The advent of futures markets allowed purchases and sales of various commodities to become standardized, with transaction size and delivery conditions specified so that prices could be determined, and locked in, more quickly and with lower transaction costs. Unfortunately, this market can and has been abused. In 1955, two schemers set about implementing a plan to corner the market for onions in the United States. The structure of the market for onions, and particularly the market for onion futures contracts, made it ripe for manipulation. The ultimate result was the banning of onion futures trading in the United States, the only commodity to be subject to such restrictions to this day.
Futures Markets
Futures markets developed to help farmers, and various other buyers and sellers, cope with the price volatility of agricultural commodities. For geographic reasons, Chicago became a center for commodities trading in the United States. For decades, the market there was largely unregulated. In 1922, the Grain Futures Act set out some restrictions on futures trading. Exchanges like the Chicago Board of Trade may have protested it but the law meant that exchanges must be licensed and licenses had to be obtained on a commodity-by-commodity basis. So, each exchange and product needed government approval. The law also required that exchanges take actions to prevent market manipulation.
Under the law, the Secretary of Agriculture regulated the exchanges. In 1936, further regulation came with the Commodity Exchange Act which extended the reach of regulators to non-grain commodities. During the first half of the 20th century, exchange activities were also interrupted by price controls during both world wars. When prices are set by the government, there is little need for the price discovery mechanism of an exchange. This led to lost income and very lean times for the commodities exchanges in Chicago.
Onions
Onion futures were introduced on the Chicago Mercantile Exchange in 1942. This exchange was the product of a transformation in 1919 of the older Chicago Butter and Egg Board. At the time, the exchange was introducing trading in new commodities not covered by wartime price controls. This was intended to bring life back to an exchange that had become inactive; the CME was quiet during the war years and onions were helping keep the exchange relevant.
Onions saw a decent amount of trading because the price movements could be volatile; the product was perishable and its supply was very weather dependent. Even after the war, onions remained important to the CME; alongside eggs, onions were one of the exchange’s top products. Even in 1955, one-fifth of the exchange’s volume was in onions, making it the most widely traded commodity there. While price controls on other products were removed, trading did not return after the war. For example, even after official price controls for butter were removed, the Dairy Products Marketing Association continued to fix prices. As a result, the exchange continued to languish.
Cornering the Market
It was in this context that two speculators attempted to corner the market for onions in the United States and control prices. They were Sam S. Siegel and Vincent Kosuga. Siegel was an onion trader at the Chicago Mercantile Exchange and also owned a produce company in the city. Vincent Kosuga was a large New York onion grower and dealer who also dabbled in trading. He had earlier lost a lot of money trading in wheat futures. As it happens, Kosuga also owned a large aluminum storage facility, perfect for onions, on his farm.
The pair’s activities were eased by the relatively low volume of onions traded. At this sleepy time for the exchange, onions may have been significant but in the grand scheme of things, it was not a very active market. There were also few traders on the exchange. This made the market easier to control. Further making it easy to corner the market, onions were scarce as a result of a poor harvest in 1955.
Siegel and Kosuga bought large amounts of onions in the second half of the year; they bought one thousand carloads by December, weighing thirty million pounds, and had this stored in Chicago. This was worth about $1.5 million. Kosuga was also taking delivery of large volumes himself. In sum, the pair controlled 98% of the American onion market. This allowed them to set prices very high. Then they began to sell.
At the schemers’ insistence, thirteen onion growers and shippers agreed to buy large amounts from the pair, worth $168,000, fearing that if they sold, it would drive prices for their produce far lower. The growers agreed to make the purchase only if the two traders did not sell after that and committed to support prices. This was a promise they quickly broke. Siegel and Kosuga were only able to offload a minor fraction of their hoard, about 265 carloads, this way. So, they had to keep selling and even sold onion futures short, betting prices would fall, from the end of 1955 and into the first few months of 1956. Prices per fifty-pound bag of onions fell from $2.55 to about $1.02 by early February, when Siegel and Kosuga offloaded over one thousand carloads of onions which were already starting to spoil.
Then, while the pair were moving their stock around, other traders got confused and thought relocations of Siegel and Kosuga’s onions were actually new shipments arriving in Chicago. Thinking that there was vast new supply, traders caused prices to plummet. At around the same time, the pair also flooded the market with onions to lower prices and allow them to cover their short position. Prices reached a low of just ten cents on March 15, 1956.
In all, the pair did manage to sell enough onions at prices high enough to still make a large profit. However, at these low prices, farmers and others were taking delivery of onions simply to keep the bags they came in; the onions were discarded or used as fertilizer. Spoiled onions were dumped into the Chicago River. Recall that this waste was happening after a poor harvest.
Onion Futures Act
Vince Kosuga reportedly made a profit of $8.5 million. However, as a result of this manipulation, he did lose trading privileges on the Chicago Mercantile Exchange. Onion growers protested the activities of Siegel and Kosuga; they faced the prospect of selling future crops at low prices. After being pressured by the pair to offtake their onion hoard, Michigan onion farmer Vergil Baldwin, who also happened to be president of the National Onion Association, presided over a meeting of this association that resolved to have onion futures trading banned.
Responding to the pressure, the U.S. Congress held hearings on the matter. The onion growers’ cause may have been helped by the fact Vergil Baldwin pushed the cause with Michigan representative and future president Gerald Ford who sponsored the bill. The Commodity Exchange Authority had already commenced its regulatory oversight of the onion futures market in 1955 after onions were added to a list of restricted commodities. This agency was a predecessor to the Commodity Futures Trading Commission. Soon after taking over this role, the authority began an investigation into the activities of Siegel and Kosuga, though this only came after the Congressional hearings had already begun.
The result of the scrutiny was the Onion Futures Act of 1958, which banned trading in onion futures. This made onions the only agricultural commodity in which futures trading is outlawed in the United States. The restriction imposed a not-insignificant injury on the Chicago Mercantile Exchange. The exchange was still reliant on egg and onion trading for much of its volume and the egg business was also waning. In the 1960s, trading in bacon would take off and revive the exchange.
Lesson
The banning of trading in onion futures may have been too heavy-handed a response to the activities of a pair of speculators. The response of the onion growers reflects a total dissatisfaction with the market. Its perfectly understandable. Futures markets are supposed to protect businesspeople from price fluctuation. If an opportunity opens up for market manipulation, it may do the opposite. The market for onion futures failed so quickly because it was relatively illiquid, controlled by few traders, and was essentially unregulated. Markets need a set of conditions in order to thrive.
More from the Tontine Coffee-House
Read about wartime controls and regulation of commodity exchanges and a salad oil financing scandal. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Newman, Kara. The Secret Financial Life of Food: From Commodities Markets to Supermarkets. Columbia University Press, 2012.
2. Grinder, Brian, and Dan Cooper. “Hold the Onions, Please! The Short History of Onion Futures.” Financial History, no. 138, July 2021, pp. 7–9.
3. Stassen, John H. “The Commodity Exchange Act in Perspective A Short And Not-So-Reverent History of Futures Trading Legislation In the United States.” Wash. & Lee L. Rev., no. 39, 1982, pp. 825–43.
4. Geiger, Lance. “The Great Onion Scandal.” The History Guy: History Deserves to Be Remembered, 5 Apr. 2024, www.youtube.com.
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