Futures instruments are far ranging, from wheat, coffee and cocoa, to gold, oil, and market indices. However, there is one futures commodity you won’t be able to add to your watch list: onions.
Here is the tale of how onion futures came to be banned by US Federal law.
In the 1950s, onion futures comprised one fifth of the commodities market within the Chicago Mercantile Exchange. Due to the perishable nature of onions, which are harvested just a few times per year, there were dramatic daily fluctuations in price. In 1955, a pair of traders discovered an opportunity to exploit this vulnerability.
Vincent Kosuga came from a farming background, and Sam Siegel worked with cold-storage and distribution facilities outside of Chicago. Kosuga recruited the help of Siegel in autumn of 1955, and they began buying up onion futures contracts, as well as literally tons of onions. Shortly thereafter, they were in control of nearly the entire Chicago onion market. As a result, millions of pounds of onions were shipped to Chicago to accommodate these acquisitions. In total, they amassed 30 million pounds (15 thousand tons) of onions by late 1955, which inflated the price dramatically.
Next, Kosuga and Siegel shifted their strategy, persuading onion farmers to buy these onions back. They threatened to release their stockpile back into the market. Double-crossing the onion farmers, the two traders started selling their hoarded onions back into the general market. This caused a huge spike in supply, rapidly driving down the price of onions. As the onion farmers and producers started repurchasing the onions, Siegel and Kosuga took large short positions of onion futures contracts. The result was a devastating drop in price – from $2.75 a bag in August 1955, to 10 cents a bag in March 1956. With such a mass surplus of worthless produce, many carts were dumped into the Chicago River and Lake Michigan.
Because of their short position on onions, Kosuga and Siegel emerged as millionaires from their manipulation scheme. The onion futures market was decimated. The situation was catastrophic for onion farmers and producers, who decided to take legal action. They reached out to Congress for help.
A congressman from Michigan by the familiar name of Gerald Ford stepped in, sponsoring a bill which outlawed trading onion futures. Despite the resistance of the commodities lobby, President Eisenhower signed the Onion Futures Act into law in 1958, effectively banning the trading of onion futures. Onion futures trading has been forbidden by law ever since.
An investigation into the matter concluded that both Kosuga and Siegel were guilty of price rigging. Both men were banned from trading for ten months, and Kosuga lost his ability to operate as a pit broker. However, they were both able to keep their profits from the conspiracy, and Kosuga later opened a restaurant called The Jolly Onion Inn.
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