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Onion Futures
There are none.
The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.
And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings.
Amazing, onion farmers and Congress panic in 1958 with the Senate Committee arguing that
...speculative activity in the futures markets causes such severe and unwarranted fluctuations in the price of cash onions…[that a] complete prohibition of onion futures trading [is necessary] in order to assure the orderly flow of onions in interstate commerce...
and for going on fifty years onion futures are banned. Makes me want to cry.
More here on the banning of futures markets . (A report from 1956 indicates that the fluctuations at that time were due to an attempted swindle.)
Hat tip to Newmark's Door
Posted by Alex Tabarrok on July 8, 2008 at 07:14 AM in Economics | Permalink
Comments
oh yeah!! go congress.
Posted by: sa at Jul 8, 2008 7:48:58 AM
Is there a future for onion futures, assuming the law was repealed? Are there carrot and turnip and radish futures, and where do they trade?
Posted by: at Jul 8, 2008 7:55:20 AM
One of the reasons commodities are commodities is that they are storable. Tomatoes and bananas are perishable. Grain, oil, and minerals are storable. Onions and root vegetables might not be storable for long enough to allow for an effective futures market.
Also, the American law wouldn't stop India from creating a futures market for onions. They eat more onions per captita than the US and onions represent a more significant cost than for them.
Posted by: MostlyAPragmatist at Jul 8, 2008 8:12:41 AM
"Is there a future for onion futures, assuming the law was repealed?"
I'll take a side bet on that.
QED.
Posted by: Monte Davis at Jul 8, 2008 8:20:25 AM
See also today's FT, p.11, which cites a study showing that volatility increased, following the passage of the Onion Futures Act. By the way, the price of onions is up 420 percent since 2000. Here is the link: http://www.ft.com/cms/s/0/45da56b6-4c89-11dd-96bb-000077b07658.html
Posted by: Tyler Cowen at Jul 8, 2008 8:21:08 AM
And yet, amazingly, even without a futures market, onions are widely available at reasonable price throughout North America, and have been for decades, leaving aside the normal problems besetting any agricultural commodity.
Almost makes one wonder whether a futures market as such is actually a requirement for ensuring an adequate supply of a commodity at a reasonable price without people not actually involved in farming, distribution, or retailing being able to profit from their non-productive activity.
But maybe, soon, we will hear more from concerned sources how a futures market in onions will solve America's onion crisis - a crisis of 'price volatility.' Which has nothing to do with weather leading to reduced harvests, or overproduction to take temporary advantage of higher prices. Oh no, the problem is 'volatility.'
Wait until people realize that the major problem with oil is there is less of it in the pipeline - nothing like real production figures to paint that picture (Mexico being recently in the news). Then I am sure that a futures market will do wonders to reduce 'volatility.' Won't actually put any oil in the pipeline, but just like with onions, the problems are of the theoretical variety, and not those based on quantifiable reality.
'Imagine we had a market,
it's easy if you try,
and imagine we were pumping
100 millions barrel a day,
it's easy if you try...'
The 'market' is about to collide with something that doesn't reside in human imagination, and the results will not be swayed by imagining them.
But hey, in the meantime, let's talk about onions - it is almost enough to bring a tear to some peoples' eye.
Posted by: rent_to_own at Jul 8, 2008 8:24:15 AM
'By the way, the price of onions is up 420 percent since 2000.'
And the price of crude oil? Let's just say, using this link, http://www.economagic.com/em-cgi/data.exe/var/west-texas-crude-long , that the price of onions (sans futures market) has risen in decently approximate lockstep with the price of WTI crude (with futures market).
Amazing. You would almost think that the price of fuel and fertilizer just might have something to do with food production and the prices paid by customers.
No, of course not, it is just a coincidence.
Posted by: at Jul 8, 2008 8:31:02 AM
"By the way, the price of onions is up 420 percent since 2000."
Please see this article (and graph) on rice, which is a slightly more important commodity in the world diet:
http://seekingalpha.com/article/72187-dipping-into-the-rice-price-rise
"Since 2002, prices for rough rice have skyrocketed, rising 75% alone in the last year. One year ago, rough rice traded at $10 on CBOT. As of April 2, however, prices for the May 2008 contracts had nearly doubled, closing at $19.79."
Posted by: meter at Jul 8, 2008 9:26:39 AM
Since oil prices has gone up, you're not allowed to talk about onions and bad laws. Bad Tyler!
Posted by: Hei Lun Chan at Jul 8, 2008 10:01:25 AM
"and for going on fifty years onion futures are banned. Makes me want to cry."
Alex Tabbarok never harmed an onion. So why do they make him cry?
See: http://www.youtube.com/watch?v=xYA-zVxS6hw
Posted by: Mike Moffatt at Jul 8, 2008 10:06:42 AM
And by Alex Tabbarok, I meant Alex Tabarrok.
