.

Department of Agriculture (USDA) 

seriously consider all industry 

proposals, including one to 

eliminate the National Agricultural

Statistical Service (NASS) survey of 

cheese prices, in the minimum 

federal milk pricing formula. If 

USDA continues to use the survey,

GAO recommends that USDA audit

the survey data. In written 

comments, USDA agreed to audit

the survey data. USDA did not

agree to proactively consider a 

proposal to eliminate the survey 

but would give due consideration 

to all industry proposals. 

Because the CME spot 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. 

CME Spot Cheese Market and NASS Cheese Survey Block Cheese Prices 

Dollars per pound

1.50

1.40

1.30

1.20

1.10

Jan. 21

Feb. 11

March 4

March 25

April 15

May 6

May 27

June 17

July 8

July 29

Aug. 19

Sept. 9

Sept. 30

Oct. 21

Nov. 11

Dec. 2

Dec. 23

Jan. 13

Feb. 7

2006 2007

NASS survey

of cheese

CME spot

cheese market

Source: USDA

www.gao.gov/cgi-bin/getrpt?GAO-07-707.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Orice Williams

at (202) 512-8678 or williamso@gao.gov. 
Contents 

Letter 1

Results in Brief 3 

Background 5

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 8 

CFTC and CME Provide Increased Oversight of the CME Spot 

Cheese Market 13 

The USDA Survey of Cheddar Cheese Prices Largely Duplicates 

CME Cheese Prices and Introduces a Time Lag into Some Milk 

Prices 22

Conclusions 27

Recommendations for Executive Action 28 

Agency Comments and Our Evaluation 29 

Appendix I Scope and Methodology 33 

Appendix II Comments from the Department of Agriculture 35 

Appendix III GAO Contact and Staff Acknowledgments 39 

Table 

Table 1: Average of Number of Transactions Per Trading Session 

by Barrel and Block on the CME Spot Cheese Market, 

1997-2006 10

Figures 

Figure 1: Percentage of Trading, by Largest Block and Barrel

Market Participants, January 1, 1999, to February 2, 2007 11 

Figure 2: Influence of CME Spot Cheese Market Prices on Class III 

Milk Pricing 23 

Figure 3: CME Spot Cheese Market and NASS Cheese Survey Block 

Cheese Prices 26 

Page i GAO-07-707 Spot Cheese Market
Abbreviations 

AMS Agricultural Marketing Service 

CEA Commodity Exchange Act 

CFTC Commodity Futures Trading Commission 

CME Chicago Mercantile Exchange 

DMO Division of Market Oversight 

DOJ Department of Justice 

FMMO federal milk marketing order 

FTC Federal Trade Commission 

NASS National Agricultural Statistical Service 

NCE National Cheese Exchange 

SRO self-regulatory organization 

USDA U.S. Department of Agriculture 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page ii GAO-07-707 Spot Cheese Market
United States Government Accountability Office

Washington, DC 20548 

June 21, 2007 

Congressional Requesters

For almost a decade, the Chicago Mercantile Exchange (CME) has been 

home to a spot cheese market, which impacts the prices of virtually all

cheese traded in the United States as well as producer milk prices and 

milk futures contracts.1

 This spot cheese market moved to CME in 1997 

amid allegations of price manipulation on the National Cheese Exchange

(NCE) in Green Bay, Wisconsin. 2 NCE was a nonprofit corporation 

established to be a market where surplus supplies of cheese were bought 

and sold, and cheese had been traded there for over two decades. Cheese 

producers generally use CME spot cheese market prices to set their sales 

prices, according to industry participants. In turn, minimum prices for raw 

farm milk bought by many cheese manufacturers are set using a U.S. 

Department of Agriculture (USDA) pricing formula whose most significant

commodity component is the weekly average of cheddar cheese prices 

drawn from a survey of large cheese manufacturing plants.3

 Futures 

contracts for milk used in manufacturing cheese are also settled at 

expiration using the minimum price for milk as determined by the pricing 

formula. 

Some industry participants had hoped that moving the spot cheese market 

would alleviate concerns about price manipulation. But during the last few 

years, trade press articles have described ongoing concerns in the dairy 

industry about potential price manipulation at the CME spot cheese 

market and the potential effects on certain milk prices. Generally, price 

manipulation is any planned operation, transaction, or practice that 

intends to and causes or maintains an artificial price—that is, a price that

is higher or lower than it would have been if it had reflected the forces of 

 1

A futures contract is a highly standardized (as to quantity, quality, location, and delivery 

terms) agreement to buy or sell a commodity for delivery in the future and has as its 

purpose the offset or management of risk rather than actual delivery of a product. 

2

Spot markets involve the payment and physical delivery of a commodity. For cheese, this

occurred at the NCE and now at the CME, in addition to other locations. References to spot

markets in this report are only referring to the market at either NCE or CME. 

3

See 7 C.F.R. § 1000.50 (2007). Actual prices paid can exceed the minimum price. Raw milk 

is milk that has not been processed (pasteurized). 

Page 1 GAO-07-707 Spot Cheese Market 
supply and demand. The Commodity Futures Trading Commission 

(CFTC), which provides regulatory oversight of the CME because of its 

futures markets and also has responsibility for enforcing a federal 

prohibition against manipulating the price of any commodity in interstate 

commerce, has received several complaints or allegations from industry 

participants and others about price manipulation on the CME spot cheese 

market. These concerns generally involve observed price fluctuations on 

the CME spot cheese market and the possibility that these fluctuations 

might result in prices that are too high or too low. Such concerns have 

revived suspicions about the market’s susceptibility to manipulation and 

raised questions about the effectiveness of the move from NCE in 

addressing concerns about price manipulation and whether there is 

sufficient regulatory oversight of the market. 

Given these ongoing questions and the importance of the CME spot cheese 

market in setting cheese and minimum milk prices in the United States, 

you asked us to review the market’s operations, its susceptibility to 

manipulation, and the role played by various oversight and enforcement 

organizations in monitoring the spot cheese market. Specifically, we 

examined (1) the structure and operations of the CME spot cheese market

compared to those of NCE and ongoing concerns about price 

manipulation on the CME spot cheese market, (2) how the market is 

regulated and efforts to address potential price manipulation, and (3) how 

the CME spot cheese market impacts federal milk pricing. 

To address these objectives, we reviewed industry and academic literature 

regarding market operations and obtained information from CFTC, CME, 

and market participants on the structure and operations of the CME spot 

cheese market. We reviewed existing studies that assessed market 

characteristics associated with price manipulation, examined available 

trading data, and obtained officials’ views on potential manipulation. We 

did not attempt to determine whether manipulation had occurred on the 

CME spot cheese market; instead, we identified the characteristics of this 

market that were consistent with those of markets considered susceptible 

to price manipulation. We obtained and analyzed information about CFTC 

and other oversight and enforcement organizations on their roles in 

monitoring the CME spot cheese market. Finally, we obtained and 

reviewed relevant laws and regulations related to milk pricing in the 

United States as well as interviewed various agency and industry officials 

about the role of CME spot cheese market prices in milk pricing. We 

conducted our work between September 2006 and June 2007 in Chicago;

Washington, D.C.; and two locations in Wisconsin in accordance with 

generally accepted government auditing standards. 

Page 2 GAO-07-707 Spot Cheese Market 
Several aspects of the structure and operations of the CME spot cheese 

market are comparable to those that existed at NCE, and certain market 

conditions at the CME spot cheese market continue to raise questions 

about the potential for price manipulation. For example, the CME spot 

cheese market, which has technical, market-specific rules based in part on

NCE rules, offers trading in some of the same products and has many of 

the same industry participants as NCE. The CME spot cheese market 

involves daily anonymous trading, whereas NCE traded cheese once a 

week and trader identities were publicly known. Certain factors that were 

prevalent on NCE and that are often associated with the potential for price 

manipulation still exist, such as low trading volume and a small number of 

traders who make the majority of trades. Although the CME spot cheese 

market averages only a few transactions per day, CME spot cheese market

prices are used by the dairy industry in establishing the prices that are 

used to set long-term contracts between market participants. While a 

significant portion of the cheese industry participates in the CME spot 

cheese market, the majority of trading at the CME spot cheese market is 

concentrated among a small number of traders, primarily large companies

and cooperatives in the cheese and dairy industry. Therefore, certain 

participants may have the ability to influence prices through transactions 

on the CME spot cheese market. Factors such as daily trading may, 

though, decrease opportunities for a sustained influence on prices. For 

example, unlike at NCE, where a price would remain in effect for 1 week, 

trading on a daily basis at CME provides more opportunities for market 

participants to counter any trades that may be at prices above or below 

what they consider to be market value. 

