Do you know why the trading of onions in future markets is banned in the US? Also, onion is the only agricultural product on which future trading is banned.
To increase your curiosity even more, it all is because of one guy- Vincent Kosuga. The man who cornered whole onion market in the United States.
How did this all happen?
Vincent Kosuga started out as Onion farmer in 1930s. But greed is the motivational factor for ambitious people. He wasn’t feeling farming onion was enough. He wanted to control other farmers’ onion producing too.
Before going into details of the story, let me tell you a financial concept of Futures contract. Suppose you’re into farming of onions and you know that in six months you’ll be able to produce half a million worth of onion. But you need money now. So you go into the contracts with someone who has money right now and is willing to pay a certain amount right now in return of the delivery of half a million worth of onions six months later. The catch here is that you don’t know what the price of onion would be six months later. It could be high or low. You are going into the contract speculating the price that you think it would be six months later. Now, if eventually, the price is lower than that, you made the right move by going into the futures contract but if it is higher than what you had speculated, you lost some money which you could have earned had you not opted for Futures.
Futures contract are available in the market and you don’t have to be farmer to trade into onion/other product’s futures contract.
Vincent started out into futures market with wheat. But as he was into onion farming, he thought of dealing into onions’ future market. As he was a farmer himself, he trusted his instinct that he knows a lot about onions and can make a fortune by trading into their futures.
So In 1955, he decided to corner the onion market. (Cornering the market is not an easy thing to do as you have to get into contact with all farmers/dealers in the onion market and get them under your umbrella. It’s not just a city or state that we are talking about- To corner the onion market, Vincent has to control the whole United States’ onion market.
Vincent’s plan starts in New York. He was building a warehouse and he was stock piling onions there. And all around the country, he started buying onion from everyone and started storing in his warehouses. These warehouses were spread across the whole nation. Another catch is that Kosuga has to do all this in silence. Because if the market finds out about his move, the price will go up and up (In a way, demand going high- the price goes up) and Vincent won’t be able to buy onions at lower price and earn through the “evil plan” that he had.
After he bought most of the onions that were already produced, he wondered about those that were being produced right now. So he went to farmers and made futures deals with them for the onions that they were producing.
Eventually, he cornered the market. He was controlling 98% of the onion market. Then he creates artificial shortage of onions in the market which makes the price go up. This is when Vincent makes his move. He calls all the distributors and key people of onions market and asks them to buy onions from him for the price he demands. If they don’t do that, he’ll just dump all the onions in the market which will make the prices reach the floor and all those people will lose money. So basically, by force, he made fortune from onions. (Approx 9 million pound worth of onions were bought).
But, Vincent didn’t stop here.
He didn’t just want to make a killing. His plan was to make TWO killings.
He thought that if he controls the whole market- he can make the prices go up as well as down. So he silently starts to short the market. (He decides to make future deals AGAINST the price of onions). Once these contracts were in place, he makes his final move. He dumps all the stored onions in the market. Literally. Truck loads of onions were coming into Chicago, New York, Texas… Vincent himself was taking onions from the warehouses and taking them into the market. The market goes haywire.
The supply goes higher than the demand. The prices reach to floor and onions eventually become worthless. A 50 pound bag of onion went to a price as low as 10 cent. Then what did they do of onions? A huge amount of onions actually had to be dumped into the river.
Because of this, a lot of people took the beating because of this. Many went bankrupt. Many attempted suicide. Some called the congressman too. Someone had to stop this. But the laws against creating artificial scarcity of onions were too loose. So after the court case verdict, Vincent loses his trading license for 10 months and he was asked to pay a small fine (A few thousands of fine against 9.5 million pound that he made).
Eventually, as the law makers realized how speculators can control the market, they decided to make a rule banning the futures’ trading of onions. And to this date, this law exists. To this date, YOU CAN NOT trade in futures of onions.
-Arjuna@War (Parth Shah)