Onion Futures Act facts for kids

The Onion Futures Act is a United States law that stops people from trading special agreements called "futures contracts" for onions. It also bans trading these contracts for "motion picture box office receipts," which means how much money movies make.

This law came about because of two onion traders, Sam Siegel and Vincent Kosuga, in 1955. They tried to control the entire onion market on the Chicago Mercantile Exchange. Their actions caused big problems, and because of this, 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 list of banned contracts. This change happened because the Motion Picture Association of America asked for it.

A Tricky Tale: The Onion Futures Act

How Onion Trading Began

Trading onion futures started at the Chicago Mercantile Exchange in the mid-1940s. The exchange was looking for new ways to make money after butter futures trading stopped. By the mid-1950s, onion futures were the most popular product traded there. In 1955, they made up 20% of all trades.

The Great Onion Market Trick

In the fall of 1955, Sam Siegel and Vincent Kosuga bought a huge amount of onions and onion futures. They ended up controlling 98% of all the onions available in Chicago. Millions of pounds (thousands of tonnes) of onions were sent to Chicago because of their purchases. By late 1955, they had stored about 30 million pounds of onions in Chicago.

Then, they changed their plan. They told onion farmers to buy their onions. They threatened to flood the market with onions if the farmers didn't buy. Siegel and Kosuga promised the farmers they would hold onto the rest of their onions to keep prices high.

As the farmers started buying, Siegel and Kosuga secretly made bets that onion prices would fall. This is called taking "short positions." They also had their stored onions cleaned because they were starting to spoil. They shipped them out of Chicago, cleaned them, and then sent them back. These "new" shipments made other traders think there were too many onions. This pushed onion prices down even more in Chicago.

By March 1956, Siegel and Kosuga had flooded the markets with their onions. The price of a 50-pound bag of onions dropped to just 10 cents. In August 1955, that same bag cost $2.75! So many onions were sent to Chicago that other parts of the United States had onion shortages.

Siegel and Kosuga made millions of dollars from their bets that prices would drop. At one point, 50 pounds of onions sold for less than the bag they came in. This caused many onion farmers to go bankrupt. Farmers were left with huge amounts of worthless onions. Many even had to pay to get rid of the onions they had grown and bought.

Why the Government Stepped In

After the onion market crashed, many people said Kosuga's actions were unfair gambling. The sudden price changes caught the attention of the Commodity Exchange Authority. They started an investigation. The U.S. Senate Committee on Agriculture and House Committee on Agriculture held special meetings to discuss the issue.

During these meetings, the Commodity Exchange Authority explained that onions spoil easily. This made them very sensitive to big price changes. Then-congressman Gerald Ford from Michigan suggested a new law. It was called the Onion Futures Act, and it would ban futures trading in onions.

Not all traders liked the idea. Some argued that onion shortages weren't a big deal. They said onions were just a side dish, not a main food. The president of the Chicago Mercantile Exchange, E. B. Harris, strongly argued against the bill. He called it "burning down the barn to find a suspected rat." However, the law was passed. President Dwight D. Eisenhower signed the bill in August 1958. This meant onions were no longer considered a "commodity" that could be traded in futures.

What Happened Next: The Act's Impact

The Chicago Mercantile Exchange Changes Course

After the ban, the Chicago Mercantile Exchange sued the government. They said the ban unfairly stopped trade. But a federal judge ruled against them. The exchange decided not to appeal to the Supreme Court, so the ban stayed.

Losing such a profitable product was very hard for the Chicago Mercantile Exchange. Other products they traded, like eggs, turkeys, and potatoes, weren't enough to support the exchange. This led to new leaders taking over. They came up with a different plan. They started trading futures contracts for new products like pork bellies (which is bacon before it's sliced) and frozen concentrated orange juice. These new products became very popular. They helped the Chicago Mercantile Exchange become successful again.

Did Onion Prices Become More Stable?

The ban gave experts a special chance to study what happens when a futures market is removed. They wanted to see if it made commodity prices more stable. Experts have had different ideas about whether the ban helped or hurt onion price stability.

In 1960, a study by Holbrook Working suggested that onion prices became less wild after futures trading started in the 1940s. He used this to support the idea that markets are "efficient." In 1963, another study by Roger Gray, an expert in farm futures, agreed. He found that onion prices became more unstable after the Onion Futures Act was passed.

However, in 1973, Aaron C. Johnson published a study that disagreed with Gray. He found that onion price changes in the 1960s were the smallest ever recorded. Financial writer Justin Fox pointed out that even if prices were more stable in the 1960s, it could have been due to better weather or new ways to transport onions. He said, "There was certainly no clear evidence from the onion fields to support the presumption that speculative markets got prices right."

In the 2000s, onion prices were much more unpredictable than corn or oil prices. Because of this, the son of a farmer who first wanted the ban now thinks onion futures trading should come back.