Results in Brief 

The CME spot cheese market is not regulated by CFTC or USDA, but 

CFTC and CME provide oversight and assess allegations of price 

manipulation. The Commodity Exchange Act (CEA), which establishes the 

U.S. regulatory scheme for commodity futures markets and is CFTC’s 

enabling legislation, prohibits manipulating the price of any commodity in 

interstate commerce and provides CFTC with authority to enforce this 

prohibition. Moreover, because cheese prices established on CME could 

impact prices in a related futures market for milk, CFTC’s Division of 

Market Oversight (DMO) has a surveillance interest in the trading activity 

on the CME spot cheese market. Accordingly, CFTC has examined 

allegations of price manipulation in the CME spot cheese market. 

Moreover, mainly because of the link between the CME spot cheese 

market and milk futures contracts, CFTC surveillance staff regularly 

obtain data on price movements and periodically review trends in the CME 

spot cheese market to identify potential manipulative activity in related 

futures contracts. In addition, CME conducts daily oversight of the market 

Page 3 GAO-07-707 Spot Cheese Market 
and may take disciplinary actions to enforce its rules, which include 

prohibiting price manipulation of the CME spot cheese market. CME 

officials noted that CME has a network of surveillance and investigative 

staff observing trading, reviewing activities of market participants, and 

verifying the accuracy and completion of transactions on the spot cheese 

market. Both CFTC DMO and CME officials told us that they had 

examined activities of participants in the spot cheese market. These 

examinations may be in response to complaints and unusual price 

movements identified by staff members. To date, none of these 

examinations have led to an instance of CFTC taking legal action against a

market participant. 

The CME spot cheese market impacts federal minimum milk prices 

through the USDA National Agricultural Statistics Service (NASS) survey 

of cheddar cheese prices, which is highly correlated to CME cheese prices. 

Prices obtained through the NASS survey of cheese prices are a major 

commodity component in USDA’s minimum milk pricing formulas. The 

survey, as it was intended by USDA, captured more transactions than 

those that occurred at NCE, and it currently captures more transactions 

than occur on the CME. USDA officials told us that the agency still uses 

the survey for this reason. However, the industry, which under federal law,

would need to approve any changes to the use of the NASS survey of 

cheese prices in the milk pricing formulas, has recently recommended 

alternative proposals including using CME spot cheese prices instead in 

setting minimum milk prices. Although USDA’s Agricultural Marketing 

Service (AMS) is in the process of obtaining industry input, ongoing 

reliance on the survey raises three issues. First, USDA does not audit the

data collected in the NASS survey of cheese prices and therefore cannot 

ensure the accuracy of the data used to calculate the minimum prices of 

certain types of milk. Second, although the NASS survey of cheese prices

is intended to capture more transactions than those used in CME trading, 

industry participants said they use CME cheddar cheese prices as the 

reference price for most of the cheese they sell. As a result, the survey 

results and CME spot cheese market prices rarely differ significantly. 

Third, the survey is not particularly timely. One to 2 weeks can elapse 

between when some transactions occur and when NASS survey results 

capturing those transactions are released. This time lag can contribute to 

dairy market participants paying minimum prices for certain milk that do 

not fully reflect current market conditions. 

As AMS continues to collect information and evaluate the proposals put 

forth by the industry concerning the NASS cheese survey, it must balance 

the interests of the industry and ensure that the information captured is 

Page 4 GAO-07-707 Spot Cheese Market 
accurate. This report recommends that USDA, in conjunction with the 

industry, take steps to reduce the redundancy that exists in the NASS 

survey of cheese prices and improve the timeliness associated with its 

survey of cheese prices. Specifically, we recommend that USDA give 

serious consideration to all proposals, in consultation with the industry, 

including the industry proposal to use the CME spot cheese market prices 

instead of the NASS survey of cheese prices in the minimum federal milk 

pricing formula. However, if USDA continues to use the NASS survey of

cheese prices, we recommend that USDA implement an auditing program 

for the survey in a timely manner to ensure the accuracy of the 

information provided. We provided a draft of this report to CFTC, USDA, 

and CME. We received written comments from USDA, which are 

discussed later in this report and reprinted in appendix II. We also 

received technical comments from CFTC, USDA, and CME, which have 

been incorporated where appropriate. In its response, USDA agreed with 

our recommendation intended to ensure that AMS implements a program 

to audit data reported to NASS in its survey of cheese prices. However, 

the agency disagreed with our recommendation to proactively consider, in

consultation with the industry, the industry proposal to use CME spot 

cheese market prices instead of NASS survey of cheese prices in the 

minimum federal milk pricing formula. Specifically, USDA stated that it is

outside of its authority to proactively consider proposals to change federal 

milk marketing order provisions. USDA stated that it would give due 

consideration to a current proposal to use CME spot cheese market prices. 

We were not and are not recommending that USDA take action outside of 

its current authority and have, therefore, clarified our recommendation. In 

addition, USDA stated that the continued use of the NASS survey seems 

prudent given that concerns remain about potential manipulation at the 

CME spot cheese market. As we note in our report the NASS survey of 

cheese prices largely duplicates prices from the CME spot cheese market 

and does not address concerns about price manipulation. 

At any given time, participants in the cheese industry may have an interest 

in buying or selling cheese for immediate delivery. Historically, they could 

do so by identifying a buyer or seller through their contacts and 

relationships in the industry or by participating in various centralized 

markets throughout the United States where industry participants 

gathered to buy and sell cheese. From 1974 to 1997, NCE was the central

Background 

Page 5 GAO-07-707 Spot Cheese Market 
market of, and functioned as a surplus market for, cheese.4

 It also served 

as the primary price discovery mechanism for cheese produced in the 

United States.

5

In general, before 1987 cheese prices on NCE experienced little volatility, 

because USDA purchased cheese to ensure that cheese prices did not fall

below a certain level. After mid-1988, the volatility of cheese prices 

increased sharply because of lower price supports for milk, and NCE’s 

role in price discovery took on additional importance until it closed in 

1997.

6

 While price volatility does not indicate that manipulation is 

occurring, the increased volatility in cheese prices, the corresponding 

effect on milk prices, and a perceived lack of oversight of NCE raised 

concerns about potential price manipulation. Following a series of 

investigations and congressional hearings involving NCE, a joint 

committee composed of a dairy industry trade group and NCE solicited 

proposals for a new site for the spot cheese market. CME was selected and 

the spot cheese market began operating there in May 1997. CME, the 

largest futures exchange in the United States, is a publicly traded 

corporation that offers a marketplace where various commodities such as 

dairy products are traded through futures contracts or spot markets. 

Various financial instruments are also traded on CME. 

Like NCE, the CME spot cheese market functions as a surplus market for 

cheddar cheese. Industry participants consider the CME spot cheese 

market a public price discovery mechanism, and prices are published 

daily. Contracts for the sale of all varieties of cheese in the United States

are generally set using the prices of cheddar cheese established at CME as 

the reference price. For example, a contract may specify that cheese will 

be sold based on the previous week’s average price of cheddar cheese set 

at the CME. The contracts often include a premium or a discount on the 

current price of cheddar cheese on CME based on factors such as the 

quality and type of cheese and other costs such as transportation. 

 4

The spot cheese market is commonly referred to as a surplus market. A market with these 

characteristics can also be called a residual market, which is defined as a market on which 

only a small proportion of the total production or consumption of a product is actually 

traded on the market. 

5

In the process of price discovery, buyers and sellers exchange bids and offers based on

information about supply and demand for the cash commodity and agree upon, or discover,

the current price. 

6

Volatility is a measure of the degree to which prices fluctuate over time. 

Page 6 GAO-07-707 Spot Cheese Market 
One of the federal programs designed to assist dairy farmers is the federal 

milk marketing order (FMMO) program, which is designed in part to 

improve the income of dairy farmers by stabilizing market conditions and 

establishing minimum milk prices.7

 Under this program, USDA uses 

national dairy market price information—including cheese prices—to set 

the minimum prices that processors must pay for unprocessed milk in 

specified marketing areas or orders. FMMOs established a four-tier 

classified pricing system for setting minimum milk prices on a monthly 

basis, based upon the intended use of the milk. In general, FMMO class 

prices are determined by formulas that use wholesale dairy product prices. 

For example, the Class III milk formula uses monthly averages of weekly 

average butter, cheese, and dry whey prices to set the minimum price of 

milk that is used in the production of cheeses.8

 According to one industry 

participant, pricing a commodity based on the prices of products that the 

commodity is used to produce is unusual. Prior to using the NASS survey 

as a component to calculate minimum milk prices, USDA used cheese 

prices from NCE directly as an input in its milk pricing formula. As 

concerns were raised from industry sources and others about 

manipulation of cheese prices at NCE, USDA developed the NASS survey 

of cheese prices as an alternative to using NCE prices. In 1997, USDA 

stopped using NCE prices in its minimum milk pricing formulas and began 

using data provided by the NASS survey of cheese prices. 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. 

