The
Onion Futures Act (
7 U.S.CTitle 7 of the United States Code outlines the role of agriculture in the United States Code.: Commodity Exchanges: Cotton Standards: Grain Standards: Naval Stores: Importation of Adulterated Seeds: Insecticides and Environmental Pesticide Control: National Laboratory Accreditation: Insect Pests...
Chapter 1
§ 13-1]) is a
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
lawLaw is a system of rules, usually enforced through a set of institutions. It shapes politics, economics and society in numerous ways and serves as a primary social mediator of relations between people. Contract law regulates everything from buying a bus ticket to trading on derivatives markets...
banning the trading of futures contracts on
onionOnion is a term used for many plants in the genus Allium. They are known by the common name "onion" but, used without qualifiers, it usually refers to Allium cepa. Allium cepa is also known as the "garden onion" or "bulb" onion...
s. It was passed on August 28, 1958, and remains in effect .
This law is notable as the first and only ban on the trading of futures contracts of a specific commodity in United States history, and as a unique modern case with which to study the effects of the existence of an active futures market on commodity prices.
The
Onion Futures Act (
7 U.S.CTitle 7 of the United States Code outlines the role of agriculture in the United States Code.: Commodity Exchanges: Cotton Standards: Grain Standards: Naval Stores: Importation of Adulterated Seeds: Insecticides and Environmental Pesticide Control: National Laboratory Accreditation: Insect Pests...
Chapter 1
§ 13-1]) is a
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
lawLaw is a system of rules, usually enforced through a set of institutions. It shapes politics, economics and society in numerous ways and serves as a primary social mediator of relations between people. Contract law regulates everything from buying a bus ticket to trading on derivatives markets...
banning the trading of futures contracts on
onionOnion is a term used for many plants in the genus Allium. They are known by the common name "onion" but, used without qualifiers, it usually refers to Allium cepa. Allium cepa is also known as the "garden onion" or "bulb" onion...
s. It was passed on August 28, 1958, and remains in effect .
This law is notable as the first and only ban on the trading of futures contracts of a specific commodity in United States history, and as a unique modern case with which to study the effects of the existence of an active futures market on commodity prices. In particular, proponents of futures markets often claim that they serve to stabilize otherwise volatile commodity supplies (and thus, prices) by providing a market-driven consensus mechanism for future price estimation. The conclusions drawn in subsequent studies of the effects of the Act upon price volatility have been mixed.
The law was enacted after national protests from onion farmers who accused the futures traders at the
Chicago Mercantile ExchangeThe Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...
of
cornering the marketIn finance, to corner the market is to purchase enough of a particular stock, commodity, or other asset to allow the price to be manipulated, by analogy to the general business jargon where a company described as having "cornered the market" has a very high market share...
for onions, a form of
market manipulationMarket manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency...
that they claimed resulted in absurdly low prices for their crops.
The law was proposed by
RepublicanThe Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the Grand Old Party or the GOP, despite being the younger of the two major parties. In the U.S...
Congressman
Gerald FordGerald Rudolph Ford, Jr. was the 38th President of the United States, serving from 1974 to 1977, and the 40th Vice President of the United States serving from 1973 to 1974...
, who later became the
President of the United StatesThe President of the United States is the head of state and head of government of the United States and is the highest political official in the United States by influence and recognition...
.
http://sec.online.wsj.com/article/SB121547293036933987.html?mod=todays_asia_opinion
Effect on price volatilty
The ban provided academics with a unique opportunity to study the effect of an active futures market on commodity prices.
Holbrook WorkingHolbrook Working , a professor of economics and statistics at Stanford University’s FoodResearch Institute, is known for his contributions on hedging, the theory of futures prices – which anticipated the efficient market hypothesis, an early theory of market maker behavior, and the theory of...
concluded that onion prices had been less volatile during the years when the contract was active than previously.
Roger GrayRoger Winks Gray was the Holbrook Working Professor of Commodity Price Studies professor emeritus at Stanford University. He was a noted expert on agricultural futures markets. He died September 5th, 1996 at the age of 76....
, a
professor emeritusA Professor Emeritus is a full professor who retires in good standing. While technically this is the term for a male and women are known as Professor Emerita, women such as Germaine Greer are known by the masculine title. This title is also given to retired professors who continue to teach and to...
of
economicsEconomics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
at
Stanford UniversityThe Leland Stanford Junior University, commonly referred to as Stanford University or Stanford, is a private research university located in Stanford, California, United States...
and an expert in agricultural futures markets, analyzed the effects of the ban in 1963 and concluded that the existence of a standardized futures contract had reduced volatility in onion prices while they existed compared to after the ban went into effect.
A subsequent 1973 study by Aaron C. Johnson contradicted that result and concluded that onion prices were less volatile throughout the 1960s than when the contract had been traded.