CME Cutting Back On Vital Cash Market Information

Here’s a little “pop quiz.” See if you can tell the difference in these two cash cheese trading sessions at the Chicago Mercantile Exchange (the two examples are fictitious).

On Wednesday, April 30, there were no sales or uncovered offers; the only activity was an unfilled bid for one car of blocks at $1.9200. The following day, once again there were no sales or uncovered offers; the only activity was an unfilled bid for one car of blocks at $1.9200.

Did you notice any difference? Of course not. And therein lies the problem.
Starting on Thursday, May 1, the CME spot market activity reports are only listing the last bid and offer, not the total number of bids and offers. So no matter how many unfilled bids or uncovered offers there are on the board when trading ends, the CME will only report the final one.

That’s the point of the “pop quiz” above. On April 30, market observers could be certain that there was only one unfilled bid on the board at the close of trading; but starting on May 1, market observers no longer know for certain just how many unfilled bids, or uncovered offers for that matter, are on the board when trading closes.

On the surface, perhaps, this is no big deal. After all, prices at the CME are established by one of three factors: last sale, a higher unfilled bid, or a lower uncovered offer.

So if, for example, a load of blocks sold at $1.9200, then there are bids for two more loads of blocks, one at $1.9300 and one at $1.9400, the higher one is the only one that really matters because it’s the one that sets the price for the day. The unfilled bid at $1.93 is irrelevant.

Or is it? After thinking this over and talking with some other long-time market observers, we’re not convinced this CME decision is a positive one for the dairy industry.

There are at least three reasons why this limiting of cash market trading information by the CME is a bad idea for the dairy industry. A first, general reason is that it amounts to a limit on market information, and that’s never a good thing.

It’s an over-used but true cliche: today, we’re living in the information age. The more information, the better. Market observers watch any number of reports, but one of the few daily reports is the cash trading sessions for cheese and butter at the CME (we’d also list the nonfat dry milk cash market, but there’s so little activity there that it’s kind of a joke).

Obviously this cash market is a change from the “old days” in the dairy industry, when cheese traded once a week at the National Cheese Exchange in Green Bay, WI, and butter also traded once a week, at the CME. And frankly, there were times, sometimes long stretches of time, when there was no activity at all at the NCE and that was all the market information anybody needed (because cheese was in such surplus and the government was such a major buyer at the time).

But times have changed, and the CME almost a decade ago decided to move to daily cash trading. This provided daily information to market observers. Sometimes there was no trading (which itself was useful information), and sometimes there was lots of trading (and lots of information). And the CME always reported trading in full.

Now that’s no longer the case. And that’s too bad, because you can never have too much information in today’s volatile, ever-changing dairy markets.

There are also a couple of more specific problems with this CME decision. First, as our “pop quiz” example is intended to illustrate, the most cheese or butter being offered for sale or being bid for from now on will be a single load, as indicated by the CME’s market reports. That is, no matter how many unfilled bids there might be in a trading session, the CME’s report will show a grand total of just one.

Depending on how active the trading session is, that can be pretty misleading. There have been trading sessions in recent weeks that have had many, many more unfilled bids than just one on the board at the close of trading.

Do all of those additional unfilled bids, or uncovered offers, affect the price? No.

But do they affect the market outlook? Yes. Remember, one carload of cheese or butter at the CME represents about 40,000 pounds of product.

But if there are unfilled bids for a total of 10 cars, that represents unfilled demand for 400,000 pounds, not 40,000 pounds, which is a significant difference. And if there are uncovered offers of 10 cars, that represents 400,000 pounds of product that can’t find a home (at least at that price, on that day). Now nobody will know exactly how many unfilled bids or uncovered offers were on the board at the close of trading.

Another problem with this CME decision has to do with what might be called market direction. Every once in a while, there’s a bid or an offer at what initially appears to be an “outrageous” price; that is, a bid so low or an offer so high that it doesn’t really make any sense.

But after a week or two, sometimes those “outrageous” prices become the real price, as the market slowly makes its way up or down to that level.
Perhaps an illustration will help here. If somebody bid $1.80 for a load of blocks right now, chances are that nobody would sell at that price, and the unfilled bid wouldn’t affect the settling price.

But that $1.80 bid still represents what one buyer is willing to pay for one load of blocks on one particular day. And now there’s no telling, at that particular time, if there are buyers or sellers who think the market is too high, or too low for that matter.

One of the criticisms leveled at the CME, and its predecessor, the NCE, is that it’s a “thin” market. But even when there are no sales, details about unfilled bids and uncovered offers represents important market information.

Now even that market information is getting “thin.” •

Cheese Reporter welcomes letters to the editor. E-mail your comment to Dick Groves at dgroves@cheesereporter.com. Past editorials and other information can be found at www.cheesereporter.com.

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