 7

7 U.S.C. § 608c, as amended. 

8

Dry whey is a byproduct produced from the water and solid components that remain when

cheese is manufactured. 

Page 7 GAO-07-707 Spot Cheese Market 
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. Like

NCE, CME is primarily a surplus market where small amounts of blocks 

and barrels of cheddar cheese meeting certain technical specifications are 

traded. Many market participants that traded at NCE also trade at the CME 

spot cheese market. Moreover, certain market conditions at the CME spot

cheese market, including a small number of trades and a small number of 

traders who make a majority of trades, continue to make this market 

particularly susceptible to manipulation. 

NCE and CME share many similarities, including certain trading rules, 

products traded, the volume of cheese traded, and market participants, but 

there are differences. According to CME officials, technical rules specific 

to the CME spot cheese market were developed from the rules used to 

operate NCE and rules already established by CME for an existing spot 

butter market. For example, CME trades the same cheese products that 

were traded on NCE—carloads of 40-pound blocks and 500-pound barrels 

of cheddar cheese. 9

 The CME spot cheese market continues to be a 

surplus market for cheese on which relatively small amounts of cheese are 

traded relative to the overall size of the U.S. cheese market. Unlike some 

commodities, most cheese in the United States is traded through long-term 

contracts, which generally use the CME spot cheese market price as the 

reference price and previously used the NCE price. 

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 

Some Operational Aspects 

of the CME Spot Cheese 

Market Resemble Those at 

NCE 

NCE had between 30 and 40 members, including major participants in the

cheese and dairy industry, such as large agricultural cooperatives, cheese 

manufacturers, and processors of cheese. These members accounted for 

the vast majority of cheese handled and processed in the United States. 

Likewise, major cheese and dairy industry members participate on CME, 

including many companies that traded cheese on NCE. CFTC officials 

estimated that 13 of the 31 CME spot cheese market participants 

accounted for 60 percent of all cheese produced, processed, or marketed 

 9

Additionally, the NCE traded 640-pound blocks. A carload of cheese is between 40,000 and 

44,000 pounds. 

Page 8 GAO-07-707 Spot Cheese Market 
in the United States in 2004.10 These participants in the spot cheese market

represent diverse segments of the cheese and dairy industries, including 

dairy cooperatives representing many farmers and industry participants 

that produce, manufacture, and process large quantities of cheese. 

However, two differences exist between the CME spot cheese market and 

NCE. First, the names of participants involved in NCE trading were made 

public. Each member could designate up to five individuals as traders, and 

the buyer and seller were reported for each trade. Trading at the CME spot 

cheese market is conducted through a network of professional brokers, 

the standard practice in many commodities, and the buyer and seller are 

not publicly reported.11 However, according to some dairy industry 

participants, they generally know which brokers represent specific buyers 

and sellers. Second, trading on NCE occurred only once a week for one 30-

minute session. Trading takes place at the CME spot cheese market every 

weekday for at least 2 minutes and up to 16 minutes, depending on the 

interest of market participants. 

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. A thin

market generally has either few transactions; transactions that represent 

only a small proportion of the total transactions, including those that are 

priced off that market; or both.12 CME and CFTC DMO officials, some 

market participants, and academics generally agree that the CME spot 

cheese market is a thin market. Little trading occurs on the CME spot 

cheese market, and the trading that does take place consistently 

represents a small proportion of the total volume of cheese produced in 

the United States. According to CFTC officials, from 1998 to 2005, the 

volume of cheese traded at CME generally represented less than 2 percent 

of all cheddar cheese and less than 1 percent of all cheese produced in the

 10This study was undertaken at the initiative of CFTC surveillance staff to review CME spot

cheese market participants in 2004 and 2005. The most recent year for which data were 

available is 2004. 

11A commodity broker is an individual who is paid a fee for executing an order to buy or

sell a commodity for a customer. 

12According to CFTC officials, not all markets in which transactions represent a small 

proportion of all transactions would be considered thin. 

Page 9 GAO-07-707 Spot Cheese Market 
United States annually.13 This characteristic is not unique to the CME spot 

cheese market, as other agricultural commodity markets, such as the CME 

spot butter market, are also thinly traded. In addition, as shown in table 1, 

on average only one or two transactions were completed during each 

trading session in the barrel market, and the average was less than one for 

most years, indicating that on some days no cheese was traded. The one 

exception was 1997, when the average number of transactions on the 

barrel market was more than eight, because the market did not have daily

trading at that time. Similarly, on average, fewer than three trades during 

each trading session were completed in the block market each year. 

Table 1: Average of Number of Transactions Per Trading Session by Barrel and Block on the CME Spot Cheese Market, 1997-

2006 

Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Total

Average barrel 8.2 1.8 1.4 2.2 0.8 0.8 0.4 0.9 0.7 0.7 1.2

Total barrel 296 216 358 566 189 191 98 229 184 170 2,497

Average block 4.4 3.3 3.5 2.3 1.9 2.5 2.2 2.9 2.6 1.4 2.5

Total block 157 383 873 599 479 626 536 728 657 348 5,386

Source: GAO analysis of CME data. 

Academic analyses and cheese and dairy industry participants have raised 

a number of concerns associated with thin markets being susceptible to

manipulation. These concerns include the following: 

• Dominant traders may be able to attempt to manipulate prices more easily 

in thin markets. 

• Prices in thin markets may not reflect supply and demand, even without 

manipulative behavior by dominant traders. 

As noted, thin markets raise concerns about the potential for manipulation 

because of the small number of participants and transactions involved in 

the market and the ease with which prices can be impacted. For example, 

in thinly traded markets each individual participant’s activity tends to be 

more influential than it would be on a market with more transactions and

more participants. As a result, it may be easier for a market participant to 

move prices in a preferred direction over a short period of time with 

 13In 1999 trading represented slightly more—less than 2.5 percent of all cheddar produced 

in the United States. 

Page 10 GAO-07-707 Spot Cheese Market 
relatively few completed or unfilled transactions. Further, individual 

transactions to buy and sell cheese that set the market price may not 

accurately reflect supply and demand. 

Further, the CME spot cheese market has a small number of traders who 

make the majority of trades, another factor that contributes to questions 

about possible price manipulation. Relatively few market participants 

account for the majority of trading at the CME spot cheese market, as 

shown in figure 1. Between January 1, 1999, and February 2, 2007, two 

market participants purchased 74 percent of all block cheese, and three 

market participants sold 67 percent of all block cheese. During the same 

time period, four market participants purchased 56 percent of all barrel 

cheese, and two market participants sold 68 percent of all barrel cheese. 

Figure 1: Percentage of Trading, by Largest Block and Barrel Market Participants, January 1, 1999, to February 2, 2007 

Block cheese Barrel cheese Block cheese Barrel cheese

Buyers Sellers

74%

26%

44%

33% 32%

56%

67% 68%

Other buyers (44)

Largest 2 buyers

Other buyers (37)

Largest 4 buyers

Other sellers (42)

Largest 3 sellers

Other sellers (29)

Largest 2 sellers

Source: GAO analysis of CME data.

In addition, the CME spot cheese market’s pricing structure, in 

combination with a thinly traded market and a small number of traders 

who comprise the majority of trading, contributes to questions about the 

potential for price manipulation. As on many other financial markets, 

prices at the CME spot cheese market are based on completed 

Page 11 GAO-07-707 Spot Cheese Market 
transactions and on unfilled higher bids and uncovered lower offers that 

are posted by market participants.14 During a trading session an unfilled 

bid that is higher than the previous bid or transaction price can result in a 

higher price. Similarly, an uncovered offer that is lower than the previous 

offer or transaction price can result in a lower price. For example, on the

CME spot cheese market: 

• Between January 1, 1999, and February 2, 2007, the closing price for block 

cheese fluctuated based on unfilled bids and uncovered offers on at least 

17 percent of the trading days.15 During the same time period, the barrel 

market closing price fluctuated based on unfilled bids and uncovered 

offers 28 percent of trading days. 

• Between March 1, 2004, and April 16, 2004, block cheese prices increased 

from $1.49 to $2.20 per pound, or 48 percent, on the CME spot cheese 

market based primarily on unfilled bids to buy cheese, with only four 

carloads of block cheese bought or sold during this period. 

• Between October 26, 2004, and November 19, 2004, block cheese prices 

rose from $1.57 to $1.80 per pound, or 14 percent, with completed 

transactions for only three carloads of cheese completed during this 

period. 

This pricing structure is not unique to the CME spot cheese market, and 

price changes based on unfilled bids and uncovered offers may reflect 

conditions consistent with supply and demand. However, this pricing 

structure may increase opportunities to ultimately change the price of milk 

without reference to the actual costs of buying and selling cheese. 

