Onion Futures Act
Encyclopedia
The Onion Futures Act is a United States
law
banning the trading of futures contracts on onion
s. In 1955 two onion traders, Sam Seigel and Vincent Kosuga
, cornered
the onion futures market on the Chicago Mercantile Exchange
. The resulting regulatory actions led to the passing of the act on August 28, 1958. It remains in effect .
. In 1955, they accounted for 20% of its trades.
of onions were shipped to Chicago to cover their purchases. By late 1955, they had stored 30000000 pounds (13,607,771.1 kg) of onions in Chicago. They soon changed course and convinced onion growers to begin purchasing their inventory by threatening to flood the market with onions if they did not. Seigel and Kosuga told the growers that they would hold the rest of their inventory in order to support the price of onions.
As the growers began buying onions, Seigel and Kosuga purchased short positions on a large amount of onion contracts. They also arranged to have their stores of onions reconditioned because they had started to spoil. They shipped them outside of Chicago to have them cleaned and then repackaged and re-shipped back to Chicago. The new shipments of onions caused many futures traders to think that there was an excess of onions and further drove down onion prices in Chicago. By the end of the onion season in March 1956, Seigel and Kosuga had flooded the markets with their onions and driven the price of 50 pounds (22.7 kg) of onions down to 10 cents a bag. In August 1955, the same quantity of onions had been priced at $2.75 a bag. So many onions were shipped to Chicago in order to depress prices that there were onion shortages in other parts of the United States.
Seigel and Kosuga made millions of dollars on the transaction due to their short position on onion futures. At one point, however, 50 pounds (22.7 kg) of onions were selling in Chicago for less than the bags that held them. This drove many onion farmers into bankruptcy. A public outcry ensued among onion farmers who were left with large amounts of worthless inventory. Many of the farmers had to pay to dispose of the large amounts of onions that they had purchased and grown.
. The abrupt change in prices gained the attention of the Commodity Exchange Authority
. Soon they launched an investigation and the U.S. Senate Committee on Agriculture
and House Committee on Agriculture
held hearings on the matter.
During the hearings, the Commodity Exchange Authority stated that it was the perishable nature of onion which made them vulnerable to price swings. Then-congressman Gerald Ford
of Michigan sponsored a bill, known as the Onion Futures Act, which banned futures trading on onions. The bill was unpopular among traders, some of whom argued that onion shortages were not a crucial issue since they were used as a condiment rather than a staple food. The president of the Chicago Mercantile Exchange, E.B. Harris
, lobbied hard against the bill. Harris described it as "Burning down the barn to find a suspected rat". The measure was passed, however, and President Dwight D. Eisenhower
signed the bill in August 1958.
and the ban stood.
The loss of a lucrative trading product was devastating to the Chicago Mercantile Exchange. The other products that were traded, including futures contracts on eggs, turkeys, and potatoes, were not large enough to support the exchange. This led to the emergence of new leadership who pioneered a different strategy, expanding the exchange's traded products to include futures contracts on pork bellies
and frozen concentrate orange juice
. These proved to be popular products and eventually restored lost popularity to the Chicago Mercantile Exchange.
Holbrook Working
published a study in 1960 which argued that price volatility declined after the futures market for onions was introduced the 1940s. Working cited this study as proof of the Efficient-market hypothesis. In 1963, this theory was lent more support by a study published by Roger Gray
. Gray, an expert in agricultural futures markets and professor emeritus of economics at Stanford University
, concluded that onion price volatility increased after the Onion Futures Act was passed.
Aaron C. Johnson published a study 1973 that contradicted Gray's findings. He found that onion price volatility in the 1960s was the lowest of any decade on record. Financial journalist, Justin Fox
notes that while onion prices in the 1960s may have been more stable due to better weather or advances in transportation methods, "there was certainly no clear evidence from the onion fields to support the presumption that speculative markets got prices right."
In the 2000s, onion prices were significantly more volatile than corn or oil prices. This volatility led the son of a farmer who initially lobbied for the ban to advocate a return to onion futures trading.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
banning the trading of futures contracts on onion
Onion
The onion , also known as the bulb onion, common onion and garden onion, is the most widely cultivated species of the genus Allium. The genus Allium also contains a number of other species variously referred to as onions and cultivated for food, such as the Japanese bunching onion The onion...
s. In 1955 two onion traders, Sam Seigel and Vincent Kosuga
Vincent Kosuga
Vincent Kosuga was an American onion farmer and commodity trader best known for manipulating the onion futures market. Though he made millions of dollars on commodity trading, his actions were highly controversial and attracted government scrutiny...
