Regulators probing milk price manipulation

Monday, May 19, 2008 | 5:55 p.m. CDT; updated 6:53 a.m. CDT, Tuesday, July 22, 2008

WASHINGTON — Federal commodity regulators are investigating whether the farmer-owned dairy cooperative that controls about a third of the nation’s milk supply engaged in a price manipulation scheme, a spokeswoman for the group said Monday.

Monica Coleman, a spokeswoman for the Kansas City-based Dairy Farmers of America, said the Commodity Futures Trading Commission is looking into the group’s trading of cheese futures on the Chicago Mercantile Exchange.

The price of cheese futures can impact milk prices. The Department of Agriculture sets a minimum price of milk that is based in part on a survey of cheese prices that includes futures prices.

Coleman said the investigation, which was reported Monday by the Wall Street Journal, isn’t new. The group has cooperated with the CFTC on the matter since 2004, she said. The Journal reported that the CFTC is preparing to bring charges against DFA.

“We do not believe we have violated any laws, and we have and will continue to cooperate,” Rick Smith, president and chief executive of the DFA, said in a statement.

The price of milk jumped 13.5 percent in the past year, according to the Bureau of Labor Statistics, but Coleman said the “alleged activity is from 2004 and does not affect milk prices today.”

A spokesman for the CFTC would neither confirm nor deny any investigation.

The DFA was formed in 1998 through the consolidation of four regional marketing cooperatives. The group markets 61.7 billion pounds of milk for more than 19,000 dairy farmer members.

A report last year by the Government Accountability Office, the investigative arm of Congress, found that cheese trading on the Chicago Mercantile Exchange is susceptible to manipulation because cheese futures are thinly traded.

The dairy cooperative, the nation’s largest, also faces antitrust lawsuits by farmers and retailers for allegedly conspiring to suppress prices it paid for raw milk in the Southeast, while raising prices to the region’s retailers, according to the Journal. The alleged scheme could have boosted its profit as a middleman in those transactions.

Several of the antitrust suits, which have been consolidated in a federal district court in Tennessee, also name Dean Foods Co., a food and beverage company based in Dallas, as a co-defendant.

Separately, the DFA disclosed an unauthorized $1 million payment to a former director of the group in a letter to its members May 8. The group has notified the Justice Department of the payment, Coleman said.

The Justice Department is preparing to investigate the payment, the Journal reported, citing people close to the matter.

“This is obviously not conduct that we condone,” Smith said in the letter to members. “DFA’s past and present Boards of Directors were not involved in this wrongdoing.”

Smith took over as chief executive in 2006. The group’s management and board “have made a concerted effort to increase transparency, operate with integrity and focus on operating in the best interest of our dairy farmer members who own the cooperative,” Smith said in a statement Monday.

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