Finally, although there may be characteristics that raise concerns about 

price manipulation, certain characteristics of the CME cash cheese market

may reduce the risk of price manipulation. According to CME officials and 

industry participants, the risk of incurring the expenses associated with

 14A completed transaction on the CME spot cheese market is an agreement between a 

buyer and a seller for the purchase of a specific quantity of cheese at a given price. An

unfilled bid is an indication of willingness to buy a specific quantity of cheese at a given 

price that remains open and is not accepted by a seller. An uncovered offer is an indication 

of willingness to sell a specific quantity of cheese at a given price that remains open and is 

not accepted by a buyer. 

15Additionally, there may have been days in which there were completed transactions, but 

the closing price was based on an unfilled bid or uncovered offer.

Page 12 GAO-07-707 Spot Cheese Market 
the actual buying or selling of cheese may deter some market participants

from attempting to manipulate prices at the CME spot cheese market. Any 

CME spot cheese market participant who makes a bid or offer risks 

acceptance of that bid or offer and the obligation to buy and accept 

delivery of cheese or to sell and make delivery. Completed transactions for 

the purchase or sale of cheese can involve a significant expense. While a 

relatively small number of traders make the majority of trades, market 

participants represent a significant amount of potential volume of trading. 

CFTC has found that many large participants in the cheese and dairy 

industry with diverse interests monitor the CME spot cheese market and 

are prepared to participate in it. These large industry participants could, 

for example, buy cheese on the CME spot cheese market if prices fell 

below a company’s manufacturing costs or sell it if prices rose to a 

profitable level, potentially countering any attempted manipulation. 

Several industry participants we interviewed said that they believed that 

price manipulation on this market would be difficult to sustain, given the 

number of competing interests. 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. In addition, industry participants told

us that they never stopped using the CME price as a reference price in 

their long-term contacts. 

Both CFTC and CME engage in activities that may detect or deter potential 

price manipulation at the CME spot cheese market.16 Regular monitoring 

by CFTC DMO and CME represents a significant change from the level of 

oversight of NCE, which had received limited monitoring from CFTC and 

NCE staff. 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 surveillance staff 

review trading activities on the market for manipulative activity, including

manipulation that may impact the Class III milk futures. Moreover, CFTC 

Division of Enforcement can act on indications of manipulative activity 

CFTC and CME 

Provide Increased 

Oversight of the CME 

Spot Cheese Market 

 16CFTC DMO has regulatory responsibility, among other things, to provide market 

surveillance for futures markets. As a part of this responsibility, CFTC DMO monitors 

markets to identify situations that could pose a threat of manipulation and initiate 

preventative actions. 

Page 13 GAO-07-707 Spot Cheese Market 
through CFTC’s authority to enforce the CEA, which specifically prohibits

the manipulation of prices of physical commodities in interstate 

commerce.17 CME conducts daily surveillance of the CME spot cheese 

market based on its established rules and internal procedures. Both CFTC 

enforcement staff and CME investigate and, if appropriate, can take

enforcement actions in response to potential manipulative conduct on the 

CME spot cheese market. However, proving price manipulation is difficult. 

In recent years, CFTC DMO staff have monitored the CME spot cheese 

market on a regular basis both to review that prices of related Class III 

milk futures contracts are consistent with forces of supply and demand 

and in response to complaints alleging manipulative conduct. CFTC DMO 

is particularly concerned about manipulative activities in cash markets 

when prices on those markets could affect the integrity of futures contract

prices. The price paid for a Class III milk futures contract is based on the 

monthly Class III milk price released by USDA, which is heavily influenced 

by the price of cheese at the CME spot cheese market. Also, because the 

CEA prohibits manipulating the price of any commodity in interstate 

commerce, CFTC can take action under its enforcement authority to 

investigate price manipulation of any commodity, regardless of whether it 

is related to a futures contract. According to CFTC DMO officials, 

however, CFTC surveillance staff would be unlikely to monitor 

commercial activities involving a commodity without a related futures 

market. 

CFTC surveillance staff regularly obtain and analyze data on the activities 

of the CME spot cheese market participants to assist in the detection and

also prevention of price manipulation in related futures markets. In 2005, 

CME began providing CFTC with daily trading data and information on the 

CME spot cheese market on a monthly basis.18 CFTC monitors traders with

large positions in Class III milk futures and the trades that these large 

traders make in the CME spot cheese market. As part of its monitoring, 

CFTC focuses on answering the following questions: 

CFTC Monitors Trading 

Activity to Identify and 

Address Potential Price 

Manipulation on the CME 

Spot Cheese Market 

 17CFTC Division of Enforcement investigates and prosecutes alleged violations of the CEA

and CFTC regulations. The prohibition against price manipulation in interstate commerce

is set forth at 7 U.S.C. § 13b. 

18Prior to 2005, CFTC made individual requests to CME for data on the CME spot cheese 

market. 

Page 14 GAO-07-707 Spot Cheese Market 
1. Is the Class III milk futures price consistent with supply and demand 

factors in the cheese industry? 

2. How is the monthly Class III milk price released by USDA behaving 

compared to the CME spot cheese market and other cash prices? 

3. Are the largest Class III milk futures traders engaged in trades on the 

CME spot cheese market that affect the monthly Class III milk price 

released by USDA? 

4. Do the Class III milk futures traders have an incentive to engage in 

losing trades on the CME spot cheese market in order to benefit a large 

futures position? 

In its market surveillance activities, CFTC surveillance staff may use many 

sources of daily market information. Some of this information is publicly 

available, including data on the overall supply, demand, and marketing of 

the underlying commodity; futures, option, and cash prices; and data on 

trading volume and open contracts.19 Some of the information is highly 

confidential, including data from exchanges, intermediaries, and large

traders. CFTC Chicago surveillance staff generally review CME spot 

cheese market transactional data from CME, which include the identities

of buyers and sellers and timing of trades, when they see unusual price 

movements and to summarize the data for informational purposes. CFTC

surveillance staff may also interview industry participants, and interviews 

may include discussions about basic market fundamentals, the traders’ 

involvement in specific commercial transactions, or the traders’ 

observations about anything unusual about the CME spot cheese market 

or other cash transactions. 

CFTC DMO staff have prepared summary documents analyzing the market 

four times since 1999, including analyses of participants, volume, and price 

fluctuations. Generally, they have found that the majority of the cheese 

industry is represented at the CME spot cheese market and that trading on

 19An option is a contract that gives the buyer the right, but not the obligation, to buy or sell 

a specified quantity of a commodity or other instrument at a specific price within a 

specified period of time, regardless of the market price of that instrument. Open contracts 

are the total number of futures contracts long or short in a delivery month or market that 

has been entered into and not yet liquidated by an offsetting transaction or fulfilled by 

delivery. A short position on a futures contract is taken by a trader who agrees to sell a 

commodity at some point in the future. A long position on a futures contract is taken by a

trader who agrees to purchase a commodity at some point in the future. 

Page 15 GAO-07-707 Spot Cheese Market 
the market is concentrated among a small number of participants. CFTC 

has filed no complaints related to price manipulation on this market. 

These reviews represent another change from NCE, which, according to 

CFTC officials, CFTC did not monitor regularly. CFTC did review trading 

activities on NCE in 1997 prior to approving a market for trading in certain

milk futures. This review did not identify significant deficiencies or 

suggest that the market was susceptible to manipulation. In contrast, after 

a 4-year investigation in which confidential and proprietary information 

was gathered, University of Wisconsin economists found that the 

organization of NCE appeared to facilitate market manipulation, but could 

not definitively conclude that manipulation had occurred, and that NCE 

was not an efficient price discovery mechanism between 1988 and 1993.

20

Market participants told us that CFTC monitoring of the CME spot cheese 

market addressed some of their concerns about limited oversight of 

trading at NCE. 

In addition to identifying unusual activities or manipulative conduct 

through its monitoring activities, CFTC also responds to complaints and 

concerns raised by industry members and the public. CFTC surveillance 

staff in Chicago collaborate with CME officials to examine trading 

activities. Since 1999, CFTC Chicago DMO staff have done nine special

reviews of trading activity at the CME spot cheese market in response to 

specific complaints or fluctuations in market prices. These complaints 

dealt with issues including an allegation that a market participant failed to

pay in a timely manner for cheese purchased on the CME spot cheese 

market, allegations of price manipulation on that market, and concerns 

about price volatility on that market. According to CFTC officials, the 

CFTC market surveillance analyst responsible for the Class III milk futures 

market reviewed these complaints, analyzed the time period or market 

participants involved in the allegation, and responded to the party that 

complained. None of these reviews resulted in any legal action taken by

CFTC against a market participant. According to trade press reports, 

CFTC is currently investigating the trading activity of one participant in 

the CME spot cheese market for potential manipulation of the market. 

