CHEESE TRADING; A worthwhile federal study

Kraft Foods, Green Bay,

by HAYNES

Wisconsin dairy farmers have long believed they get the short end of the stick when cheese is traded. Now, U.S. Sens. Russ Feingold and Herb Kohl and four of their colleagues are calling for a study by the Government Accountability Office to see if it's true.

The study can't hurt and could reveal whether there are flaws on the Chicago Mercantile Exchange, where cheese trading moved 10 years ago after the National Cheese Exchange in Green Bay closed amid controversy.

A 1996 study by University of Wisconsin researchers concluded that the National Cheese Exchange could be used to manipulate the national cheese market. A state investigation found that cheese makers, including Kraft Foods Inc., often sold cheese at a loss in the lightly traded market to lower the prices it paid for the millions of pounds of milk and cheese it bought elsewhere. Under federal rules, milk prices were tied directly to the price of cheese milk at the exchange.

Cheese producers denied they manipulated prices and said the researchers' report was misleading. The Federal Trade Commission found that Kraft did not violate antitrust law. Milk prices are now determined through a survey, although farmers think it's suspicious that prices often match those derived from cheese trading at the Merc.

And because there are so few trades, farmers argue, the Merc is as vulnerable to shenanigans as was the old exchange. Officials at both Kraft and the Merc say the exchange is one of the largest, most respected in the world and has systems in place to ensure its integrity. Both support a GAO study.

In a letter to Comptroller General David Walker last week, the senators asked, among other things, for the GAO to look into how the Merc's cheese market is structured and operated, whether there are risks of price manipulation and the role of other federal agencies in oversight of the market. The senators said the time was right, given that the Senate would take up the farm bill over the next few months.

The GAO should conduct a prompt and thorough study of cheese trading on the Merc. It's worth knowing if the shift to Chicago a decade ago was an improvement.

Kraft Foods