Onion Futures Act

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Onion Futures Act
Great Seal of the United States (obverse).svg
Long titleAn act to prohibit trading in onion futures on commodity exchanges
Enacted bythe 85th United States Congress
EffectiveAugust 28, 1958
Citations
Public law Pub. L. Tooltip Public Law (United States)  85–839
Statutes at Large 72  Stat.   1013
Codification
U.S.C. sections created 7 U.S.C.   § 13-1
Legislative history
Major amendments
Dodd-Frank Wallstreet Reform and Consumer Protection Act

The Onion Futures Act is a United States law banning the trading of futures contracts on onions as well as "motion picture box office receipts". [1]

Contents

In 1955, two onion traders, Sam Siegel 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. As of January 2024, it remains in effect. [1]

The law was amended in 2010 to add motion picture box office futures to the list of banned futures contracts, in response to lobbying efforts by the Motion Picture Association of America. [2]

History

Onion trading

Onion futures trading began on the Chicago Mercantile Exchange in the mid-1940s as an attempt to replace the income lost when the butter futures contract ceased. [3] By the mid-1950s, onion futures contracts were the most traded product on the Chicago Mercantile Exchange. In 1955, they accounted for 20% of its trades. [4]

Market manipulation

In the fall of 1955, Siegel and Kosuga bought so many onions and onion futures that they controlled 98% of the available onions in Chicago. [5] Millions of pounds (thousands of tonnes) of onions were shipped to Chicago to cover their purchases. By late 1955, they had stored 30 million pounds (14,000 t) of onions in Chicago. [6] 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. [6] Siegel and Kosuga told the growers that they would hold the rest of their inventory in order to support the price of onions. [7]

As the growers began buying onions, Siegel and Kosuga accumulated short positions on a large number of onion contracts. [6] 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, Siegel and Kosuga had flooded the markets with their onions and driven the price of 50 pounds (23 kg) of onions down to 10 cents a bag. [6] In August 1955, the same quantity of onions had been priced at $2.75 a bag. [7] So many onions were shipped to Chicago in order to depress prices that there were onion shortages in other parts of the United States. [8]

Siegel and Kosuga made millions of dollars on the transaction due to their short position on onion futures. [5] At one point, however, 50 pounds (23 kg) of onions were selling in Chicago for less than the bags that held them (effectively, for a negative price). This drove many onion farmers into bankruptcy. [5] A public outcry ensued among onion farmers who were left with large amounts of worthless inventory. [9] Many of the farmers had to pay to dispose of the large amounts of onions that they had purchased and grown. [10]

Regulatory action

In the aftermath of the crash, many commentators characterized Kosuga's actions as unprincipled gambling. [10] The abrupt change in prices gained the attention of the Commodity Exchange Authority. [7] 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 onions which made them vulnerable to price swings. [8] Then-congressman Gerald Ford of Michigan sponsored a bill, known as the Onion Futures Act, which banned futures trading in 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". [10] The measure was passed, however, and President Dwight D. Eisenhower signed the bill in August 1958. [10] Thus, onions were excluded from the definition of "commodity" in the Commodity Exchange Act. [11]

Impact

Effect on the Chicago Mercantile Exchange

After the ban was enacted, the Chicago Mercantile Exchange filed a lawsuit in federal court alleging that the ban unfairly restricted trade. [12] After a federal judge ruled against them, they declined to appeal to the Supreme Court and the ban stood. [13]

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. [13] 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. [4] [14] These proved to be popular products and eventually restored lost popularity to the Chicago Mercantile Exchange. [15]

Effect on price volatility

The ban has provided academics with a unique opportunity to study the effect of an active futures market on commodity prices. Experts have been divided on the effect that onion futures trading has on the volatility of onion prices.[ citation needed ]

Holbrook Working published a study in 1960 which argued that price volatility declined after the futures market for onions was introduced in the 1940s. [16] Working cited this study as proof of the efficient-market hypothesis. [3] 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. [17]

Aaron C. Johnson published a study in 1973 that contradicted Gray's findings. He found that onion price volatility in the 1960s was the lowest of any decade on record. [18] Financial journalist Justin Fox noted that even though onion prices in the 1960s might 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." [3]

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. [19]

See also

Related Research Articles

<span class="mw-page-title-main">Commodity market</span> Physical or virtual transactions of buying and selling involving raw or primary commodities

A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.

<span class="mw-page-title-main">Speculation</span> Engaging in risky financial transactions

In finance, speculation is the purchase of an asset with the hope that it will become more valuable shortly. It can also refer to short sales in which the speculator hopes for a decline in value.

In finance, a futures contract is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset transacted is usually a commodity or financial instrument. The predetermined price of the contract is known as the forward price or delivery price. The specified time in the future when delivery and payment occur is known as the delivery date. Because it derives its value from the value of the underlying asset, a futures contract is a derivative.

A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. Futures exchanges provide physical or electronic trading venues, details of standardized contracts, market and price data, clearing houses, exchange self-regulations, margin mechanisms, settlement procedures, delivery times, delivery procedures and other services to foster trading in futures contracts. Futures exchanges can be organized as non-profit member-owned organizations or as for-profit organizations. Futures exchanges can be integrated under the same brand name or organization with other types of exchanges, such as stock markets, options markets, and bond markets. Non-profit member-owned futures exchanges benefit their members, who earn commissions and revenue acting as brokers or market makers. For-profit futures exchanges earn most of their revenue from trading and clearing fees.

