What onions teach us about oil prices
Onions have no futures market, yet their recent price volatility makes the
swings in oil and corn look tame.
By Jon Birger, senior writer
Last Updated: June 30, 2008: 11:49 AM EDT
Onions and oil futures
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(Fortune Magazine) -- Before the U.S. Commodity Futures Trading Commission
starts scrutinizing the role that speculators may have played in driving up
fuel and food prices, investigators may want to take a look at price swings in
a commodity not in today's news: onions.
The bulbous root is the only commodity for which futures trading is banned.
Back in 1958, onion growers convinced themselves that futures traders (and not
the new farms sprouting up in Wisconsin) were responsible for falling onion
prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford
to push through a law banning all futures trading in onions. The law still
stands.
And yet even with no traders to blame, the volatility in onion prices makes the
swings in oil and corn look tame, reinforcing academics' belief that futures
trading diminishes extreme price swings. Since 2006, oil prices have risen
100%, and corn is up 300%. But onion prices soared 400% between October 2006
and April 2007, when weather reduced crops, according to the U.S. Department of
Agriculture, only to crash 96% by March 2008 on overproduction and then rebound
300% by this past April.
The volatility has been so extreme that the son of one of the original onion
growers who lobbied Congress for the trading ban now thinks the onion market
would operate more smoothly if a futures contract were in place.
"There probably has been more volatility since the ban," says Bob Debruyn of
Debruyn Produce, a Michigan-based grower and wholesaler. "I would think that a
futures market for onions would make some sense today, even though my father
was very much involved in getting rid of it."
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