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).