, cornered
Cornering the market
In finance, to corner the market is to get sufficient control of a particular stock, commodity, or other asset to allow the price to be manipulated. Another definition: "To have the greatest market share in a particular industry without having a monopoly...
the onion futures market on the Chicago Mercantile Exchange
Chicago Mercantile Exchange
The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...
. The resulting regulatory actions led to the passing of the act on August 28, 1958. It remains in effect .
Onion trading
Onion futures trading began on the Chicago Mercantile Exchange in the mid-nineteen forties as an attempt to replace the income lost when butter futures contract ceased. By the mid-nineteen fifties, onions futures contracts were the most traded product on the Chicago Mercantile ExchangeChicago Mercantile Exchange
The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...
. In 1955, they accounted for 20% of its trades.
Market manipulation
In the fall of 1955, Seigel and Kosuga bought enough onions and onion futures so that they controlled 98 percent of the available onions in Chicago. Millions of poundsPound (mass)
The pound or pound-mass is a unit of mass used in the Imperial, United States customary and other systems of measurement...
of onions were shipped to Chicago to cover their purchases. By late 1955, they had stored 30000000 pounds (13,607,771.1 kg) of onions in Chicago. They soon changed course and convinced onion growers to begin purchasing their inventory by threatening to flood the market with onions if they did not. Seigel and Kosuga told the growers that they would hold the rest of their inventory in order to support the price of onions.
As the growers began buying onions, Seigel and Kosuga purchased short positions on a large amount of onion contracts. They also arranged to have their stores of onions reconditioned because they had started to spoil. They shipped them outside of Chicago to have them cleaned and then repackaged and re-shipped back to Chicago. The new shipments of onions caused many futures traders to think that there was an excess of onions and further drove down onion prices in Chicago. By the end of the onion season in March 1956, Seigel and Kosuga had flooded the markets with their onions and driven the price of 50 pounds (22.7 kg) of onions down to 10 cents a bag. In August 1955, the same quantity of onions had been priced at $2.75 a bag. So many onions were shipped to Chicago in order to depress prices that there were onion shortages in other parts of the United States.
Seigel and Kosuga made millions of dollars on the transaction due to their short position on onion futures. At one point, however, 50 pounds (22.7 kg) of onions were selling in Chicago for less than the bags that held them. This drove many onion farmers into bankruptcy. A public outcry ensued among onion farmers who were left with large amounts of worthless inventory. Many of the farmers had to pay to dispose of the large amounts of onions that they had purchased and grown.
Regulatory action
In the aftermath of the crash, many commentators characterized Kosuga's actions as unprincipled gamblingSpeculative attack
A speculative attack is a term used by economists to denote a precipitous acquisition of something by previously inactive speculators. The first model of a speculative attack was contained in a 1975 discussion paper on the gold market by Stephen Salant and Dale Henderson at the Federal Reserve Board...
. The abrupt change in prices gained the attention of the Commodity Exchange Authority
Commodity Exchange Authority
The Commodity Exchange Authority was a former regulatory agency of USDA. It was established toadminister the Commodity Exchange Act of 1936; it was the predecessor to the Commodity Futures Trading Commission ....
. Soon they launched an investigation and the U.S. Senate Committee on Agriculture
United States Senate Committee on Agriculture, Nutrition and Forestry
The Committee of Agriculture, Nutrition and Forestry is a committee of the United States Senate empowered with legislative oversight of all matters relating to the nation's agriculture industry, farming programs, forestry and logging, and legislation relating to nutrition and...
and House Committee on Agriculture
United States House Committee on Agriculture
The U.S. House Committee on Agriculture, or Agriculture Committee is a standing committee of the United States House of Representatives. The House Committee on Agriculture has general jurisdiction over federal agriculture policy and oversight of some federal agencies, and it can recommend funding...
held hearings on the matter.
