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Onions Have No Futures

Lots of people object to markets in certain commodities. Kidneys, archeological relics, adoption rights, and a host of more prosaic items have been deemed by critics to be the sorts of things that should not be bought and sold. Markets in these items have their defenders, of course, and generally speaking, there are relatively few things that are otherwise legal to possess that the federal government has deemed illegal to sell. Except onions. At least, future onions.

Recently, Keith Romer of NPR's Planet Money presented a story on Vince Kosuga, a farmer and commodities trader who "cornered" the U.S. onion market in 1955-56. Kosuga started by stockpiling onions in a large metal shed on his property in upstate New York, but soon expanded his holdings beyond his own farm.

ROMER: But that still wasn't enough. Vince wanted to own all the onions, even the ones that were still in the ground growing. There's a way to do this. It's called the futures market. When you buy a futures contract, you're essentially making a deal with farmers to buy the onions they haven't even harvested yet. It just so happened that Vince was also a commodities trader. In the trading pits of Chicago, Vince and his business partner, Sam Siegel, they bought up all the available futures contracts for onions. By the winter of 1955, they had done the impossible.

Kosuga’s dominance of the onion market gave him the temporary leverage to increase prices. In the world of perishable agricultural commodities, however, one can only sit on a large, high-priced inventory for so long. That’s when Kosuga and partner Sam Seigel went short.

Seigel and Kosuga started to short sell onion futures, effectively betting that the price of onions was about to drop precipitously. This was not a blind gamble, however. The pair began to sell their stockpiled onions, causing a glut of supply, and forcing the price of onions down—way down. In August 1955, a 50-pound bag of onions in Chicago cost about $2.75. By March 1956, the going rate in Chicago for the same amount of onions was a mere 10 cents due to Seigel and Kosuga’s market manipulation.

The outrage over the dislocations caused by his various positions and trades resulted in the passage of the Onion Futures Act of 1958 (sponsored by Rep. Gerald Ford), banning the trading of futures contracts on onions. That law is still in force. As agricultural economist Scott Irwin points out, though, it was no long-term solution.

IRWIN: Basically, the real losers are everyone in the form of producers and consumers.

ROMER: Without a futures market, onion farmers have a harder time planning out their crops. Onions end up costing us all just a little bit more. Now you can blame Vince Kosuga for this, or you can blame Congress. But what you can't do is buy or sell a futures contract in onions. It's against the law.

And not only does that law end up making onions more expensive for consumers, it has predictable failed at its primary goal: insulating farmers from Kosuga-style price volatility. Fortune senior writer Jon Birger reported in 2008 on the price swings that onions were experiencing.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.

The volatility has been so extreme that the son of one of the original onion growers who lobbied Congress for the trading ban now thinks the onion market would operate more smoothly if a futures contract were in place.

“There probably has been more volatility since the ban,” says Bob Debruyn of Debruyn Produce, a Michigan-based grower and wholesaler. “I would think that a futures market for onions would make some sense today, even though my father was very much involved in getting rid of it.”

And as Forbes contributor Tim Worstall recently suggested, reviving the futures market for onions in the U.S. would be good, but extending it to countries like India would be even better.

Thanks to Alex Tabarrok for his Marginal Revolution post that helped put the NPR story in perspective.