Investor Quiz: What’s the Only Commodity Banned from Futures Trading?

Onions.

No, really.

The Onion Futures Act (7 U.S.C Chapter 1 ยง 13-1) is a United States law banning the trading of futures contracts on onions. In 1955 two onion traders, Sam Seigel 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. It remains in effect as of 2012.

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In the fall of 1955, Seigel and Kosuga bought enough onions and onion futures so that they controlled 98 percent of the available onions in Chicago. Millions of pounds of onions were shipped to Chicago to cover their purchases. By late 1955, they had stored 30,000,000 pounds (14,000,000 kg) of onions in Chicago. 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. Seigel and Kosuga told the growers that they would hold the rest of their inventory in order to support the price of onions.

As the growers began buying onions, Seigel and Kosuga purchased short positions on a large amount of onion contracts. 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, Seigel 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. In August 1955, the same quantity of onions had been priced at $2.75 a bag. So many onions were shipped to Chicago in order to depress prices that there were onion shortages in other parts of the United States.

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

Posted by on April 23rd, 2012 at 9:33 am


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