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Big Stink In Cheeseland


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BIG STINK IN CHEESELAND

Kraft rejects charges it manipulated the Green Bay exchange

Even for Green Bay, Wisc., the weekly opening of the National Cheese Exchange is a decidedly low-key event. Each Friday morning for half an hour, in a room in a nondescript office building, traders mill around a cheese wall of fame--pictures of the industry's big cheeses. The traders sip their coffee and call out bids on cheddar barrels and 40-pound blocks. Trades are recorded by hand, in magic marker, on a big board.

Despite the market's relaxed style, cheese is serious business in a state whose residents are known as Cheeseheads. Now, some of them say something stinks in their cheese market--and it involves Kraft Foods Inc. State investigators have accused the giant Philip Morris Cos. unit of manipulating the tiny Green Bay market.

"VELVEETA-GATE." In a 265-page report commissioned by Wisconsin's Agriculture Dept. and released on Mar. 19, two University of Wisconsin economists sharply attacked Kraft's handling of its cheddar merchandising. Local press is calling the controversy Velveeta-gate, and Wisconsin legislators want the U.S. Justice Dept. to investigate.

From 1988 to 1992, Kraft on occasion would force exchange prices lower by selling cheese even when its inventories were tight, the report alleges. As prices fell, Kraft benefited because its dairy contracts were pegged to exchange prices. Every 1 cents drop in the benchmark exchange price lowered Kraft's costs by more than $10 million annually, the report says.

To put it mildly, the conclusions grate on Kraft. "I get emotional. It is a piece of crap," thunders Kraft President John D. Bowlin, who oversees the company's $2.7 billion cheese business. Bowlin says state investigators based their deductions on faulty data and outdated inventory information. The company's actual inventory levels, which varied considerably from projections, matched up rationally with Kraft's trades, he claims. And while Kraft accounted for as many as 90% of exchange sales during the period under investigation, Bowlin says that stemmed from a legitimate strategy: Kraft deliberately contracted for more cheese than it needed in order to avoid running out, then sold part of the excess through the exchange. For its part, the exchange supports Kraft's position, saying no player manipulated prices. The professors say they stand by their findings.

GIANT PRICE SWINGS. Suspicious dairy farmers see holes in Bowlin's protestations. Manipulation of the National Cheese Exchange "has been an inside joke for many years," says Hugo Mielke Jr., a third-generation dairyman in Marion, 50 miles from Green Bay. Mielke and others are frustrated by cheese prices that sometimes swing up or down nearly 50% in a single year. Farmers' profit margins are pared so thin that when cheese prices fall sharply, even simple pleasures become extravagances: "You don't go to that Friday fish fry," Mielke moans.

Kraft could fare perfectly well if it didn't use the exchange at all. The mammoth company has enough bargaining power to negotiate rates with dairy co-ops. But Bowlin says the cheese exchange is more efficient. "It's the only mechanism we have right now, and we think it works," he says. Indeed, several other small-scale markets operate in the same way for other commodities. Butter trades once a week at the Chicago Mercantile Exchange, with bids and offers posted on a chalkboard directly beside the bustling stock-index futures pit.

The cheese market could eventually modernize. A new computerized trading system may be introduced this year, and it could lead to expanded use of the National Cheese Exchange. Meanwhile, New York's Coffee, Sugar & Cocoa Exchange trades a cheddar futures contract. But Green Bay is still the Big Cheese--even if it's hostile turf for Kraft.By Greg Burns in ChicagoReturn to top

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