Onion Futures Act facts for kids
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| Long title | An act to prohibit trading in onion futures on commodity exchanges |
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| Enacted by | the 85th United States Congress |
| Effective | August 28, 1958 |
| Citations | |
| Public law | Pub.L. 85-839 |
| Statutes at Large | 72 Stat. 1013 |
| Codification | |
| U.S.C. sections created | 7 U.S.C. § 13-1 |
| Legislative history | |
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| Major amendments | |
| Dodd-Frank Wallstreet Reform and Consumer Protection Act | |
The Onion Futures Act is a United States law. It stops people from trading special agreements called "futures contracts" for onions. It also bans these agreements for "motion picture box office receipts," which are like movie ticket sales.
This law came about because of two onion traders, Sam Siegel and Vincent Kosuga. In 1955, they tried to control the entire onion market. Their actions led to big problems. So, the law was passed on August 28, 1958. It is still in effect today.
In 2010, the law was updated. It added movie box office futures to the banned list. This happened because movie companies wanted to prevent similar market issues.
Contents
How the Onion Law Came to Be
Onion Trading Days
Trading onion futures began in the mid-1940s. This happened at the Chicago Mercantile Exchange. They needed new products to trade after butter futures stopped. By the mid-1950s, onion futures were very popular. They made up 20% of all trades there in 1955.
When Traders Took Over the Market
In the fall of 1955, Siegel and Kosuga bought a huge amount of onions. They also bought many onion futures contracts. They ended up controlling 98% of all available onions in Chicago. Millions of pounds of onions were sent to Chicago because of their buying. By late 1955, they had stored about 30 million pounds of onions.
Then, they changed their plan. They told onion farmers to buy onions from them. They threatened to flood the market with onions if farmers didn't buy. Siegel and Kosuga promised to hold onto their own onions. This would help keep prices high.
As farmers started buying, Siegel and Kosuga secretly did something else. They made "short positions" on many onion contracts. This meant they would make money if onion prices fell. They also sent their stored onions away to be cleaned. The onions were starting to spoil. They were then repackaged and sent back to Chicago.
These "new" onion shipments made other traders think there were too many onions. This pushed onion prices down even more. By March 1956, Siegel and Kosuga had flooded the market. The price of a 50-pound bag of onions dropped to just 10 cents. In August 1955, that same bag cost $2.75.
Siegel and Kosuga made millions of dollars. Many onion farmers, however, went bankrupt. They were left with worthless onions. Some farmers even had to pay to get rid of their spoiled onions.
Government Steps In
After the onion market crashed, many people were upset. They saw Kosuga's actions as unfair gambling. The government's Commodity Exchange Authority noticed the sudden price changes. They started an investigation. The U.S. Senate Committee on Agriculture and House Committee on Agriculture held meetings.
During these meetings, experts said onions spoil easily. This made their prices change wildly. Then-congressman Gerald Ford from Michigan suggested a new law. It was called the Onion Futures Act. This law would ban trading onion futures.
Some traders did not like the bill. They argued that onion shortages were not a big deal. Onions were a side dish, not a main food. The president of the Chicago Mercantile Exchange, E. B. Harris, fought hard against the bill. He said it was like "burning down the barn to find a suspected rat." But the law passed anyway. President Dwight D. Eisenhower signed it in August 1958. This meant onions could no longer be traded as a "commodity."
What Happened After the Law?
Changes for the Chicago Mercantile Exchange
After the ban, the Chicago Mercantile Exchange sued the government. They said the ban was unfair. A judge ruled against them. They decided not to appeal to the Supreme Court. So, the ban stayed.
Losing onion trading was a big blow to the Exchange. Other products they traded, like eggs or potatoes, were not enough to keep it going. New leaders took over. They came up with a new plan. They started trading futures for things like pork bellies and frozen orange juice. These new products became very popular. They helped the Chicago Mercantile Exchange become successful again.
How Prices Changed
The ban gave experts a chance to study something unique. They could see how a futures market affects prices. Experts have different ideas about whether onion futures trading made prices more or less stable.
One study in 1960 by Holbrook Working said prices became more stable when onion futures trading started. Another study in 1963 by Roger Gray agreed. He found that onion prices became less stable after the Onion Futures Act passed.
However, a 1973 study by Aaron C. Johnson disagreed. He found that onion prices in the 1960s were the most stable ever. Financial writer Justin Fox noted that other things, like better weather, might have made prices stable. He said there was no clear proof that futures markets always make prices right.
In the 2000s, onion prices changed much more than corn or oil prices. Because of this, the son of a farmer who first wanted the ban now wants onion futures trading to come back.