Unless otherwise authorized, CFTC regulations require enforcement 

investigations to be nonpublic. Therefore, CFTC does not confirm, deny, 

or comment about possible ongoing investigations. 

 20Bruce Marion, Willard Mueller, et. al. “Cheese Pricing: A Study of the National Cheese 

Exchange,” University of Wisconsin (March 1996). 

Page 16 GAO-07-707 Spot Cheese Market 
According to CFTC DMO officials, CFTC generally would not take an

active role in oversight of the CME spot cheese market without a related

futures market because of its interpretation of its responsibilities under 

CEA and limited resources. However, other federal agencies have 

responsibilities relating to the manipulation of cash cheese prices even in 

the absence of a related futures contract. The U.S. Department of Justice 

(DOJ) has responsibility for investigating possible violations of the 

antitrust laws and taking appropriate legal action in the courts. DOJ’s 

authority includes taking action based on unreasonable restraints of trade 

such as price fixing or manipulation. In addition, the Federal Trade 

Commission (FTC) is charged by statute with preventing unfair methods 

of competition and unfair or deceptive acts or practices in or affecting 

commerce. In order to avoid duplicating efforts to pursue allegations of 

anticompetitive behavior or price fixing, the two agencies developed and 

maintained a liaison arrangement to determine who would take the lead 

on any cases involving the CME spot cheese market. 

Certain other federal and state agencies that observed or monitored 

trading at NCE no longer do so at the CME spot cheese market. In the 

past, USDA officials observed trading and published prices established at

NCE but do not observe CME spot cheese market trading. Prices are now 

publicly reported. USDA officials did not provide oversight of NCE and 

have no oversight role of CME. NCE was also subject to the Wisconsin 

Department of Agriculture, Trade and Consumer Protection’s jurisdiction 

over unfair competition and trade practices. According to CME officials, 

no state agency has a role in overseeing CME or the CME spot cheese 

market. 

In addition to monitoring trading in the futures markets and related cash 

markets, CFTC has general authority, provided by the CEA, over 

designated contract markets.21 CME, as a designated contract market, must 

demonstrate to CFTC that it meets CEA criteria for the prevention of 

market manipulation, fair and equitable trading, the conduct of trading 

facilities, and the financial integrity of transactions. In addition to 

providing market surveillance, CFTC DMO approves and oversees the 

futures exchanges, including CME, and reviews exchange rules.22 CFTC 

also assesses the effectiveness of compliance and market surveillance 

 21A designated contract market is a market designated by CFTC to trade futures and 

options under the CEA. See 7 U.S.C. § 7.

22See 7 U.S.C. § 7(b). 

Page 17 GAO-07-707 Spot Cheese Market 
capabilities and reviews new futures contracts to assess their 

susceptibility to manipulation. To ensure the market’s financial integrity, 

CFTC Division of Clearing and Intermediary Oversight reviews the audit 

and financial surveillance activities of self-regulatory organizations (SRO),

including CME.23 According to CFTC officials, they have not approved 

CME spot cheese market rules. However, CFTC conducted a rule 

enforcement review of CME that covered the time period October 2004 to

October 2005.24 This review, which did not specifically include the CME 

spot cheese market rules, included an examination of the compliance of a 

number of CME’s programs with CEA, including the audit trail, trade 

practice surveillance, disciplinary, and dispute resolution programs. CFTC 

did not make any recommendations for improvements in these areas. 

Proving actual or attempted price manipulation is difficult, according to 

CFTC officials.25 They noted that CEA does not have a specific definition 

of manipulation. Rather, it has been left to the courts to develop the law 

through cases or decisions. Accordingly, as established by federal courts 

and CFTC, proving manipulation requires being able to show the 

following: 

• The market participant had the ability to influence market prices. 

• The market participant specifically intended to influence prices. 

• Artificial prices existed.

• The market participant caused an artificial price.

26

Proof of an attempted manipulation requires sufficient evidence of (1) an

intent to affect the market price and (2) some overt act in furtherance of 

 23Self regulatory organizations include exchanges and registered futures associations that 

enforce financial and sales practice requirements for their members. 

24A rule enforcement review is an analysis of an exchange’s overall compliance capabilities.

25The prohibition against manipulation of prices of commodity futures and commodities in 

interstate commerce is set forth in the CEA at 7 U.S.C. § 13b. 

26In re Cox, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) 23,786 at 34,061 (CFTC 

July 15, 1987); see also Frey v. CFTC, 931 F.2d 1171 (7th Cir. 1991); CFTC v. Enron Corp., 

2004 U.S. Dist. Lexis 28794 (S.D. Tex 2004). 

Page 18 GAO-07-707 Spot Cheese Market 
that intent.27 Like the test for manipulation, the test for attempted 

manipulation depends upon the facts and circumstances of a particular 

market and its participants.28 We did not find any studies or court cases 

that have concluded that there has been manipulation on the CME spot 

cheese market or NCE. 

An intent to raise or lower CME spot cheese market prices could be based 

on a variety of incentives. For example, farmers that produce milk used to 

manufacture cheese benefit when the price of cheese on the CME spot 

cheese market is high because the CME spot cheese market influences a 

broad array of cheddar cheese prices that are included in the pricing 

formula for Class III milk. Alternatively, a company that largely sells 

cheese purchased from others could benefit from low CME spot cheese 

market prices. This is because most cheese plants from which it buys 

would be using the lower CME cheese prices to set their contract price, 

but it would sell its cheese at a price not based on CME prices. These 

factors alone do not imply that price manipulation has occurred—in fact, 

price manipulation has not been proven—but these incentives appear to

contribute to ongoing questions about the susceptibility of the market to 

manipulation relative to one with more trading or more market

participants comprising the majority of trades. 

Further, identifying actual or attempted manipulation on the CME spot 

cheese market can be difficult for a number of other reasons. First, 

because the CME spot cheese market functions as a market to dispose of 

excess supply or to fill temporary inventory needs, it may not always 

reflect prices that are consistent with supply and demand in the broader 

market as market participants attempt to manage short-term inventory 

needs through the CME spot cheese market. For this reason, determining 

what constitutes an artificial price can be difficult. In addition, companies 

may attempt to influence prices without considering their activity to be 

 27See In re Abrams, [1994-1996 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,479 at

43,136 (CFTC) July 31, 1995). See also In re Hohenberg Brothers, [1975-1977 Transfer 

Binder] Comm Fut. L. Rep. (CCH) ¶ 20,271 at 21,477 (CFTC Feb. 18, 1977). 

28See Cargill v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971), cert. denied, 406 U.S. 932 (1972) 

(Manipulation cases tend to be characterized by fact-specific, case-by-case analysis, which 

examines whether prices have been affected by factors other than the legitimate forces of 

supply and demand.); see also Frey v. CFTC, 931 F.2d 1171, 1175 (7th Cir. 1991). Accord In

re Indiana Farm Bureau Cooperative Association, [1982-1984 Transfer Binder] Comm. Fut. 

L. Rep. (CCH) ¶ 21,796 at 27,281 (CFTC Dec. 17, 1982) (defining manipulation or attempted

manipulation “has fallen to case-by-case judicial development”) 

Page 19 GAO-07-707 Spot Cheese Market 
manipulative. For example, according to one industry participant, traders 

may act to influence the spread between the prices of barrel cheese and 

block cheese to keep it in line with general historical trends. Finally, 

USDA officials and industry participants told us that some market 

participants used the CME spot cheese market as a forum to “register an 

opinion” on what they believed cheese prices should be by making bids 

and offers with the intent to change the price of cheese to more closely 

align with their opinions of supply and demand conditions. 

Representatives of two market participants we interviewed said that they 

did not believe that this activity constituted manipulation on the CME spot 

cheese market. However, CFTC enforcement officials disagreed and 

believe that the types of behavior described above may constitute 

manipulative behavior. 

CME rules govern its oversight of the CME spot cheese market. CME, as 

an SRO, is responsible for establishing and enforcing rules governing 

member conduct and trading; providing for the prevention of market 

manipulation, including monitoring trading activity; ensuring that futures 

industry professionals meet qualifications; and examining exchange 

members for financial strength and other regulatory purposes. CME rules 

authorize the managing director of regulatory affairs to enforce CME rules 

and gather all the information necessary to investigate abuses of trading 

practices. Through this authority, CME monitors trading activities, collects 

data on its markets, and inspects the books and records of members. In 

addition, the managing director of regulatory affairs may investigate and 

recommend institution of disciplinary proceedings for alleged violations of 

CME rules. 