<span class="mw-page-title-main">Chicago Mercantile Exchange</span> Financial and commodity derivative exchange

The Chicago Mercantile Exchange (CME) is a global derivatives marketplace based in Chicago and located at 20 S. Wacker Drive. The CME was founded in 1898 as the Chicago Butter and Egg Board, an agricultural commodities exchange. For most of its history, the exchange was in the then common form of a non-profit organization, owned by members of the exchange. The Merc demutualized in November 2000, went public in December 2002, and merged with the Chicago Board of Trade in July 2007 to become a designated contract market of the CME Group Inc., which operates both markets. The chairman and chief executive officer of CME Group is Terrence A. Duffy, Bryan Durkin is president. On August 18, 2008, shareholders approved a merger with the New York Mercantile Exchange (NYMEX) and COMEX. CME, CBOT, NYMEX, and COMEX are now markets owned by CME Group. After the merger, the value of the CME quadrupled in a two-year span, with a market cap of over $25 billion.

<span class="mw-page-title-main">Chicago Board of Trade</span> Options and futures exchange in Chicago

The Chicago Board of Trade (CBOT), established on April 3, 1848, is one of the world's oldest futures and options exchanges. On July 12, 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form CME Group. CBOT and three other exchanges now operate as designated contract markets (DCM) of the CME Group.

<span class="mw-page-title-main">New York Mercantile Exchange</span> American futures exchange

The New York Mercantile Exchange (NYMEX) is a commodity futures exchange owned and operated by CME Group of Chicago. NYMEX is located at One North End Avenue in Brookfield Place in the Battery Park City section of Manhattan, New York City.

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<span class="mw-page-title-main">West Texas Intermediate</span> Grade of crude oil used as a benchmark in oil pricing

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The Chicago Butter and Egg Board, founded in 1898, was a spin-off entity of the Chicago Produce Exchange. In the year 1919, it was re-organized as the Chicago Mercantile Exchange (CME). Roots of the Chicago Butter and Egg Board are traceable to the 19th century.

<span class="mw-page-title-main">Benchmark (crude oil)</span> Reference price for trading of an oil commodity

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<span class="mw-page-title-main">CME Group</span> American financial derivatives company

CME Group Inc. is a financial services company. Headquartered in Chicago, the company operates financial derivatives exchanges including the Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange, and The Commodity Exchange. The company also owns 27% of S&P Dow Jones Indices. It is the world's largest operator of financial derivatives exchanges. Its exchanges are platforms for trading in agricultural products, currencies, energy, interest rates, metals, futures contracts, options, stock indexes, and cryptocurrencies futures.

Lean Hog is a type of hog (pork) futures contract that can be used to hedge and to speculate on pork prices in the US.

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.

Vincent W. Kosuga was an American onion farmer and commodity trader best known for manipulating the onion futures market. Public outcry over his practices led to the passing of the Onion Futures Act, which banned the trading of futures contracts on onions.

Everette Bagby 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. He was previously the secretary of the Chicago Board of Trade.

Flooding the market is an excess amount of inventory for sale causing an undesired drop in price for the product that can, in extreme cases, make the price go negative or make the products impossible to sell at any price.

<span class="mw-page-title-main">Negative pricing</span> Prices below zero

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References

  1. 1 2 7 U.S.C.   § 13-1
  2. ↑ Finke, Nikki (2010-06-24). "CONGRESS BANS FILM FUTURES TRADING". Deadline. Retrieved 2020-11-16.
  3. 1 2 3 Fox, Justin (July 9, 2008). "What do onion prices tell us about oil prices?". Time . Retrieved 2011-01-03.
  4. 1 2 Greising & Morse 1991 , p. 80
  5. 1 2 3 Lambert 2010 , p. 42
  6. 1 2 3 4 Greising & Morse 1991 , p. 81
  7. 1 2 3 Time Staff (July 2, 1956). "COMMODITIES: Odorous Onions". Time . Archived from the original on June 16, 2007. Retrieved 2011-01-02.
  8. 1 2 Markham 2002 , p. 324
  9. ↑ Greising & Morse 1991 , p. 82
  10. 1 2 3 4 Lambert 2010 , p. 43
  11. ↑ "7 U.S. Code § 1a - Definitions". LII / Legal Information Institute.
  12. ↑ Chicago Mercantile Exch. v. Tieken, 178F. Supp.779 (N.D. Ill.1959).
  13. 1 2 Lambert 2010 , p. 44
  14. ↑ Lambert 2010 , p. 48
  15. ↑ Lambert 2010 , p. 53
  16. ↑ Working, Holbrook (1960-02). "Price Effects of Futures Trading." Reprinted from Food Research Institute Studies, Vol. 1, No. 1, February 1960, in Selected Writings of Holbrook Working, Anne E. Peck, ed., Chicago Board of Trade, 1977. pp. 45–71.
  17. ↑ "Onion Revisited." Gray, Roger. Journal of Farm Economics,. Vol. 45, No. 2, May 1963.
  18. ↑ Johnson, Aaron C. "Effects of Futures Trading on Price Performance in the Cash Onion Market, 1930–1968," (excerpted from USDA, ERS, Technical Bulletin No. 1470, February 1973), in Peck (1977a), pp. 329–336.
  19. ↑ Birger, Jon (June 27, 2008). "What onions teach us about oil prices". Fortune . Retrieved 2016-04-02.

Bibliography

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