Tweet [1]
From today’s Wall Street Journal [2]:
As it happens, though, there’s a useful case-study in
the relationship between futures markets and commodity prices: onions.
Congress might want to brush up on the results of its prior
antispeculation mania before it causes more trouble.
In 1958, Congress officially banned all futures
trading in the fresh onion market. Growers blamed "moneyed interests"
at the Chicago Mercantile Exchange for major price movements, which
could sink so low that the sack would be worth more than the onions
inside, then drive back up during other seasons or even month to month.
Championed by a rookie Republican Congressman named Gerald Ford, the
Onion Futures Act was the first (and only) time that futures trading in
a specific commodity was prohibited, and the law is still on the books.
But even after the nefarious middlemen had been
curbed, cash onion prices remained highly volatile. In a classic 1963
paper, Stanford economics professor Roger Gray examined the historical
behavior of onion prices before and after the ban and showed how the
futures market had actually served to stabilize prices.
The fresh onion market is highly seasonal. This leads
to natural and sometimes large adjustments in prices as the harvest
draws near and existing inventories are updated. Speculators became the
fall guys for these market forces. But in reality, the Chicago futures
exchange made it possible to mitigate the effects of the harvest
surplus and other shifts in supply and demand.
To this day, fresh onion prices still cycle through
extreme peaks and troughs. According to the USDA, the hundredweight
price stood at $10.40 in October 2006 and climbed to $55.20 by April,
as bad weather reduced crop yields. Then it crashed due to
overproduction, falling to $4.22 by October 2007. In April of this
year, it rebounded to $13.30.
Futures trading can’t drive up spot prices because the
value of futures contracts agreed to by sellers expecting prices to
fall must equal the value of contracts agreed to by buyers expecting
prices to rise. Again, it merely offers commodity producers and
consumers the opportunity to lock in the future price of goods, helping
to protect against the risks of future price movements.