CME conducts surveillance and investigations of the CME spot cheese 

market through its market regulation division. CME’s market regulation 

division employs market surveillance analysts, one of whom is assigned to 

monitor the CME spot cheese market, among others. According to CME 

officials, the market surveillance analyst assigned to the CME spot cheese 

market monitors daily trading, maintains familiarity with traders and 

industry news and trends, and reviews large price changes resulting from 

uncovered bids or offers and determines the identity of market 

participants. The analyst reviews and analyzes spot call cheese trade 

activity in relation to Class III milk futures positions. The analyst, along 

with market regulation staff, handles inquiries and complaints from 

market participants and firms, contributes to contract specification 

changes and rule language updates, and regularly participates in 

problematic delivery-related issues. The analyst physically observes 

CME Conducts Daily 

Surveillance of the CME 

Spot Cheese Market 

Page 20 GAO-07-707 Spot Cheese Market 
trading at the CME spot cheese market on average three times a week. In 

addition, the analyst reviews the input of daily trading data into a CME 

database to ensure that trades are properly recorded and that clearing

member firms verify their assigned transactions and provide buyer and 

seller identification and relevant delivery details.29

In addition to employing market surveillance staff, CME assigns one 

investigator to regularly review the CME spot cheese market to identify 

potential violations of trading practices and determine if trader activity is 

adversely affecting Class III milk futures. According to CME officials, they 

have investigated trading activity related to delivery of cheese sold on the 

CME spot cheese market and have disciplined two traders. However, CME 

officials told us that CME has only rarely opened formal investigations into 

traders on the spot cheese market for rules violations. This surveillance is 

stricter than at NCE, which had rules against manipulating prices but no 

staff to oversee the market and generally did not investigate trading 

activities. 

According to CME officials, CME market regulation staff also review 

traders’ positions and activities in the CME spot cheese and Class III milk

futures markets to determine if a trader’s futures positions would benefit 

from price changes on the spot cheese market. For example, the market 

surveillance analyst may look for trading activity on the CME spot cheese 

market that might directly benefit a trader’s futures positions, such as 

selling cheese in order to lower prices and benefit a short position in Class 

III milk futures. The market surveillance analyst for the CME spot cheese 

market also reviews trading data from both markets for large price 

changes and market trends. 

Finally, CME annually provides a dairy forum for CME spot cheese market 

participants to meet and discuss potential improvements to the spot 

cheese market. Forum meetings have included discussion of such topics 

as electronic trading, anonymous trading, daily limits on trading, and 

technical specifications for products traded. Working committees have 

been formed based on these meetings, and CME staff told us that they 

would focus on potential improvements that received majority support as 

expressed at the forum. According to market participants, regular 

 29Clearing member firms are entities through which futures and other transactions are 

cleared and settled. They are also charged with ensuring the proper conduct of each

contract’s delivery procedures and the adequate financing of trading. 

Page 21 GAO-07-707 Spot Cheese Market 
monitoring and oversight of the CME spot cheese market by CME officials 

has addressed certain industry concerns about potential price 

manipulation that existed when NCE operated the spot cheese market. 

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.30 USDA used to rely on the price 

of 40-pound blocks of cheddar determined on NCE in pricing milk, but 

developed the NASS survey of cheese prices in response to concerns, 

raised by industry and others, about a thin market and the potential for 

price manipulation on NCE. As stated by the Secretary of Agriculture at a 

hearing before a subcommittee of the U.S. Senate Committee on 

Appropriations in March 1997, USDA began conducting a national survey

of cheddar cheese prices in response to concerns about the accuracy of 

reported prices at NCE. The NASS survey of cheese prices is intended to 

capture more transactions than those occurring on the CME spot cheese 

market. According to USDA officials, the NASS survey of cheese prices 

has continued to be used in the milk pricing formula. However, USDA’s 

ongoing reliance on the survey raises three issues. First, USDA does not 

audit the data reported in the NASS survey of cheese prices to ensure the

accuracy of the prices reported. Second, industry participants use the 

CME spot cheese market price as a reference price, and survey results and 

CME spot cheese market prices rarely differ significantly. Third, the timing 

of the survey introduces into certain milk prices a 1- to 2-week time lag 

between when data are reported by NASS and when transactions captured 

in the survey occur. Figure 2 provides an overview of how CME spot 

cheese prices influence milk pricing. 

The USDA Survey of 

Cheddar Cheese 

Prices Largely 

Duplicates CME 

Cheese Prices and 

Introduces a Time Lag 

into Some Milk Prices 

 30According to analyses by the University of Wisconsin, from January 2000 to January 2007,

cheese prices have determined upward of 83 percent of the USDA price of Class III milk. 

Page 22 GAO-07-707 Spot Cheese Market 
Figure 2: Influence of CME Spot Cheese Market Prices on Class III Milk Pricing 

+/-

$

+/-

$

+/-

$

+/-

$

+/-

$

+/-

$

+/-

$

+/-

$

+/-

$

+/-

$

Sources: GAO; Art Explosion (map).

Class III milk

pricing formula

CME Class III

milk futures

contract

termination

price

Farmer

$

Chicago Mercantile Exchange (CME)

cheese market price ( ) used to

negotiate individual cheese

contracts ( ) plus a premium/discount

$

NASS surveys cheese plants

for prices of cheddar cheese sold

USDA uses NASS

cheese prices and

other dairy component

prices in its formula

83%

(cheese)

17%

(other)

Minimum

Class III

milk price

NASS

weekly

average

cheese

prices

One to 2-week time span

+/-

$

Weekly

NASS

survey

of cheese

prices

USDA began using NASS survey cheese data as an input into milk pricing 

formulas after NCE closed. Since USDA began using data from the NASS 

survey of cheese prices in its milk pricing formula, the agency has held 

hearings in response to industry concerns about the pricing formulas for 

Class III milk. Some industry participants have put forth a number of 

proposals related to eliminating the use of the NASS survey of cheese 

prices in milk pricing, including proposals in 2000 and 2006, that 

recommended eliminating the use of the NASS survey and instead using 

CME spot cheese market prices in the milk pricing formulas.31 In 2000, in 

hearings on milk order reform, industry opinions varied on the use of CME 

cheese prices instead of the NASS survey of cheese prices, with some 

industry participants stating that they preferred the use of the NASS 

survey of cheese prices. USDA decided to continue to use the NASS survey 

of cheese prices, stating that the NASS survey prices are based on a much

greater volume than using CME prices. As of June 2007, hearings were still 

being held regarding the more recently submitted proposal, which 

recommended using CME prices instead of NASS survey prices. A final 

regulation would be subject to industry approval requirements contained 

NASS Survey of Cheese Prices

The Class III milk formula uses monthly 

averages of weekly cheese, butter, and dry 

whey prices as reported by the NASS

survey to set the minimum price of milk that 

is used in the production of cheeses. Each 

week, NASS surveys large cheddar cheese 

plants that produce and sell over 1 million 

pounds of cheese annually about the prices

of the cheddar cheese they sold. The 

cheese must meet certain technical 

specifications, such as age and moisture 

content. According to USDA officials, these 

technical specifications match the technical 

specifications for cheese sold at the CME 

spot cheese market. They also said the 

survey consistently captures transactions

from 30 to 40 of the largest cheddar cheese 

plants and excludes fixed price contracts

with a duration of longer than 30 days. 

Source: GAO.

 31CME spot cheese market prices could be used in federal minimum milk pricing provided

that the CME spot cheese market remains open for trading. 

Page 23 GAO-07-707 Spot Cheese Market 
in the statute.32 USDA officials have told us that historically there has been

a lack of consensus in the industry to make this change. Several milk 

producers and cheese manufacturers we interviewed stated that they 

generally supported the idea of no longer using NASS survey prices in the 

milk pricing formulas. In order to assess the potential impact of current 

proposed changes to the Class III milk pricing formulas, the USDA 

conducted preliminary economic analyses, which analyzed the change to

historical Class III milk prices if CME spot cheese market prices had been 

used instead of the results of the NASS survey of cheese prices.

33 On the 

basis of this analysis, USDA concluded that using the CME spot cheese 

market prices instead of the NASS survey of cheese prices would lead to a 

difference of little significance. 

Under the milk marketing orders, NASS collects dairy market prices, such 

as the NASS survey of cheese prices, for use in USDA’s milk pricing 

formulas, which raises three issues.34 First, USDA does not currently audit 

responses provided by survey participants. Under the Dairy Market 

Enhancement Act of 2000, mandatory price reporting requirements for 

dairy products used in setting milk prices were established.35 Additionally, 

USDA was authorized to conduct audits of transactions reported by survey 

participants.36 Auditing the transactions could help to ensure the accuracy

of the information used to establish minimum milk prices under the 

FMMOs. However, USDA does not currently audit these transactions, 

which include transactions captured in the NASS survey of cheese prices. 

Agency officials told us that they had developed a proposed rule to 

conduct audits of the data. According to a USDA official, the proposed 

rule is currently under review by the Office of Management and Budget. 

