In 1958, the Onion Futures Act was passed by Congress and signed into law by President Eisenhower, resulting in the prohibition of trading onion futures. To this day, it is illegal to trade futures contracts on onions. Why? Because in 1955, a man named Vince Kosuga, who would later become known as the Onion King, cornered the market on onions and then drove it into the ground.
Originally, Kosuga was an onion farmer growing onions in the Northeast in the 1930s. But he was also a commodities trader, actively trading commodities futures on the Chicago Mercantile Exchange. The commodities derivative markets were born out of a desire from farmers to lessen the uncertainty of growing and selling agriculture by locking in prices. With futures contracts, farmers could lock in the future price of their crop, hedging against the risk that a bad harvest would depress prices or that demand for various products would result in unwanted price volatility.
For a time, Kosuga traded wheat futures, nearly going bankrupt after a few unsuccessful bets. He then turned to the onion market, with which he was more familiar. Seeing an opportunity to control the market, he began buying up onions all over the country. By the fall of 1955, he and his business partner had effectively gained control of 98% of the available onions in Chicago. Having cornered the market, he then sat down with the other onion growers and told them that he would flood the market unless they collectively agreed to raise the price of onions. The other growers agreed and began purchasing Kosuga’s inventory at these elevated prices. Seeing yet another opportunity to take advantage of the markets, Kosuga and his business partner turned around and bought short positions on a massive amount of onions contracts. Going back on their word, they then flooded the market with all of the onions they had physically stored up in various local warehouses. At one point, the price of onions had dropped so much that the canvas bag they were in was worth more than the onions themselves. The situation got so bad that truckloads of onions had to be dumped into the Chicago River.
The Onion King was not the first to influence market prices of a good, nor was he the last. In the first few months of this year, we’ve watched a group of Reddit users heavily influence the stock prices of struggling companies like GameStop and AMC through a trade known as a short squeeze. In March, a previously unknown family office named Archegos Capital flooded the markets with shares of Baidu, ViacomCBS, and a handful of other stocks, trying to unwind billions of dollars of highly leveraged positions. In response, major banks moved quickly to limit the damages to their balance sheets and overall markets. Credit Suisse, who moved later than the others, said it expected $4.7 billion in losses due to the trades. In both instances, the wild market swings of these specific stocks reverberated through the rest of the markets. Since the pandemic began and the market sold off in early 2020, we’ve seen significantly increased levels of market volatility, with some referring to the current market environment (somewhat humorously) as a “bunny market” – one that keeps “hopping” around in response to a variety of highly impactful, moving variables.
Many financial and economic theories are predicated on the belief that the financial markets are efficient – effectively allocating capital to those in a position to use them efficiently. These theories further assume that over time, that effective allocation will lead to long-term upward growth. Since their inception, the modern financial markets have primarily proved these assumptions correct. Nevertheless, in the short term, there are always exceptions to these held assumptions. For example, there are moments where individuals or groups with a lot of financial power and leverage manage to manipulate market prices. In the face of this reality, we find ourselves faced with several responses.
On the one hand, we could try to jump on the bandwagon of whatever the latest hot trade is. We can try to be market manipulators and benefit from movements not necessarily driven by fundamental value but rather by human behavior. Joining the herd is an enticing option, given the instances where individuals get lucky and come away with big wins. However, it is also hazardous. It opens us up to a scenario in which we experience huge losses. Taking on risk does that.
Alternatively, we can continue to uphold the belief that diversification will win out over time. We can look at the historical data with our hindsight is 20-20 vision and observe that being spread out over a variety of assets not only allows us to grow our assets but do so with much less risk than that of a concentrated position. And we can view stories of market manipulation as momentary instances of misallocation, knowing that over time, the markets will realign to their long-term trends.
Vince Kosuga made a fortune cornering the onion market. Unfortunately, he also ruined the futures market for everybody else. And while the onion market did inevitably recover, it was painful for those who had built a livelihood around it. When it comes to the livelihoods of our clients and your financial legacy, we want to remain level-headed and committed to investing for the long-term despite the many market swings and temptations we will undoubtedly face.
Chung, Juliet, and Margot Patrick. “What Is Archegos and How Did It Rattle the Stock Market?” The Wall Street Journal, Dow Jones & Company, 6 Apr. 2021, www.wsj.com/articles/what-is-archegos-and-how-did-it-rattle-the-stock-market-11617044982.
“Onion Futures Act.” Wikipedia, Wikimedia Foundation, 7 May 2021, en.wikipedia.org/wiki/Onion_Futures_Act.
“Onion Futures Act.” Wikipedia, Wikimedia Foundation, 7 May 2021, en.wikipedia.org/wiki/Onion_Futures_Act.
Smith, Robert. “Episode 657: The Tale Of The Onion King.” NPR, NPR, 15 Oct. 2015, www.npr.org/transcripts/448718171.
“Vincent Kosuga.” Wikipedia, Wikimedia Foundation, 30 Apr. 2021, en.wikipedia.org/wiki/Vincent_Kosuga.
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