The Great Onion Scandal: How the Onion Futures Ban Impacts Producers and Consumers Today

Did you know that trading onion futures contracts is prohibited for investors? That’s right – out of all the commodities, onions hold a unique position in the world of futures trading. This blog post will explore the fascinating history behind the onion futures ban, its ongoing impact on producers and consumers, and the importance of futures markets for price stabilization.

The Origin of the Onion Futures Ban

The Chicago Mercantile Exchange, known initially as the Chicago Butter and Egg Board began trading onion futures in 1942 to recover from the losses incurred by the discontinued butter futures. The story behind the ban on onion futures trading revolves around Vincent Kosuga, an ambitious onion farmer and commodities trader from upstate New York.

In 1955, Kosuga set out to control the entire US onion market by stockpiling onions from across the country on his farm. He managed to buy 98% of the available onion futures contracts on the Chicago Mercantile Exchange. In collaboration with his friend Sam Siegel, another onion trader, the duo manipulated the market by hoarding 30 million pounds of onions in Chicago and restricting the supply to the market.

The Market Manipulation

In March 1956, Kosuga and Siegel deceived onion growers and shippers by selling massive amounts of onion futures, creating significant short positions. They also shipped onions out of Chicago for repackaging and sent them back, causing both futures and cash prices to plummet. According to a Time article from 1956, a 50-pound bag of onions was priced at $2.75 in August 1955 and dropped to a mere $0.10 by March 1956. Consequently, onions were dumped into the Chicago River, leaving farmers with worthless crops. Kosuga made a staggering $8.5 million profit, which is equivalent to about $80 million today, adjusted for inflation.

The Aftermath and the Onion Futures Act

In response to this market manipulation scandal, the US Congress passed Public Law 85-839 in 1958, known as the Onion Futures Act, banning onion futures trading on any exchange. This law still stands today, making onion futures the only commodity with such a prohibition.

The Impact on Producers and Consumers

Despite the ban, onion prices continue to be highly volatile. In 1963, Stanford professor Roger Gray studied historical onion prices before and after the ban, highlighting the benefits of futures market price stabilization. Over 60 years after the ban, onion prices still experience extreme fluctuations, negatively impacting both producers and consumers.

Without a futures market, onion producers struggle to efficiently project their crops, while customers are forced to pay unstable prices. In conclusion, the Onion Futures Act’s ongoing effects serve as a reminder of the essential role futures markets play in providing stability and predictability in the world of commodities.

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.