During the hearings, the Commodity Exchange Authority stated that it was the perishable nature of onion which made them vulnerable to price swings. Then-congressman Gerald Ford
Gerald Ford
Gerald Rudolph "Jerry" Ford, Jr. was the 38th President of the United States, serving from 1974 to 1977, and the 40th Vice President of the United States serving from 1973 to 1974...
of Michigan sponsored a bill, known as the Onion Futures Act, which banned futures trading on onions. The bill was unpopular among traders, some of whom argued that onion shortages were not a crucial issue since they were used as a condiment rather than a staple food. The president of the Chicago Mercantile Exchange, E.B. Harris
E.B. Harris
Everette B. Harris, better known as E.B. Harris, was an American businessman. Harris served as President of the Chicago Mercantile Exchange from 1953 to 1978. During this time, he oversaw the diversification of the products traded on the exchange...
, lobbied hard against the bill. Harris described it as "Burning down the barn to find a suspected rat". The measure was passed, however, and President Dwight D. Eisenhower
Dwight D. Eisenhower
Dwight David "Ike" Eisenhower was the 34th President of the United States, from 1953 until 1961. He was a five-star general in the United States Army...
signed the bill in August 1958.
Effect on the Chicago Mercantile Exchange
After the ban was passed, the Chicago Mercantile Exchange filed a lawsuit in federal court alleging that the ban unfairly restricted trade. After a federal judge ruled against them, they declined to appeal to the Supreme CourtSupreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
and the ban stood.
The loss of a lucrative trading product was devastating to the Chicago Mercantile Exchange. The other products that were traded, including futures contracts on eggs, turkeys, and potatoes, were not large enough to support the exchange. This led to the emergence of new leadership who pioneered a different strategy, expanding the exchange's traded products to include futures contracts on pork bellies
Pork belly
Pork belly is a boneless cut of fatty meat derived from the belly of a pig. Pork belly is popular in Asian cuisine, and forms a part of many traditional European dishes such as the Alsatian Choucroute garnie, the Swiss Berner Platte, and the German Schlachtplatte...
and frozen concentrate orange juice
Orange juice
Orange juice is a popular beverage made from oranges. It is made by extraction from the fresh fruit, by desiccation and subsequent reconstitution of dried juice, or by concentration of the juice and the subsequent addition of water to the concentrate...
. These proved to be popular products and eventually restored lost popularity to the Chicago Mercantile Exchange.
Effect on price volatility
The ban provided academics with a unique opportunity to study the effect of an active futures market on commodity prices. Experts have been divided on the effects onion futures trading on the volatility of onion prices.Holbrook Working
Holbrook Working
Holbrook Working , a professor of economics and statistics at Stanford University’s FoodResearch Institute, is known for his contributions on hedging, the theory of futures prices – which anticipated the efficient market hypothesis, an early theory of market maker behavior, and the theory of...
published a study in 1960 which argued that price volatility declined after the futures market for onions was introduced the 1940s. Working cited this study as proof of the Efficient-market hypothesis. In 1963, this theory was lent more support by a study published by Roger Gray
Roger Gray
Roger Winks Gray was the Holbrook Working Professor of Commodity Price Studies professor emeritus at Stanford University. He was a noted expert on agricultural futures markets. He died September 5, 1996 at the age of 76....
. Gray, an expert in agricultural futures markets and professor emeritus of economics at Stanford University
Stanford University
The Leland Stanford Junior University, commonly referred to as Stanford University or Stanford, is a private research university on an campus located near Palo Alto, California. It is situated in the northwestern Santa Clara Valley on the San Francisco Peninsula, approximately northwest of San...
, concluded that onion price volatility increased after the Onion Futures Act was passed.
Aaron C. Johnson published a study 1973 that contradicted Gray's findings. He found that onion price volatility in the 1960s was the lowest of any decade on record. Financial journalist, Justin Fox
Justin Fox
Justin Fox is an American financial journalist, commentator, and writer born in Morristown, New Jersey. He is the editorial director of the Harvard Business Review Group and business and economics columnist for Time magazine. He graduated from Princeton University and has worked for Fortune...
notes that while onion prices in the 1960s may have been more stable due to better weather or advances in transportation methods, "there was certainly no clear evidence from the onion fields to support the presumption that speculative markets got prices right."
In the 2000s, onion prices were significantly more volatile than corn or oil prices. This volatility led the son of a farmer who initially lobbied for the ban to advocate a return to onion futures trading.