Onion Futures Act

Onion trading Onion futures trading began on the Chicago Mercantile Exchange in the mid-1940s as an attempt to replace the income lost when the butter futures contract ceased. Market manipulation In the fall of 1955, Siegel and Kosuga bought so many onions and onion futures that they controlled 99.3% of the available onions in Chicago. Millions of pounds (thousands of metric tons) of onions were shipped to Chicago to cover their purchases. By late 1955, they had stored 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. As the growers began buying onions, Siegel and Kosuga accumulated short positions on a large number of onion contracts. Siegel and Kosuga made millions of dollars on the transaction due to their short position on onion futures. Many of the farmers had to pay to dispose of the large amounts of onions that they had purchased and grown. The abrupt change in prices gained the attention of the Commodity Exchange Authority. ==Impact==

Effect on the Chicago Mercantile Exchange After the ban was enacted, the Chicago Mercantile Exchange filed a lawsuit in the United States District Court for the Northern District of Illinois alleging that the ban unfairly restricted trade. After a federal judge ruled against them, they declined to appeal to the Supreme Court and the ban stood. The loss of a lucrative trading product was devastating to the Chicago Mercantile Exchange. The other products that were traded, including futures contracts on eggs, turkeys, and potatoes, were not large enough to support the exchange. These proved to be popular products and eventually restored lost popularity to the Chicago Mercantile Exchange. Effect on price volatility The ban has provided academics with a unique opportunity to study the effect of an active futures market on commodity prices. Experts have been divided on the effect that onion futures trading has on the volatility of onion prices. Holbrook Working published a study in 1960 which argued that price volatility declined after the futures market for onions was introduced in the 1940s. Working cited this study as proof of the efficient-market hypothesis. In 1963, this theory was lent more support by a study published by Roger Gray. Gray, an expert in agricultural futures markets and professor emeritus of economics at Stanford University, concluded that onion price volatility increased after the Onion Futures Act was passed. Aaron C. Johnson published a study in 1973 that contradicted Gray's findings. He found that onion price volatility in the 1960s was the lowest of any decade on record. Financial journalist Justin Fox noted that even though onion prices in the 1960s might have been more stable due to better weather or advances in transportation methods: "There was certainly no clear evidence from the onion fields to support the presumption that speculative markets got prices right." ==See also==