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The Onion Futures Act (7 U.S.C Chapter 1 § 13-1]) is a United States law banning the trading of futures contracts on onions. It was passed on August 28, 1958, and remains in effect as of 2009.

This law is notable as the first and only ban on the trading of futures contracts of a specific commodity in United States history, and as a unique modern case with which to study the effects of the existence of an active futures market on commodity prices. In particular, proponents of futures markets often claim that they serve to stabilize otherwise volatile commodity supplies (and thus, prices) by providing a market-driven consensus mechanism for future price estimation. The conclusions drawn in subsequent studies of the effects of the Act upon price volatility have been mixed.

The law was enacted after national protests from onion farmers who accused the futures traders at the Chicago Mercantile Exchange of cornering the market for onions, a form of market manipulation that they claimed resulted in absurdly low prices for their crops.

The law was proposed by Republican Congressman Gerald Ford, who later became the President of the United States.[1]

Effect on price volatilty

The ban provided academics with a unique opportunity to study the effect of an active futures market on commodity prices. Holbrook Working concluded that onion prices had been less volatile during the years when the contract was active than previously.

Roger Gray, a professor emeritus of economics at Stanford University and an expert in agricultural futures markets, analyzed the effects of the ban in 1963 and concluded that the existence of a standardized futures contract had reduced volatility in onion prices while they existed compared to after the ban went into effect.

A subsequent 1973 study by Aaron C. Johnson contradicted that result and concluded that onion prices were less volatile throughout the 1960s than when the contract had been traded.

References

• Text of the law
• Futures regulation before the CFTC
• The Onion Ringer, the Wall Street Journal, July 8, 2008.
• Gray, Roger."Onion Revisited." Journal of Farm Economics,. Vol. 45, No. 2, May 1963.
• What do onion prices tell us about oil prices?, The Curious Capitalist at Time Magazine Blogs, July 8th, 2008
• Working, Holbrook. “Price Effects of Futures Trading,” (reprinted from Food Research Institute Studies, Vol. 1, No. 1, Feb. 1960), in Selected Writings of Holbrook Working, Anne E. Peck, ed., Chicago Board of Trade, 1977. pp. 45-71.
• Johnson, Aaron C. “Effects of Futures Trading on Price Performance in the Cash Onion Market, 1930-1968,” (excerpted from USDA, ERS, Technical Bulletin No. 1470, Feb. 1973), in Peck (1977a), pp. 329-336.