Posted by: Mike Moffatt at Jul 8, 2008 10:08:58 AM
I love these two bit libertarian posts... The administration is incinerating $15B per month in Iraq and we hear about onion futures. You stay relevant, Tabarrok.
Posted by: Eric M at Jul 8, 2008 11:06:16 AM
Onions and root vegetables might not be storable for long enough to allow for an effective futures market.
Electricity is not stored in significant quantities at all, and it has an effective futures market, running out over a year. (You can do some things with batteries and pumped storage but in every country I know of these have trivial capacity compared to daily electricity demand, let alone annual demand).
Posted by: Tracy W at Jul 8, 2008 11:11:41 AM
Almost makes one wonder whether a futures market as such is actually a requirement for ensuring an adequate supply of a commodity at a reasonable price without people not actually involved in farming, distribution, or retailing being able to profit from their non-productive activity.
The argument is that futures markets reduce the volatility of prices paid by farmers, distributors, and retailers, not that a futures market is necessary for the good to be supplied at all.
And speculators are performing a productive activity. There are two roles - firstly they provide an onion farmer the opportunity to reduce the farmer's price uncertainty. Secondly, they create information about likely future demand for onions. They're no more unproductive than insurers or weather forecasters.
Wait until people realize that the major problem with oil is there is less of it in the pipeline - nothing like real production figures to paint that picture (Mexico being recently in the news). Then I am sure that a futures market will do wonders to reduce 'volatility.'
While I suspect, based on the rest of your comment, that you intend this to be read sarcastically, the statement is actually right if read literally. A futures market will indeed do wonders to reduce volatility if we are running out of oil.
Imagine there is an international government department devoted to managing demand for oil. Furthermore, imagine that this government department is wise and benevolent, and motivated entirely by the public good. The government department notices that the supply of oil is running out. There are two logical things that our benevolent government department should do to smooth the adjustment to a world of low oil prices. Firstly, it should reduce demand now, so people get used to doing with less and are not faced with an abrupt shift in demand when suddenly oil supply collapses. Secondly, it should signal that more investment is needed in alternatives to oil.
Now, let's take the future market's response to a forthcoming shortage of oil. If there is less oil in the pipeline then futures prices should rise (either because this information is publicly-known by oil traders or due to insider trading). Therefore anyone looking to purchase oil on long-term future contracts (such as a shipping company or a power station that burns oil) has an incentive to reduce their demand for oil and look for alternatives. Furthermore, anyone with oil to hand nowadays has an incentive to store it and sell it in the future on a high-priced future contract. Therefore the same results are achieved as if oil demand was managed by a wise benevolent international government department. The adjustment process to less oil is smoothed and investment in alternatives is increased.
Running out of oil is exactly the situation in which you want a futures market. If we could be assured of a steady supply of oil into the future, futures markets would be rather less useful than they are in the real world we actually live in.
Posted by: Tracy W at Jul 8, 2008 11:27:57 AM
Almost makes one wonder whether a futures market as such is actually a requirement for ensuring an adequate supply of a commodity at a reasonable price without people not actually involved in farming, distribution, or retailing being able to profit from their non-productive activity.
The argument is that futures markets reduce the volatility of prices paid by farmers, distributors, and retailers, not that a futures market is necessary for the good to be supplied at all.
And speculators are performing a productive activity. There are two roles - firstly they provide an onion farmer the opportunity to reduce the farmer's price uncertainty. Secondly, they create information about likely future demand for onions. They're no more unproductive than insurers or weather forecasters.
Wait until people realize that the major problem with oil is there is less of it in the pipeline - nothing like real production figures to paint that picture (Mexico being recently in the news). Then I am sure that a futures market will do wonders to reduce 'volatility.'
While I suspect, based on the rest of your comment, that you intend this to be read sarcastically, the statement is actually right if read literally. A futures market will indeed do wonders to reduce volatility if we are running out of oil.
Imagine there is an international government department devoted to managing demand for oil. Furthermore, imagine that this government department is wise and benevolent, and motivated entirely by the public good. The government department notices that the supply of oil is running out. There are two logical things that our benevolent government department should do to smooth the adjustment to a world of low oil prices. Firstly, it should reduce demand now, so people get used to doing with less and are not faced with an abrupt shift in demand when suddenly oil supply collapses. Secondly, it should signal that more investment is needed in alternatives to oil.
Now, let's take the future market's response to a forthcoming shortage of oil. If there is less oil in the pipeline then futures prices should rise (either because this information is publicly-known by oil traders or due to insider trading). Therefore anyone looking to purchase oil on long-term future contracts (such as a shipping company or a power station that burns oil) has an incentive to reduce their demand for oil and look for alternatives. Furthermore, anyone with oil to hand nowadays has an incentive to store it and sell it in the future on a high-priced future contract. Therefore the same results are achieved as if oil demand was managed by a wise benevolent international government department. The adjustment process to less oil is smoothed and investment in alternatives is increased.
