Onions and Futures

Onion prices are quite volatile because of the limited storability of onions. Onion futures trading developed in the 1950's and came under the regulation of the Commodity Exchange Administration (CEA) in 1955.

On August 1, 1955 the futures contract for Golden Globe onions opened at $2.40 for a 50 lb bag. Soon the price was up to $2.75, whereas normally onions traded at about $1 per 50 lb bag. This high price signal drew in an avalance of onions to Chicago. As the onions started arriving the price dropped each day by its 50 cent limit. But it did not drop fast enough to cut off the flow. By the end of the contract period in March the price dropped to 10 cents per 50 lb bag and closed at 15 cents. This was about the price of the bag that held the onions so onions were virtually worthless. They were dumped into Lake Michigan.

Those who were hurt by wide fluctuations in onion prices tended to blame those fluctuations on futures trading. The National Onion Association called for a ban on futures trading in onions. In 1958 a law was enacted in Congress to ban futures trading in onions. It was challenged as unconstitutional but the courts upheld it.

When economists have compared the volatility of onion prices during the period of futures trading with the volatility during the period before futures trading they found that the volatility was higher before futures trading. But when futures trading in onions was banned the volatility did not go up again. So economic theory is generally but not perfectly supported by the experience of the onion market.