One Commodity with No Futures

Which futures contracts are investors banned from trading? Well, some of you may know that the answer is future contracts of onions. The Chicago Mercantile Exchange, which was established as the Chicago Butter and Egg Board, started onion futures trading in 1942 to recover losses of its terminated butter futures.

Vincent Kosuga
Vincent Kosuga

In 1955, Vincent Kosuga, an onion farmer and commodity trader in upstate New York, determined to possess every onion in the US. He stored onions from Texas, Michigan, California, and around the country on his farm in a conveyor. Mr. Kosuga desired to obtain all the onions, even the onion seedlings. He was a commodities trader and bought (long) 98 percent of the available onion futures contracts in the Chicago Mercantile Exchange. Ironically, Chicago name has a history related to the onion. In November 1955, Mr. Kosuga held about 50 percent of the cash supply in Chicago available for delivery in the future. He intended to cause increases in the prices of future and cash onions. Hedgers’ positions were 93 percent short and 7 percent long, whereas speculators’ positions were 87 percent long and 13 percent short. The aggregate positions of speculators and hedgers were about equal, so that hedgers stood opposite speculators.

In December 1955, Mr. Kosuga and his onion trader friend, Sam Siegel, stockpiled 30 million pounds (14 million kg) of onions in Chicago. They agreed with growers and shippers of onions to make no deliveries on the Chicago Mercantile Exchange during the remainder of the onion season of any part of the remaining onions which they held across the country. Messrs. Kosuga and Siegel paid the grower-shippers to support the long-side of the market temporarily. In March 1956, they tricked onion growers and shippers across the country. They sold large quantities of onion futures and structured significant short positions in the future. Also, they shipped onions outside of Chicago for repackaging and re-shipped them back to Chicago. These shipments resulted in decreases in future prices and cash prices. According to the Time article of 1956, 50 pounds bag of onion was priced at USD 2.75 in August 1955 and declined to USD 0.10 by March 1956. Onions were dumped into the Chicago River. Onion farmers were ravaged with worthless crops. Mr. Kosuga made USD 8.5 million, which is approximately USD 80 million today after inflation adjustments.

In 1958, the US Congress passed Public Law 85-839, known as Onion Futures Act, which banned onion futures trading on any exchange.

Messrs. Kosuga and Siegel sold large quantities of onion futures and structured large short positions in the future. Also, they shipped onions outside of Chicago for repackaging and re-shipped them back to Chicago.

Variations Onions vs S&P500 as of Dec2010
Source:brighthedge.com
Variations Onions vs Corn vs Crude Oil as of Dec2010
Source: brighthedge.com

Cash onion prices remained highly volatile. Stanford professor Roger Gray researched the historical onion prices before and after the ban and indicated the benefit of the futures market price stabilization in 1963. After more than 60 years of outlawing futures trading in onions, the extreme variations of onion prices reveal that the detriment effect is on producers and consumers, which still confirms Mr. Gray’s findings. The onion producers do not efficiently project their crops, and customers pay unstable amounts without a futures market. 

Disclosure: I do not have any of the securities mentioned above. This article expresses my own views, and I wrote the article by myself. I am not receiving compensation for it. I have no business relationship with any company whose security is mentioned in this article.

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Covers investment, financial analysis and related financial market issues for BrightHedge. He has extensive experience in portfolio management, business consulting, risk management, and accounting areas.

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The investment information, comments and recommendations contained herein are not subject to investment advice. The comments and recommendations contained herein are based on personal views. These views may not fit your financial situation and your risk and return preferences. For this reason, based only on the information contained herein, investment decisions may not have the appropriate outcome.