The Great Chicago Onion Ring: Why Selling Onion Futures Is Against Federal Law
How two bankers' investment scheme inspired a hit movie, broke the onion markets, and made pork bellies a star.
Dan Lewis, author of the daily newsletter Now I Know (“Learn Something New Every Day, By Email”) joins us Wednesdays with surprising facts about the world of business.
If you have seen Trading Places, the Eddie Murphy-Dan Aykroyd-Jamie Lee Curtis comedy—or if you are knowledgeable about commodities trading—you probably know what “futures” and “shorting” are.
If not, a “future” is a contract to buy a certain commodity at a date in the future for a price set today. The buyer of the contract hopes the commodity’s price will go up the interim, while the contract’s seller hopes it will go down. “Shorting” (or “short selling”) happens when a seller of a futures contract does not yet own what he or she is selling. Instead, the seller borrows commodity futures from their owner, sells them, and buys them back later. The short seller hopes that the price of the commodity will go down between when he or she borrows it and when he or she repurchases it, thereby making a pretty penny on the difference.
In various points of the movie, Aykroyd and Murphy are trading futures of pork bellies and frozen concentrated orange juice. In fact, futures of almost all commodities can be purchased on public markets. Almost all, because in the United States, onion futures are prohibited from trade—thanks to Dwight Eisenhower, Gerald Ford, and a pair of traders who gamed the system and walked away millionaires.
In 1955, onions made up 20 percent of the commodities traded at the Chicago Mercantile Exchange. Two traders, Sam Seigel and Vincent Kosuga, saw an opportunity. The pair began buying onions and onion futures in huge amounts, cornering the market—by that fall, they ended up with roughly 98 percent of all the onions in Chicago, totaling roughly 30 million pounds of the vegetable.
Soon after, Seigel and Kosuga started to short sell onion futures, effectively betting that the price of onions was about to drop precipitously. This was not a blind gamble, however. The pair began to sell their stockpiled onions, causing a glut of supply, and forcing the price of onions down—way down. In August 1955, a 50-pound bag of onions in Chicago cost about $2.75. By March 1956, the going rate in Chicago for the same amount of onions was a mere 10 cents due to Seigel and Kosuga’s market manipulation. The pair walked away millionaires, and left the onion market in shambles—worthless in Chicago and impossible to find everywhere else. Onion producers were going out of business, and turned to Congress.
Gerald Ford, then a Congressman from Michigan, sponsored a bill outlawing the trade of onion futures—a very specific bill aimed at preventing this very specific type of endeavor. The commodities trading lobby, of course, opposed the bill, threatening litigation if it were signed into law. President Eisenhower called their bluff, signing the Onion Futures Act in the summer of 1958. The Mercantile Exchange sued, and lost. The trading of onion futures is banned in the United States to this day.
The movie industry, at least, is better off for it. Because the Onions Future Act robbed the Mercantile Exchange of a robust market—and therefore, profit center—its leadership needed to expand the offerings in order to maintain a healthy business. The two most notable additions: pork bellies and frozen concentrated orange juice—the two key items dealt in Trading Places.
Bonus fact: In Trading Places, Aykroyd and Murphy’s characters make their killing by engaging in insider trading—they are privy to an advance version of the orange crop report. One would think that, had they been caught, they would go to prison, but this is not the case. As of 2010, insider trading was not, generally speaking, illegal in commodities markets. In fact, that year, the head of the U.S. Commodity Futures Trading Commission testified in front of Congress arguing that this be changed, and in his testimony, he cited to the scheme pulled off in Trading Places.