The Commodity With No Futures

Which futures contract are you, by act of Congress, forbidden to trade?

Two answers, and only two. Hollywood box-office receipts — banned in 2010, after the studios lobbied to keep anyone from betting against their opening weekends. And onions. The onion ban came first, and it is the older and stranger of the pair: the only outright statutory prohibition on a futures contract for a physical commodity in the United States. You can trade pork bellies, frozen concentrated orange juice, uranium, electricity, the weather, and the volatility of volatility itself. You cannot trade an onion. The law that says so — Public Law 85-839 — turns sixty-eight this August and has never been repealed.

It is a good trivia answer. It is a better case study, because the onion ban accidentally created something economists almost never get to see, and the data it produced does not say what most people think it says.

The contract

The Chicago Mercantile Exchange began life as the Chicago Butter and Egg Board and took its modern name in 1919. Onion futures arrived in 1942, launched to replace income the exchange had lost when its butter contract was terminated. They did better than anyone expected. By the mid-1950s, onion futures were the busiest product on the Merc — roughly 20 percent of all its trades.

The reason is worth holding onto, because it is the irony the rest of the story turns on. Onions trade well because they are violently volatile. Demand is inelastic — households buy about the same quantity of onions whether they are cheap or dear — production is concentrated in a few growing regions exposed to the same weather, and the crop is perishable enough that storage decisions swing supply hard. Small shifts in the harvest produce enormous moves in price. That is precisely the condition under which growers and shippers most need a hedge. The contract existed to tame the volatility. The volatility is also what eventually got the contract killed.

The corner

In 1955, a man set out to own every onion in America.

Vincent Kosuga was an onion farmer from Pine Island, New York, and a commodity trader who had already nearly bankrupted himself speculating in wheat. He retreated to onions, a market he actually understood, and partnered with Sam Siegel, a Chicago produce dealer. Late that year the two of them executed one of the cleanest corners in American market history.

They bought onions from Texas, Michigan, California — anywhere they were grown — and warehoused them. By November 1955, Kosuga held about 98 percent of the onion futures open interest on the CME and controlled, by the CFTC's later case record, roughly half the cash onions in Chicago available for delivery against those contracts. The position structure tells the story: hedgers were 93 percent short, speculators 87 percent long. Kosuga sat on the speculator long side. In practice, he was facing the entire hedging community at once.

What he did next is what separates a corner from a con. He ran it in two acts.

In December 1955, holding the deliverable supply, Kosuga and Siegel could have squeezed the shorts immediately. Instead they cut a deal. They paid growers and shippers to keep their onions off the Chicago market and to support the long side — agreeing to make no further deliveries for the rest of the season. They stockpiled some 14 million kilograms in Chicago. The price held.

Then, in March 1956, having quietly built large short positions, they reversed. They dumped the stockpile and released the supply they had paid others to hold back. The detail that makes it fraud rather than mere cornering: they shipped onions out of Chicago, had them repackaged, and railed them back in — manufacturing the appearance of a supply flood. Cash and futures prices collapsed together. A 50-pound bag that fetched USD 2.75 in August 1955 traded for USD 0.10 by March 1956 — less than the cost of the empty bag and the labor to fill it. Growers found it cheaper to dump onions into the Chicago River than to ship them anywhere. Kosuga and Siegel walked away with about USD 8.5 million, roughly USD 100 million in today's dollars.

Notice the asymmetry, because it is the part the headlines missed. Kosuga was long at the top and short at the bottom; he was paid on the way up and on the way down. The farmers were structurally short futures — that was their hedge — and were carried out on the cash collapse with no offsetting gain. Their hedge performed exactly as designed and still destroyed them, because the thing they were hedging against was not weather or demand. It was a manipulated price. No hedge protects you from that.

The law

Outraged growers lobbied Congress and found a vocal champion in a young Michigan congressman named Gerald Ford — yes, that one. The result, signed by Eisenhower in August 1958, was the Onion Futures Act.