Recently, USDA disclosed that there had been a reporting error in the data 

included in its survey of nonfat dry milk prices. According to USDA 

 32See the Agricultural Marketing Agreement Act of 1937, as amended, 7 U.S.C. § 608c (8), 

(18). 

33USDA, Preliminary Economic Analysis Class III and Class IV Prices, Agricultural 

Marketing Service, February 2007. In this economic analysis, USDA uses an econometric

model in which it substituted NASS survey of cheese prices for CME spot cheese market 

prices and projected the potential effect on milk prices. 

34In a 2004 report, GAO provided information on various dairy policy options. GAO, Dairy 

Industry: Information on Milk Prices, Factors Affecting Prices, and Dairy Policy

Options, GAO-05-50 (Washington, D.C.: Dec. 29, 2004).

35Pub. L. No. 106-32 (Nov. 22, 2000). 

36See 7 U.S.C. § 1637b(c)(3), as amended by Pub. L. No. 106-32 § 2. 

Page 24 GAO-07-707 Spot Cheese Market 
officials, this error affected milk prices for farmers for at least 2 months 

and caused a market loss of at least $6.4 million. Without auditing the data

provided in the NASS survey of cheese prices, USDA cannot ensure the 

accuracy of the data that are used in the milk pricing formulas. 

Second, although USDA officials told us that the NASS survey captured a 

wider range of cheese prices than using prices from the CME spot cheese 

market, the survey captures the weekly average CME spot cheese market

price because cheese manufacturers use the CME spot cheese market 

price as a reference price plus or minus a premium or discount depending 

upon the specifications of the cheese. As a result, price manipulation on 

the CME spot cheese market, if reflected in the NASS survey, could lead to 

certain federal order minimum milk prices being artificially high or low. 

Despite surveying a broader range of transactions, the survey provides 

limited additional information beyond what is already available directly

from the CME spot cheese market and results in a high correlation 

between the NASS survey of cheese prices and CME spot cheese market 

prices (see fig. 3). According to a University of Wisconsin study, the NASS

survey has a 98 percent correlation with CME spot cheese market prices 

when adjusted to account for the difference in timing between collecting 

price information and publishing survey results.37 USDA has generally not

analyzed differences between the NASS survey prices and CME spot 

cheese market prices such as those in figure 3. Additionally, while industry 

participants recognize the role of the NASS survey of cheese prices in 

setting certain minimum federal order milk prices, industry participants 

we interviewed said the survey did not provide them with useful 

information. Industry participants told us that small differences between 

the two price series are likely due to premiums and discounts negotiated 

into contract prices, such as for transportation costs. 

 37Ed Jesse, “Backcasting Formula-Based Federal Order Class Prices,” University of 

Wisconsin (October 2004). 

Page 25 GAO-07-707 Spot Cheese Market 
Figure 3: CME Spot Cheese Market and NASS Cheese Survey Block Cheese Prices

Dollars per pound

1.50

1.40

1.30

1.20

1.10

Jan. 21

Feb. 11

March 4

March 25

April 15

May 6

May 27

June 17

July 8

July 29

Aug. 19

Sept. 9

Sept. 30

Oct. 21

Nov. 11

Dec. 2

Dec. 23

Jan. 13

Feb. 7

2006 2007

NASS survey of cheese

CME spot cheese market

Source: USDA.

The third issue raised by USDA’s use of the NASS survey of cheese prices 

is that the results are not released for 1 to 2 weeks after certain

transactions captured in the survey occur. California Department of Food 

and Agriculture officials told us that California does not participate in

FMMOs. They also told us that California does not rely on the NASS 

survey, in part because of concerns about the timing of the survey. 

Additionally, although industry members we interviewed stated that the 

effects of the time lag may balance out over time, they said that the use of

the NASS survey created short-term problems in milk pricing because of 

the time lag. For example, one industry member said that because of a 

timing lag that can occur during periods of rapidly declining cheese prices

at the CME spot cheese market, USDA minimum milk prices may not fully 

reflect current milk prices. As a result, cheese manufacturers may be 

buying milk based on prices calculated using higher cheese prices from 

the preceding weeks but selling cheese at current lower market prices. 

This is due in part to the time lag in the NASS survey of cheese prices and 

could cause, in the short term, losses for the manufacturer. However, dairy 

farmers may benefit in this example. In periods of rapidly rising cheese 

Page 26 GAO-07-707 Spot Cheese Market 
prices, the time lag could result in dairy producers receiving less for their 

milk than if current market conditions were reflected in the minimum milk 

prices. In this example, cheese manufacturers might benefit. 

According to USDA officials, the effect of the time lag inherent in the 

NASS survey of cheese prices on Class III milk prices is diminished by two 

factors. First, USDA publishes the minimum Class III milk price on a 

monthly basis, and according to USDA officials, this dilutes the effect of 

the time lag on the Class III minimum milk price. Second, according to 

USDA, 75 percent of milk is sold with a premium over the Class III 

minimum milk price, and these “over-order” premiums reduce the effect of

the time lag in the Class III minimum milk price.38 However, monthly Class 

III minimum milk prices can sometimes be based on data that do not 

include a portion of or the entire last week of NASS survey of cheese data 

for that month. This can be compounded because industry participants 

sometimes base their cheese prices on the prior week’s CME spot cheese

market price. As a result, the effect of the time lag would be present in the 

monthly Class III milk price. Moreover, according to some industry 

participants we interviewed, the Class III minimum milk price is used by 

industry participants as the base price onto which over-order premiums 

are applied. This means that if the minimum milk price is too high or too 

low because of the effect of the lag, the lag would be reflected in milk 

prices set by industry participants who start with the minimum price and 

add a premium. Therefore, the time lag may result in industry members 

paying or receiving prices for milk that no longer fully represent current 

market conditions. 

The move from NCE to CME changed little about the structure or function

of the spot cheese market but has increased oversight. The CME spot 

cheese market continues to be a surplus market where a few large 

participants buy and sell cheese and less than 1 percent of the cheese 

produced in the United States is traded. In addition, market participants 

continue to use CME spot cheese market prices to set most cheese prices

in the United States. As a result, concerns about price manipulation will 

likely remain. However, monitoring of trading activity by CFTC DMO and 

CME represents a substantial increase in the level of oversight of the CME 

Conclusions 

 38Over-order premiums refer to charges that are negotiated by milk sellers (individual 

farmers and cooperatives) and milk buyers (fluid milk processors and dairy product 

manufacturers such as cheese makers) that are above the minimum milk price. 

Page 27 GAO-07-707 Spot Cheese Market 
spot cheese market as compared to oversight of NCE. This has addressed 

some concerns about potential price manipulation on the CME spot 

cheese market. While not guaranteeing that price manipulation will be 

detected or prevented, regular and targeted reviews may help to ensure 

the integrity of and confidence in the market. 

The CME spot cheese market also impacts minimum milk prices through 

the NASS survey of cheese prices, which largely captures the CME spot 

cheese price but with a 1- to 2-week lag. USDA developed the NASS survey 

of cheese prices, in part to address industry and other concerns about a 

thin market and potential price manipulation. However, despite surveying 

a broader range of transactions, the industry uses the CME spot cheese 

market as the primary mechanism for price discovery and for pricing the 

majority of cheese sold. As a result, the NASS survey continues to capture

largely redundant spot cheese market prices. Any small difference 

between prices from the NASS survey and CME spot cheese prices may be

due to factors such as a time lag between data collection and price 

reporting, premiums or discounts on the CME price, or errors in data 

collected in the NASS survey of cheese prices. In addition, the NASS 

survey data are not currently audited by USDA, and a recent error in 

nonfat dry milk prices has raised questions about the accuracy of the data 

reported. California, with one of the largest dairy industries in the country, 

has chosen to use CME cheese prices over NASS survey of cheese prices 

in its milk pricing formula because officials believe they more accurately

reflect current market conditions. The NASS survey of cheese prices 

largely captures CME price data by surveying producers versus capturing

current data directly from CME. A lag of 1 to 2 weeks exists in data 

collected in this survey. As a result, industry participants may be paying 

prices for milk that may not be current. 

As USDA continues to hold hearings on a variety of issues, including the 

Class III milk pricing formula, we acknowledge that there may be a variety

of proposals to consider. To improve the timeliness of reported cheese 

prices and reduce redundancy that exists in the NASS survey of cheddar

cheese, we recommend that the Secretary of USDA direct the 

Administrator, Agricultural Marketing Service to give serious 

consideration to all proposals, in consultation with the industry, including

the industry proposal to use the CME spot cheese market prices instead of

the NASS survey of cheese prices in the minimum federal milk pricing 

formula. 

Recommendations for 

Executive Action 

Page 28 GAO-07-707 Spot Cheese Market 
If USDA continues to use the NASS survey of cheese prices, we 

recommend that the Secretary of USDA direct the Administrator, AMS, to 

implement in a timely manner a program to audit data reported to NASS in 

its survey of cheese prices. 

