Dollars and Jens
Tuesday, January 18, 2005
The price of milk and market failure
The obscure cheese exchange opens with the blare of a siren each trading day at 10:45 a.m. and closes about 15 minutes later. Some days there are no trades. But the low-tech methods and limited trading don't reflect the huge influence of the exchange. The dairy industry uses the quotes for the price of cheese on the exchange to set raw milk prices, in much the same way the financial industry uses benchmarks like the prime rate to set interest rates for everything from home equity loans to credit cards.


It's a strategy that has made [Dairy Farmers of America] the dominant buyer of cheese at the Mercantile Exchange, conducting more than half of all purchases, according to several sources who track the exchange. The cooperative now buys hundreds of truckloads of cheddar cheese at the Merc each year, timing its purchases for maximum impact on the cheese price.
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I'm not entirely satisfied of this, but I'm not actually sure that this strategy, conducted consistently, would have a long-term effect on the prices; obviously if markets were efficient this would be the case, but the problem here is that they aren't. It doesn't seem to me that this is going to artificially restrict supply or increase demand (much); it feels to me as though, over a period of time, whatever other reactive forces are at play in determining the market will pull prices down.

This doesn't mean this shouldn't be fixed; insofar as the strategy is not conducted consistently, it's clearly screwing with the information discovery process, and I'm sure there are efficiencies to be gained from improving that — not least, the energy and waste put into the — ultimately unsuccessful, I posit — rent-seeking.

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