Here is the first uncomfortable fact. The Act did not fine Kosuga. It did not jail him. What he had done was not, under the law as it stood in 1955, clearly criminal. Congress could not reach the manipulator, so it abolished the instrument instead. The CME's president called it burning down the barn to find a suspected rat. The rat kept the USD 8.5 million and went home to Pine Island.

A law that punishes a tool because it cannot punish a person is not economic policy. It is a political reflex. Hold that thought; it is the thesis.

The experiment

What makes the onion ban genuinely interesting, rather than merely a good story, is what it created. Economists almost never get a controlled experiment in a price series. The onion handed them one: a long history of a commodity with a futures market, a clean legislative break in 1958, and then a long history of the same commodity without one.

If the textbook claim is right — that speculators and hedgers between them aggregate dispersed information and dampen swings — onion prices should have grown choppier after the ban. If the populist claim is right — that speculation destabilizes — they should have calmed down.

The evidence does not cooperate with either side.

Holbrook Working (1960) studied the introduction of onion futures in the 1940s and found volatility fell — a tidy win for the efficient-market reading. Roger Gray of Stanford (1963) compared the periods on either side of the 1958 ban and reached the same conclusion from the other direction: onion price volatility rose once the futures market was gone. For decades, Gray was the citation everyone reached for — the one this blog reached for in its earlier draft.

It is not the last word. In 1973, USDA economist Aaron C. Johnson ran the numbers again and found that the 1960s — the first full decade with no onion futures at all — showed the least volatile onion prices on record. That is not a footnote. By the Brighthedge standard, that is the falsifier. If the most stable stretch in the entire dataset is the stretch with no futures market, the clean experiment is not clean.

It is not clean because the counterfactual is contaminated by everything else that moves an onion — weather, storage technology, the concentration of production, transport costs. Those forces are first-order. The presence of a contract is, at most, second-order. The post-2006 record makes the point bluntly: onion prices ran up roughly 400 percent, then collapsed about 96 percent, then rose 300 percent again, all between 2006 and 2008 — with no futures market to credit and none to blame.

The verdict

Strip out the overselling on both sides and the honest read is narrow, and worth stating plainly.

Futures markets probably dampen onion-price volatility somewhat — mostly by handing growers a forward price to plant against and a hedge to carry inventory against. The onion data is consistent with that. It does not prove it, because the counterfactual is too noisy. Anyone who tells you the onion ban cleanly proves futures stabilize prices is overselling; anyone who tells you the quiet 1960s prove the opposite is doing the same thing in the other direction.

But — and this is the move — the policy question does not depend on settling that econometric argument. The Onion Futures Act is bad policy on a ground that has nothing to do with volatility statistics. It banned a tool, permanently, for an entire country, because of what two men did with it once. We did not ban equities after Enron or mortgages after 2008; we regulated the conduct. Congress, unable in 1958 to regulate Kosuga's conduct, regulated the onion.

And the ban endures — sixty-eight years — for the most ordinary reason in political economy. Its cost is spread thin: a few cents and a little extra uncertainty on every onion grower and consumer in the country. The benefit of repeal would land on that same diffuse, unorganized group. Nobody with concentrated stakes is fighting for it, so the periodic repeal petitions go nowhere. When Congress did finally touch the Act, in 2010, it was not to free the onion. It was to add Hollywood box-office receipts to the banned list, because the studios asked. The onion's only company on the forbidden list is not a commodity at all. It is a lobbying outcome.

Markets are full of claims that cannot be tested, because the counterfactual is unobservable. The onion is the rare exception — the one commodity where the futures market was switched off and left off, with the lights on, for everyone to watch. Seventy years of watching has not told us that futures stabilize prices, and it has not told us that they don't. It has told us that even when the experiment is handed to us, the data is murkier than either camp will admit, and the law outlives the argument regardless.

Research is only useful when it is willing to be wrong in public. In 1958 Congress ran an experiment, got an ambiguous result, and never updated. The onion is still waiting.