Intro
In the US onions are the only commodity that you can't trade futures contracts on – by law. The history of why is an exploration into how, even to this day, you can corner a market, make lots of money, and ruin thousands of lives.
What's a Future ?
A future is a contract to buy or sell an asset at a predetermined price on a specific date. A guaranteed price can be an effective hedge in volatile markets. But contracts can also be traded (before their end-date) & where there's trading there's opportunity.
The Onion Bloom
In the 1940s, when butter trading ceased, the Chicago Mercantile Exchange (formerly Chicago Butter and Egg Board) introduced onion futures. Everybody who was anybody was trading this new financial product – by the 1950s onions accounted for 20% of all trades!
Crowning the Onion King
In 1955, through a herculean effort, Vincent Kosuga secured 98% of US onions, he also bought all the futures contracts. Almost all the onions in existence in that moment and in the future were his. He was the Onion King and he had an evil plan.
The Carefully Layered Plan
Vinny owned essentially all of the supply so by controlling how many onions he sold he could change the price to whatever he wanted. With his new power over the price of onions, the onion king was about to take the market on a wild ride.
Step 1 – Sell Onions
In late 1955, Vinny gathered all the onion buyers & growers in Chicago to announce that he owned all the onions and if they wanted any they would have to pay the price he set. It worked – he started selling millions of onions at inflated prices.
Step 2 – Short Onions
A short is a bet that the price of an asset will go down. Vinny shorted the onions, then proceed to flood the markets with lots of onions. The oversupply sent a $2.45 bag of onions down to just $0.10. He made the equivalent of $83 million on the short.
Onion Revolt
The price shock to the onion market bankrupted many onion farmers & threatened to do the same to the rest – if the Onion King wasn't stopped. Farmers lobbied future president Gerald Ford to introduce the 'Onion Futures Act', banning futures contracts on onions.
King is Dead
In the aftermath, Vinny could no longer sell his onion shorts and the Chicago Mercantile Exchange (CME) lost 20% of its trading. It worked out for CME, after diversifying they're now the largest derivatives market in the world. The farmers were not so lucky.
Onions Make Us Cry
In the US, onion farmers can no longer sell their future crops at a guaranteed price. To this day the onion market is highly volatile. Prices soaring 400% only to crash by 96% is not out of the norm. The onion business is tough.
Cornering the market is manipulation, holding large enough positions gives a level of control over an asset.
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