Running out of oil is exactly the situation in which you want a futures market. If we could be assured of a steady supply of oil into the future, futures markets would be rather less useful than they are in the real world we actually live in.
Posted by: Tracy W at Jul 8, 2008 11:30:05 AM
Great post, Alex! And great comments, Tracy W--the sarcasm was too think for me to wade in. Glad you took one for the team.
Posted by: Bob Murphy at Jul 8, 2008 12:22:17 PM
"Makes me want to cry."
Joke intended?
Posted by: RZ at Jul 8, 2008 6:20:24 PM
I love these two bit libertarian posts... The administration is incinerating $15B per month in Iraq and we hear about onion futures. You stay relevant, Tabarrok.
There are plenty of libertarian criticisms of the Iraq War, such as those at www.antiwar.com. In case you hadn't noticed, this blog is mostly about economics and related matters.
Blogging about the consequences of a statist piece of legislation sponsored by a future GOoPer president might be more relevant than you think to understanding why another GOoPer president would launch an assault on a sovereign country 45 years later.
Or maybe you think domestic statism has nothing to do with statism in foreign policy? If you think this, you're ignorant of more than libertarianism.
Posted by: Bill Stepp at Jul 8, 2008 10:13:52 PM
Eric M: you fail to understand, and because of that, you fail to understand. Economic understanding would have kept us out of the Iraq war, and every bit of economic education works towards understanding. You refuse to be educated, and so you refuse to understand.
Posted by: Russell Nelson at Jul 9, 2008 2:11:40 AM
This is a comical post.
I am close to uniquely in a position to be able launch an onion futures contract - if they were legal. Let's just say onion futures are not one of my top choices for potential new futures contracts even if they were legal. There are far more serious issues in the financial world that could be addressed with futures style products than onions, for example...well, I can't go there.
"A futures market will indeed do wonders to reduce volatility if we are running out of oil. "
While this is mostly true - like 99% of the time true, I suspect that in some situations it is not true. With commodities, there always exists the possibility that there will be a breakage of the link between the cash price and futures price. If this link is suspect, the futures may not perform volatility reduction.
As proof of the volatility reduction abilities of futures markets, look at long term commodity volatility vs. long term individual stock volatility. Individual stock volatility is much, much higher.
Posted by: mickslam at Jul 9, 2008 8:59:44 AM
Insulin and blood-bank futures and swaps.
Any takers?
We need liquidity to make sure the likes of Wilford Brimley aren't pulling any fast ones over on innocents like Pfizer.
From then on, its just supply and demand, baby.
I can see it now: "Sorry, Gus...we just can't make your insuling fast enough. Actually, we can, but we just don't want to. Supply and Demand. Just like the Nymex shows, ya know? Maybe next time, just be sure not to pour sugar on your oaties."
Posted by: AlCoholic at Jul 9, 2008 5:36:45 PM
A futures market will indeed do wonders to reduce volatility if we are running out of oil. "
While this is mostly true - like 99% of the time true, I suspect that in some situations it is not true.
Can you be more specific about the situations in which you expect it might not be true? You talk about the link between cash prices and futures prices breaking - what do you mean by breaking? Spot electricity prices can be massively different from future electricity prices due to the difficulties with storing electricity. For example if there is an unexpected plant outage at a time of high demand spot electricity prices can surge to over $1000/MWh, while forward prices remain steady at say $70/MWh, if the plant outage is expected to be a short-term problem. Is this what you mean by breaking the linkage?
Posted by: Tracy W at Jul 10, 2008 6:22:02 AM
Ill call this a good thing regardless of whether futures markets control price fluctuations- what we've been given here, accidentally of course, is a control case. One where (unless one is an onion farmer or prodigious consumer of onions) some additional variability in the price isn't a big cost for society to pay.
Posted by: Carleton Wu at Jul 12, 2008 1:43:11 AM
Secondly, they create information about likely future demand for onions.
The futures are horrible at predicting the future. Where was the July 08 crude contract 12 months ago?
In the 70s.
Posted by: Ron at Jul 23, 2008 1:47:00 PM
The futures are horrible at predicting the future. Where was the July 08 crude contract 12 months ago?
In the 70s.
So I assume you're now a billionaire because you're better at predicting the price of oil than the futures market?
Here's a hint on how to respond that doesn't make you sound like you know nothing:
"the market can stay irrational longer than you can stay solvent"
Which is at least true, in contrast to "eh, markets are horrible at predicting prices". That's just dumb.
Posted by: Steve Johnson at Jul 25, 2008 4:44:15 PM
