Onions, Oil, Speculators, Congress

Michael Giberson

From Platts Power Line blog, a discussion of the 1958 law banning of futures trading in onions and suggestions that Congress should contemplate the lessons from that experience before it gets too exciting about clamping down on speculation in energy commodities.

The ban on onion futures trading, introduced by freshman congressman Gerald Ford of Michigan in 1958, was supposed to reduce price volatility in onion markets. It didn’t work.

A short article by Roger Gray in the 1963 Journal of Farm Economics indicated that storage season price volatility was significantly reduced during the years of active onion futures trading, as compared to the years before and after that trading. Related discussion by Holbrook Working in the 1963 Food Research Institute Studies also supports that conclusion.

Much more recently, David Jacks published “Populists versus Theorists: Futures markets and the volatility of prices” in the 2007 Explorations in Economic History. Jacks discusses several cases in which futures markets have been banned, and some cases in which a ban was instituted and then repealed. His main conclusion: “the results presented in this paper strongly suggest that futures markets were associated with—and most likely caused—lower commodity price volatility.”

Not every analysis of volatility and futures trading finds that futures trading always reduces volatility – the wikipedia article on the Onion Futures Act mentions Aaron Johnson’s “Effects of Futures Trading on Price Performance in the Cash Onion Market, 1930-1968” as concluding onion prices were more stable after the ban (I haven’t actually read this study, so can’t vouch one way or the other for it) – but the overwhelming result from many, many analyses of the issue finds that futures markets tend to reduce price volatility.

SEE ALSO: Commentary by Jon Birger, What onions teach us about oil prices, Fortune.

REQUEST: Some references I looked over this morning indicated that an infamous onion futures market manipulation in 1956 fostered political support for the ban, but I haven’t found a good discussion of the episode. If you know of one, put a reference in the comments.

4 thoughts on “Onions, Oil, Speculators, Congress

  1. See Jerry W Markham, Manipulation of Commodity Futures Prices — The Unprosecutable Crime, 8 Yale J on Regulation 281, 318-319 (1991) for a brief discussion of the enforcement actions said to have motivated congress.

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