We provided a draft of this report to CFTC, USDA, and CME. We received 

written comments from USDA, which are reprinted in appendix II. We 

also received technical comments from CFTC, USDA, and CME, which 

have been incorporated where appropriate. In written comments from the 

Under Secretary of Marketing and Regulatory Programs, USDA agreed 

with our recommendation intended to ensure that AMS implements a 

program to audit data reported to NASS in its survey of cheese prices. 

However, the agency disagreed with our recommendation to proactively 

consider, in consultation with the industry, the industry proposal to use 

CME spot cheese market prices instead of NASS survey of cheese prices in 

the minimum federal milk pricing formula. 

Agency Comments 

and Our Evaluation 

In response, USDA noted, as we do in the report, that it is in the process of

holding a hearing addressing proposed changes to the federal milk 

marketing order minimum price formulas and that using the CME spot 

cheese price is among the proposals. According to USDA, it is outside of 

USDA’s authority to “proactively consider” proposals to change federal 

milk marketing order provisions. We have, therefore, clarified our 

recommendation. We were not and are not recommending that USDA 

take action outside of its current authority and we recognize that USDA 

must follow its rules of practice and procedure when conducting 

proceedings to amend marketing orders. Specifically, USDA states that 

proposals to use the CME price will be given “due consideration, weighing 

both the supporting and opposing testimony” in the hearing process. Our 

recommendation is that USDA give serious consideration to all proposals, 

in consultation with the industry, including the industry proposal to use 

the CME spot cheese market prices instead of the NASS survey of cheese

prices in the minimum federal milk pricing formula. 

USDA also stated that because concerns remain about potential 

manipulation at the CME spot cheese market, “use of the NASS price to set

FMMO minimum prices seems prudent until an alternative is shown to be 

clearly superior.” While we recognize that there are potentially a variety of 

ways to price Class III milk, the use of CME spot cheese market prices has

certain merits over using NASS prices. As stated in our report, while 

concerns remain about price manipulation at the CME spot cheese market, 

the NASS survey of cheese prices does not address these concerns. The 

Page 29 GAO-07-707 Spot Cheese Market 
NASS survey of cheese prices largely duplicates CME spot cheese market 

prices. Use of CME spot cheese market prices instead of NASS survey of

cheese prices could reduce redundancy. As USDA itself has found, the 

long-term difference in using CME spot cheese prices instead of NASS 

survey of cheese prices in milk pricing is close to zero. This is because, as 

we note in our report, the cheese industry uses CME spot cheese prices to

set contract prices. As a result, CME spot cheese market prices are 

captured by the NASS survey of cheese prices. Further, industry 

participants that we interviewed stated that they have not adjusted how 

they set contract prices due to concerns about manipulation on the CME 

spot cheese market. Therefore, any pricing concerns about CME would 

also be reflected in the NASS survey prices. 

USDA further stated that GAO has not demonstrated that there has been a 

loss or benefit to cheese makers due to the time lag associated with 

calculating a monthly average federal minimum milk price. However, the 

report does include an example of a potential loss to cheese makers. As 

stated in the report, one industry member we interviewed told us that 

during periods of rapidly declining cheese prices at the CME spot cheese 

market, the timing lag may result in USDA minimum milk prices not fully 

reflecting current milk prices and may result in cheese makers buying milk 

at prices higher than the prices at which the cheese maker sell its cheese. 

Additionally, we clarified in the report that industry participants we 

interviewed that told us the NASS survey made their business more 

complicated were referring to short-term problems in milk pricing due to 

the use of the NASS survey and the corresponding time lag. Moreover, the 

time lag is one reason why California does not rely on the NASS survey of 

cheese prices. Finally, USDA comments included an overview of 

minimum milk prices and the manufacturing plant relationship with the 

FMMO. 

As agreed with your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution until 14 days from the 

report date. At that time, we will send copies of this report to the 

appropriate committees. We will also send copies to the Chairman of 

CFTC, the Secretary of Agriculture, and the Managing Director, Regulatory 

Counsel of CME. We also will make copies available to others upon 

request. In addition, the report will be available at no charge on the GAO 

Web site at http://www.gao.gov. 

Page 30 GAO-07-707 Spot Cheese Market 
If you or your staff have any questions concerning the report, please 

contact me at (202) 512-8678 or williamso@gao.gov, or John Wanska, 

Assistant Director, at (312) 220-7628 or wanskaj@gao.gov. Contact points 

for our Offices of Congressional Relations and Public Affairs may be found 

on the last page of the report. Key contributors to this report are listed in 

appendix III. 

Orice M. Williams 

Director, Financial Markets 

 and Community Investment 

Page 31 GAO-07-707 Spot Cheese Market 
List of Congressional Requesters 

The Honorable Arlen Specter 

Ranking Member 

Committee on the Judiciary 

United States Senate 

The Honorable Hillary Rodham Clinton 

United States Senate 

The Honorable Russell D. Feingold

United States Senate 

The Honorable Herb Kohl 

United States Senate 

The Honorable Charles E. Schumer 

United States Senate 

Page 32 GAO-07-707 Spot Cheese Market 
Appendix I: Scope and Methodology 

Page 33 GAO-07-707 Spot Cheese Market 

Appendix I: Scope and Methodology 

To review the structure and operations of the Chicago Mercantile 

Exchange (CME) spot cheese market, we obtained and analyzed 

information about CME, including internal rules and procedures that 

govern the market. 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. We obtained 

and reviewed industry and academic literature regarding market structure. 

To analyze concerns about price manipulation, we reviewed existing 

studies that assessed market characteristics associated with price 

manipulation. In addition, we obtained and analyzed spot cheese market 

trading data provided by CME. To assess the reliability of the CME data, 

we reviewed the data and interviewed CME officials, and determined that 

the data were sufficiently reliable for our purposes. Using the data 

provided, we calculated summary statistics on volume of trading, number 

of market participants, and the role of uncovered bids and unfilled offers. 

We also obtained Commodity Futures Trading Commission (CFTC) and 

CME officials’ views as well as those of market participants and members 

of the cheese and dairy industry on the potential for price manipulation at

the CME spot cheese market and NCE. We did not attempt to determine 

whether manipulation has occurred on the CME spot cheese market; 

instead, we identified the characteristics of this market that are consistent 

with those of markets considered susceptible to price manipulation. 

As a part of our review of market monitoring and oversight, we obtained

and analyzed information about CFTC, CME, and other oversight and 

enforcement organizations on their role in monitoring the CME spot 

cheese market. In addition, we interviewed officials from CFTC’s Division 

of Market Oversight, Division of Enforcement, and Office of General 

Counsel to obtain information about CFTC’s role in the CME spot cheese 

market. We also interviewed CME officials from its Legal and Market 

Regulation Division, Corporate Development Division, and Products and 

Services Division to discuss CME’s oversight of the CME spot cheese 

market. 

To review how the CME spot cheese market impacts federal minimum 

milk prices, we obtained and reviewed federal laws and United States 

Department of Agriculture (USDA) regulations governing the federal milk

pricing formulas. We also reviewed academic analysis of the role the spot 

cheese market has in milk pricing. In addition, we interviewed officials 

from USDA’s Agricultural Marketing Service and National Agricultural 

Statistical Service as well as numerous academics who study issues of 

dairy policy. We also interviewed market participants and members of the 

cheese and dairy industry on the relationship between the CME spot 
Appendix I: Scope and Methodology 

cheese market and minimum federal milk prices. Members of the dairy and 

cheese industry included cheese manufacturers, dairy cooperatives, 

processors of cheese, and milk producers. 

Page 34 GAO-07-707 Spot Cheese Market 
Appendix II: Comments from the Department 

of Agriculture 

Page 35 GAO-07-707 Spot Cheese Market 

Appendix II: Comments from the Department 

of Agriculture 
Appendix II: Comments from the Department 

of Agriculture 

Page 36 GAO-07-707 Spot Cheese Market 
Appendix II: Comments from the Department 

of Agriculture 

Page 37 GAO-07-707 Spot Cheese Market 
Appendix II: Comments from the Department 

of Agriculture 

Page 38 GAO-07-707 Spot Cheese Market 
Appendix III: GAO

A

 Contact and Staff 

cknowledgments 

Page 39 GAO-07-707 Spot Cheese Market 

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO contact Orice Williams, (202) 512-8678, or williamso@gao.gov 

In addition to those individuals named above, John Wanska, Assistant 

Director; Marta Chaffee; Emily Chalmers; Jay Cherlow; Alison Martin; 

Marc Molino; Andy Pauline; and Paul Thompson made key contributions 

to this report. 

Staff 

Acknowledgments 

(250314) 
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