Through the miracles of web search, with an initial boost from Highgamma’s comment linking to a 1996 WSJ story, I have reconstructed what happened in cheese in 1988 that led to my first foray into commodity manipulation.
For many of the gory details, you can read this summary of a very long report on the goings on in the cheese market in the ’88-’96 time frame. Here’s a GAO take on it. (Who knew cheese was such a big deal?!)
The Cliffs’ Notes version is pretty simple. Starting in 1988, Kraft started selling large quantities of cheese on the National Cheese Exchange. At first glance, this seems peculiar, because Kraft is a major cheese buyer. But at second glance it makes sense. Kraft bought most of its cheese on contracts tied to the NCE price. So driving down the NCE price reduced its acquisition costs under the contracts. Put differently, Kraft was short cheese forward contracts, and had an incentive to drive down prices. Given the thinness of the NCE market, selling a few carloads at the Friday auctions accomplished just that.
Kraft, it should be noted, vociferously denied these allegations. But the case set out in the report seems pretty damning. In particular, in a manipulation of cash-settled forwards (which Kraft’s cheese purchase contracts were), the manipulator loses money on the transactions used to distort the price, but makes it up on the forwards. That definitely appears to be the case here. Relatively small volume transactions on NCE lost money, but had a big price impact which benefited Kraft’s far larger volume of cheese purchases.
In other words, Kraft’s strategy was right out of my 2001 J. Business article “The Manipulation of Cash-Settled Futures Contracts.”
I’m sure you have all been on tenterhooks waiting for those details. Or not.