There are none.
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.
Amazing, onion farmers and Congress panic in 1958 with the Senate Committee arguing that
…speculative activity in the futures markets causes such severe and unwarranted fluctuations in the price of cash onions…[that a] complete prohibition of onion futures trading [is necessary] in order to assure the orderly flow of onions in interstate commerce…
and for going on fifty years onion futures are banned. Makes me want to cry.
More here on the banning of futures markets . (A report from 1956 indicates that the fluctuations at that time were due to an attempted swindle.)
Hat tip to Newmark’s Door
oh yeah!! go congress.
One of the reasons commodities are commodities is that they are storable. Tomatoes and bananas are perishable. Grain, oil, and minerals are storable. Onions and root vegetables might not be storable for long enough to allow for an effective futures market.
Also, the American law wouldn’t stop India from creating a futures market for onions. They eat more onions per captita than the US and onions represent a more significant cost than for them.
See also today’s FT, p.11, which cites a study showing that volatility increased, following the passage of the Onion Futures Act. By the way, the price of onions is up 420 percent since 2000. Here is the link: http://www.ft.com/cms/s/0/45da56b6-4c89-11dd-96bb-000077b07658.html
‘By the way, the price of onions is up 420 percent since 2000.’
And the price of crude oil? Let’s just say, using this link, http://www.economagic.com/em-cgi/data.exe/var/west-texas-crude-long , that the price of onions (sans futures market) has risen in decently approximate lockstep with the price of WTI crude (with futures market).
Amazing. You would almost think that the price of fuel and fertilizer just might have something to do with food production and the prices paid by customers.
No, of course not, it is just a coincidence.
Since oil prices has gone up, you’re not allowed to talk about onions and bad laws. Bad Tyler!
And by Alex Tabbarok, I meant Alex Tabarrok.
Onions and root vegetables might not be storable for long enough to allow for an effective futures market.
Electricity is not stored in significant quantities at all, and it has an effective futures market, running out over a year. (You can do some things with batteries and pumped storage but in every country I know of these have trivial capacity compared to daily electricity demand, let alone annual demand).
Almost makes one wonder whether a futures market as such is actually a requirement for ensuring an adequate supply of a commodity at a reasonable price without people not actually involved in farming, distribution, or retailing being able to profit from their non-productive activity.
The argument is that futures markets reduce the volatility of prices paid by farmers, distributors, and retailers, not that a futures market is necessary for the good to be supplied at all.
And speculators are performing a productive activity. There are two roles – firstly they provide an onion farmer the opportunity to reduce the farmer’s price uncertainty. Secondly, they create information about likely future demand for onions. They’re no more unproductive than insurers or weather forecasters.
Wait until people realize that the major problem with oil is there is less of it in the pipeline – nothing like real production figures to paint that picture (Mexico being recently in the news). Then I am sure that a futures market will do wonders to reduce ‘volatility.’
While I suspect, based on the rest of your comment, that you intend this to be read sarcastically, the statement is actually right if read literally. A futures market will indeed do wonders to reduce volatility if we are running out of oil.
Imagine there is an international government department devoted to managing demand for oil. Furthermore, imagine that this government department is wise and benevolent, and motivated entirely by the public good. The government department notices that the supply of oil is running out. There are two logical things that our benevolent government department should do to smooth the adjustment to a world of low oil prices. Firstly, it should reduce demand now, so people get used to doing with less and are not faced with an abrupt shift in demand when suddenly oil supply collapses. Secondly, it should signal that more investment is needed in alternatives to oil.
Now, let’s take the future market’s response to a forthcoming shortage of oil. If there is less oil in the pipeline then futures prices should rise (either because this information is publicly-known by oil traders or due to insider trading). Therefore anyone looking to purchase oil on long-term future contracts (such as a shipping company or a power station that burns oil) has an incentive to reduce their demand for oil and look for alternatives. Furthermore, anyone with oil to hand nowadays has an incentive to store it and sell it in the future on a high-priced future contract. Therefore the same results are achieved as if oil demand was managed by a wise benevolent international government department. The adjustment process to less oil is smoothed and investment in alternatives is increased.
Running out of oil is exactly the situation in which you want a futures market. If we could be assured of a steady supply of oil into the future, futures markets would be rather less useful than they are in the real world we actually live in.
“Makes me want to cry.”
Joke intended?
Eric M: you fail to understand, and because of that, you fail to understand. Economic understanding would have kept us out of the Iraq war, and every bit of economic education works towards understanding. You refuse to be educated, and so you refuse to understand.
Insulin and blood-bank futures and swaps.
Any takers?
We need liquidity to make sure the likes of Wilford Brimley aren’t pulling any fast ones over on innocents like Pfizer.
From then on, its just supply and demand, baby.
I can see it now: “Sorry, Gus…we just can’t make your insuling fast enough. Actually, we can, but we just don’t want to. Supply and Demand. Just like the Nymex shows, ya know? Maybe next time, just be sure not to pour sugar on your oaties.”
Ill call this a good thing regardless of whether futures markets control price fluctuations- what we’ve been given here, accidentally of course, is a control case. One where (unless one is an onion farmer or prodigious consumer of onions) some additional variability in the price isn’t a big cost for society to pay.
The futures are horrible at predicting the future. Where was the July 08 crude contract 12 months ago?
In the 70s.
So I assume you’re now a billionaire because you’re better at predicting the price of oil than the futures market?
Here’s a hint on how to respond that doesn’t make you sound like you know nothing:
“the market can stay irrational longer than you can stay solvent”
Which is at least true, in contrast to “eh, markets are horrible at predicting prices”. That’s just dumb.
Welcome to our company which sells all kinds of FFXI Gil.
Is it realistic?
there are more information you did not write
You plagarized an article without giving credit. This was written by By Jon Birger on June 30, 2008, titled: “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.”
Shame on you.
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