One of the pleasures of quaerere verum in the groves of academe is what one learns from one’s students. Three weeks ago, in a discussion about farmers and futures, Thomas Blank, a student in my class related that in the US there was no futures market in onions. Neither neglect or laziness was the cause but legislation. I was, of course, gob stopped. What offence could the doughty and flavorful onion have caused to merit such a fate? One can eliminate an explanation based on special features of the onion, otherwise no legislation would be needed. Perhaps, it is a `Murikan thang’. Apparently not. As I learnt from Thomas, in January 2008, the Indian National Commodity and Derivative Exchange decided not to pursue onion futures trading. The exchange’s director observed that the onion is “difficult to store……..’
The prohibition on an Onions futures market, as these things often do, an amusing history. It begins in the 50’s when a futures market in onions existed. Legend has it that a New York onion grower and Chicago distributor of the same, conspired to rig the market to drive onion prices down. So successful were they, that farmers paid dealers to dispose of their stock (negative prices!). The dealers dumped the onions and sold the burlap sacks in which they arrived. Onion farmers in Michigan agitated, congressman Gerald Ford took up the cause and in 1958, public law 85-839 was born.
No contract for the sale of onions for future delivery shall be made on or subject to the rules of any board of trade in the United States.
The prohibition on onion futures brings to mind Alvin Roth‘s paper on repugnance. However, it does not easily fit amongst the variety of examples that he lists. First, trade in onions itself is not repugnant because it is allowed. Bilateral futures contracts with companies like ConAgra are not unusual. So, the type of contract under consideration is not repugnant. The law prohibits a centralized exchange. Why? Once on the books, it is easy to see why there may be no political will to remove it. But, why is it on the books in the first place?
David Jacks suggests that it is an aversion to speculators and middlemen that explains the prohibition. Speculators are seen as information monopolists and thus despised. Jacks notes that amongst those first against the wall come the revolution, speculators would have been high on Lenin’s list. Lincoln, as well, thought that speculators deserved to have their heads shot off (it follows by Beck’s theorem, of course, that Obama is a Leninist).
7 comments
October 19, 2010 at 12:12 pm
Mark Reitblatt
I think you mean Lincoln is a Leninist. I think it’s Beck-axiomatic that Obama is a Leninist.
October 19, 2010 at 2:57 pm
Bob McDonald
Not just onions! Title VII of Dodd Frank says there is no “trading in motion picture box office receipts (or any index, measure, value, or data related to such receipts), and all services, rights, and interests … in which contracts for future delivery are presently or in the future dealt in.”
The trading firm Cantor-Fitzgerald was going to start a movie exchange (futures on box office receipts). They got the go-ahead from the CFTC and Hollywood went ballistic.
I’m sure that Congress was deeply moved by the inherent logic of Hollywood’s position.
By the way, some in the onion industry now wish they could hedge — there was a lot of onion volatility in 2006-2007. Who knew?
October 19, 2010 at 3:21 pm
rvohra
In the case of Hollywood exchange one can see why producers would be against it. The price on the exchange could be used to infer the quality of the movie. With onions, the farmers themselves would have benefited but chose to close trade in futures down.
October 19, 2010 at 4:16 pm
Bob McDonald
Precisely. Maybe a futures market would help them make better decisions about which movies to invest in and market heavily. Just like the stock market.
But that’s exactly the problem I saw with the contract: If Hollywood did pay attention to the futures market, they would alter their production plans and some of the futures investors would lose. For example they might decide not to promote a movie that had a low futures price. In that case, what is the futures price reflecting? And this is a potential problem with the stock market as well (there have been papers about this).
So I think the market might have failed anyway.
October 19, 2010 at 10:35 pm
alex
There is a perfectly good play money market in movie futures, also run by HSX. And, if the research is to be believed, play money prediction markets can predict just as well as real money prediction markets; meaning, why wouldn’t Hollywood react the same way to a movie with a tanking price on the play money market as on the real money market (i.e. why wouldn’t they pull the movie).
In addition, if I remember correctly, the reason HSX exists at all is because the information produced by the play money market is purchased by “Hollywood companies.” (For use as market research, I suppose.)
Actually, this may be the strange case where money itself makes the market repugnant.
~alex
October 20, 2010 at 8:33 am
pll
Interesting. The HSX is one of the markets analyzed in Wolfers and Zitzewitz (J of Econ Perspectives, Spring 2004).
In terms of the market being repugnant, I’m not persuaded it would be the case with movies.
October 28, 2010 at 2:02 am
Lones Smith
Fascinating! Yet no matter how you slice it, this is a law that brings a tears to one’s eye…