The warning from the Government Accountability Office comes as block cheddar cheese reached $1.95 a pound Thursday on the Chicago Mercantile Exchange, up 67 percent from $1.17 a pound a year ago. Industry observers attribute the price surge to strong demand and higher milk prices.

Because cheddar is the benchmark for mozzarella and other cheeses, some big pizza chains, including Yum Brands Inc.'s Pizza Hut and Papa John's International Inc., already have responded by raising their prices.

There are few active cheese traders at the CME and the volume of cheese that changes hands is small, the GAO said, making it susceptible to price manipulation. Less than 2 percent of all cheddar cheese made in the United States is traded at the CME, among only 30 participants, which range from dairy cooperatives to large companies.

The GAO investigation came at the request of several farm-state senators who were concerned about the CME's vulnerability to price distortions.

The agency found that the 1997 transfer of spot cheese trading to the CME, from the National Cheese Exchange in Green Bay, Wis., where allegations of price manipulation also surfaced, resulted in greater oversight by the CME as well as the Commodity Futures Trading Commission.

But otherwise, the structure of the market is largely the same, the report said.

Sen. Russ Feingold, D-Wis., one of the five senators who requested the study, called on the department to ''improve its oversight of the prices it receives in order to better protect our hardworking dairy farmers.''

Source: Santa Barbara News Press