Dick Groves
Editor, Cheese Reporter

 

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20 Years Without The National Cheese Exchange

Believe it or not, it’s been 20 years since the National Cheese Exchange held its final trading session in Green Bay, WI, and the cheese industry’s cash market moved to the Chicago Mercantile Exchange. So what can we conclude after 20 years without the NCE?

For one thing, we can safely conclude that there are probably a lot of (primarily young) people in the cheese and dairy industry who have never even heard of the NCE. So here’s a brief review.

The National Cheese Exchange was a nonstock, nonprofit corporation that generally had about 40 members. The only function of the NCE was to provide facilities for the purchase of cheese by those who found themselves in need and for the sale of cheese for those who found themselves with a surplus. The NCE met every Friday morning in Green Bay for half an hour (longer if activity warranted).

The NCE (and its predecessor, the Wisconsin Cheese Exchange) came under a fair amount of scrutiny throughout its history, but came under heightened scrutiny during its last decade in business. Among other things, in March of 1996, the University of Wisconsin-Madison released a major study concluding that the NCE “appears to facilitate market manipulation.”

Two months later, two subcommittees of the House Agriculture Committee held a two-day hearing on the NCE. Things then quieted down for a few months, probably due in part to the fact that cheese prices reached a then-record-high in August 1996 ($1.6950 per pound for Cheddar blocks).

But cheese prices fell precipitously toward the end of 1996 (blocks ended the year at $1.1875), and by early 1997 a joint committee comprised of members of the NCE and the National Cheese Institute were looking at developing an alternative cash market for the cheese industry. And in March 1997, the NCE’s board and NCI’s executive committee accepted a proposal from the CME to create a new cheese cash market at the CME.

The last trading session at the NCE took place on Friday, April 25, 1997. Six days later, the CME held its first cash cheese trading session (that was one of the first changes implemented at the CME: trading shifted from Friday morning to Thursday afternoon).

So what sorts of impacts has the change from the NCE to the CME had for the cheese industry’s cash market? Arguably the biggest change occurred about a year and a half after the CME cash market started; that’s when the cash market moved from weekly to daily.

That change, in turn, led to a couple of other impacts. First, trading volume has increased at the CME, compared to trading volume at the NCE.

For example, back in 1985, NCE President Dick Gould, during a presentation at an industry meeting, noted the following NCE cheese sales totals for recent years: 1979, 16.1 million pounds; 1980, 9.9 million pounds; 1981, 1.4 million pounds; 1982, 1.4 million pounds; 1983, 1.2 million pounds; and 1984, 11.1 million pounds.

That’s why the NCE was often criticized for being a “thin” market. There wasn’t always very much cheese sold there.

Last week, in just four days of trading at the CME, about 1.7 million pounds of cheese was sold (40 carloads, and assuming 42,000 pounds per car), or more than was sold in 1981, 1982 or 1983.

There are at least a couple of caveats that should be mentioned here. First, back in 1981, monthly Cheddar cheese production ranged from about 134 million pounds to about 192 million pounds, while monthly Cheddar output in 2015 ranged from 263 million pounds to 297 million pounds. Simply put, more Cheddar is being sold at the CME today than was sold on the NCE 35 or so years ago because there’s a lot more Cheddar being produced.

Second, back in the early 1980s, millions of pounds of surplus Cheddar was being sold to the federal government every week under the dairy price support program. So, recalling the function of the NCE noted earlier, cheese makers who had surplus Cheddar back then could sell it to USDA’s Commodity Credit Corporation, and cheese buyers who needed Cheddar could buy it back from the CCC (at least some of the time).

Another major impact of the shift from weekly to daily cash cheese trading has been the increase in price volatility. There are several ways of looking at this, starting with the fact that, with daily trading, there are five opportunities for prices to change every week, compared to one opportunity every week when trading took place only on Friday morning.

Also, with the CCC buying hundreds of millions of pounds of Cheddar during some years, volatility was practically non-existent some years at the NCE. For example, there were just four block price (“market opinion”) changes at the NCE in 1981, another four changes in 1982 and another four changes in 1983.

Two weeks ago at the CME, the block price changed five times: it increased on Monday, then fell each of the next four days.

Also, during the 1977-97 period, the NCE block price ranged from a low of 89.25 cents a pound in early 1977 to the record high noted earlier: $1.6950 per pound. In the 20 years of the CME’s cash cheese market, the block price has ranged from a low of 98 cents a pound in 2000 to a record high of $2.45 per pound in 2014.

Finally, arguably the biggest change since the cheese industry’s cash market moved to the CME is that the market has become largely depoliticized. Maybe that’s a benefit of a daily cash market: by the time somebody starts to complain about cheese prices going down (and taking milk prices with them), they start to increase.


Cheese Reporter welcomes letters to the editor. Comments should be sent to: Dick Groves by Fax at (608) 246-8431; or e-mail your comments to
dgroves @cheesereporter.com.

 

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