One of the few vegetables that I have always detested is the lowly bulbous root better known as the onion. I am not sure why, but since as early as I can remember, I have fought hand and tooth resisting having to eat any dishes with onions as an ingredient. Little did I realize there was also a group of onion growers in Michigan that had an even stronger dislike for onion futures speculators.
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."
Commodities futures speculators provide the liquidity that make futures markets viable hedging vehicles. Speculators bid up commodities futures prices or bid them down depending upon underlying fundamentals of supply and demand. Efforts to control commodities prices should be focused on underlying supply and demand driving commodities prices. Speculators will ensure that commodities prices neither rise to high or fall too low.
