#OCON: Onion Trading Ban Still Stinks
In a speech at OCON 2013, I observed how profit-seeking speculators, particularly futures traders, are the perennial scapegoats for any market move legislators don’t find palatable, such as high fuel or food prices. So if government outlawed futures trading and speculation in commodities altogether, would prices settle into a low, calm, range?
Putting aside the moral argument: that commodities are privately owned, and that an individual or group of individuals has every right to buy or sell as much as they please, the very real fact is that speculative futures market reduce volatility, they don’t create it.
That’s not an assumption on my part, but demonstrated by the hard data surrounding another important commodity: onions, which I referenced in my OCON lecture.
In the late 1950s, farmers blamed dropping onion prices on speculators at the Chicago Mercantile Exchange, where, at the time, an onion contract was actively traded.
In response to complaints from the powerful lobby, Republican Congressman Gerald Ford, who would go on to be our 38th President, pushed through the Onion Futures Act.
So in 1958, the futures trading in onions was banned, because, “speculative activity in the futures market causes such severe and unwarranted fluctuations in the price of cash onions” that “a complete prohibition of union futures trading” was needed “in order to assure the orderly flow of onions in interstate commerce.” Still on the books to this day, it remains the only ban on trading of a specific commodity in United States history.
In the years that followed, numerous studies demonstrated onion prices were actually more volatile after the ban was passed then during the period in which onion futures were traded.
Recent history confirms the pattern. Onion prices climbed 430% from October 2006 through April of 2007, before crashing 92% by October. All commodities were volatile during that period, but onion prices were demonstrably more volatile than corn, wheat or oil, despite the lack of a futures market.
To this day, onion prices are significantly more volatile than oil prices, yet oil is the most heavily speculated on commodity in the world.
With and Without Futures Markets:
It’s a point that was reinforced by none other than Joseph Dial, a commissioner for the Commodities Futures Trading Commission (CFTC), who, in 1997, observed that economists “found more cash market volatility in onion prices before and after the period of futures trading than there was while the onion futures market was operating. In other words, futures markets don’t cause volatility, they respond to and decrease volatility.”
Prices rise and fall based on supply and demand, regardless of whether politicians ban futures trading or not. Outlawing speculation altogether, as was done in the case of onions, wouldn’t eliminate volatility, but exacerbate it. When will Washington learn?