Various cases have impacted investor confidence and market regulation in commodities trading throughout history. One interesting example, the Onion Futures Manipulation incident, involved Vincent Kosuga, the Onion King.
Kosuga initiated a manipulation scheme that impacted the onion futures market in the 1950s. This article will detail what happened and its influence on commodities trading.
Background of the Onion Futures Market
Onion futures trading started in the late 1940s on the Chicago Mercantile Exchange. Their launch was an attempt to replace the lost income from butter futures in the 1930s due to the emergence of federal dairy subsidies. Onion futures contracts became the most traded product on the CME by the mid-1950s, and in 1955, they made up 20% of the exchange’s volume.
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Vincent Kosuga: The Onion King of Chicago
Vincent Kosuga was a New York farmer with a 5,000-acre farm where he grew onions and other vegetables. First, Kosuga got involved in the commodity markets trading wheat but lost all of his capital. He promised his wife he would not trade again but instead got into trading what he knew: onions.
Onions were the most traded commodity on the Chicago Mercantile Exchange at the time. This was because onions have limited storability, so their price would fluctuate more than most commodities. The bigger volatility meant a bigger profit potential.
Kosuga was friends with Sam Siegel, who also traded onions and had a produce company. They thought that by joining forces, they could corner the market in onion futures.
Manipulating the Onion Futures Market
By the fall of 1955, Kosuga and Siegel held 98% of the onions in Chicago, threatening other potential competitors. When the prices drove up, Vincent and Sam bought short positions on large amounts of onion contracts.
They used to send the onions away to be cleaned and repackaged to prevent them from spoiling. When the vast shipments returned to Chicago, it gave traders the false impression of extra supply, which caused an artificial price drop.
Towards the end of the farming season in March 1956, they flooded the market with onions, causing significant distress to farmers. Prices nosedived from $2.75 to 10 cents per 50lb bag. Sam and Vincent made huge profits on their shorts.
This trading manipulation disrupted not only the onion market, but also the entire commodity market and the local agro-economy. Finally, the government, heeding the requests of onion farmers, banned Kosuga from commodities trading.
The Investigation and Legal Battles
Kosuga and Siegel were brought before the Commodity Futures Trading Commission. Kosuga’s registration as a floor broker was revoked, and all contract markets were mandated to refuse him trading privileges for ten months.
The Onion Futures Act of 1958
The onion futures case of Vincent Kosuga made the government pass the Onion Futures Act, despite traders’ protests. The Act states that:
“(a) no contract for the sale of onions for future delivery shall be made on or subject to the rules of any board of trade in the United States. The terms used in this Act shall have the same meaning as when used in the Commodity Exchange Act.
(b) Any person who shall violate the provisions of this section shall be deemed guilty of a misdemeanor and upon conviction thereof, be fined not more than $5,000.
SEC. 2. This Act shall take effect thirty days after its enactment.“
To this day, it is illegal to trade onion futures.
Conclusion
The manipulation scheme by Vincent Kosuga impacted onion futures, leading to the passing of the Onion Futures Act of 1958 by the government. This incident showcases the importance of market regulation and the consequences that even individual traders determined to manipulate the market can have.
