Whether you buy onions at the supermarket or a local farm stand, you know the cost of an onion is relatively stable.
You probably also know that the cost of pumping your regular unleaded gas is about $4 a gallon with no ceiling in sight.
Despite a June 27, 2008 story in Fortune Magazine, a July 7 article in the Financial Times, and a July 8 op-ed in the Wall Street Journal, you may not realize the mainstream media missed a crucial element when comparing the volatility of onions to oil: perishability.
Background to the cessation of onion trading
Reacting to speculators causing a volatile onion market in the 1950s, the National Onion Association lobbied freshman Republican Senator Gerald Ford and Democratic Senator Hubert Humphrey to co-sponsor a piece of bipartisan legislation called the Onion Futures Act.
Codified under 7 USC Sec. 13-1, the 1958 law prohibits regulated trading of the bulbous genus Allium, and mandates enforcement to the U.S. Commodity Futures Trading Commission.
Before enacting the law, the U.S. Senate Committee on Agriculture and Forestry stated "that speculative activity in the futures markets causes such severe and unwarranted fluctuations in the price of cash onions...[a] complete prohibition of onion futures trading in order to assure the orderly flow of onions in interstate commerce" was necessary, according to a 2005 research paper by David Jacks, assistant professor of economics at Simon Fraser University.
In other words, according to a then-commentator whom Jacks quoted, "It seems clear that futures trading in onions was prohibited simply because too few members of Congress believed that the onion futures market was, on balance, economically useful."
Speculation does not cause price volatility
"I firmly believe," Fortune senior writer Jon Birger speculated in a companion online video to his printed story, "If there was no futures trading in oil, you would see oil prices much higher today."
Birger is confused.
Citing USDA gains in oil and corn at 100% and 300%, compared to a roller-coaster ride of fluctuation for onions, Birger wrote, "The volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings."
CFTC Commissioner Joseph Dial reinforced this idea in a 1997 speech:
...onion producers prevailed upon Congress to include in the Commodity Exchange Act a prohibition against futures trading in onions. This had the twin effects of killing the onion futures market, which the producers so hated, and giving futures economists a perfect test case.However, the Financial Times spoke to a senior Indian official (as India is also considering an onion trading ban) who responded, "When a commodity is scarce, its price rises, whether it is traded on an exchange or not."
When those economists later studied this case, they 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. Futures markets don't cause volatility; they respond to and decrease volatility.
Who's right: Birger, Dial, or the Indian?
Perishability causes volatility; and bans cause innovation
Vermont Senator Bernie Sanders wants to ban oil speculation to stabilize barrel cost swings.
Sanders doesn't get it.
He should pay attention to Newsweek business producer John Schoen who reminded readers that the oil market is global; and read a July 20 op-ed in The New York Times with the message that the economy, not speculation, "is driving the recent run-up in commodity prices."
Those who say the 1958 ban ought to be lifted and onion trading should commence are forgetting that onions are perishable goods.
"Perishability makes prices inherently volatile," stated University of Houston professor and commodity wonk Craig Pirrong last winter.
Oil, corn, soybeans, wheat, carrots and virtually every other commodity (except potatoes, which were almost banned in the 1960s) are not perishable, yet folks such as FOX Business reporter Brian Sullivan stereotype onions with grains and soybeans in the same sentence.
The perishability of onions "was a key factor in passing the law," said Wayne Mininger of the National Onion Association when I spoke to him yesterday.
Mininger, a 38-year veteran in the onion industry, said the association continues to support the law, adding he does not recall any annual meetings with proposed resolutions to lift the ban.
(On a side note, why the mainstream media failed to speak to the group that lobbied for the 1958 bill and continue to represent the desires of 500+ onion growers and wholesalers is a mystery to me.)
Curiously, one of the association members, Bob Debruyn of Debruyn Produce, a Michigan-based grower and wholesaler, voiced his support of a ban lift in the Fortune story.
...a futures market for onions would make some sense today, even though my father was very much involved in getting rid of it.The Onion Futures Act led to mass reforms and strategic planning at the Chicago Mercantile Exchange and New York Mercantile Exchange, including CME to start trading livestock and meat products (such as the notorious pork bellies) and NYMEX to trade energy futures. Moreover, the foreign exchange board (which trades our favorite subject of oil) was later implemented.
None of this would occur today, presumedly, without an onion ban, say Pirrong and Risk Magazine's Alexander Campbell.
- Julia Child
Among other bloggers who referenced the Fortune, WSJ, and FT stories, check out:
- University of Michigan-Flint economics professor Mark Perry's blog
- Alex Tabbarok at Marginal Revolution
- Don Boudreaux at Cafe Hayek
- Market Based Management
- Byrne Hobart at Byrne's Eye View
Brian Clark at Copyblogger suggests there are two types of writers: those who get the scoop and those who ring a cowbell and amplify the sound around the world wide web.
I tried to do both here. I amplified the sound of onions ringing (pun intended of the WSJ headline) and introduced the idea that you can cry to onions all you want but allowing perishable onion trading would be equivalent to lifting oil speculation because both actions would cause more harm than good.
What do you think?
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