How Will Obama Protect Us From Onion Speculators?


President Obama last week pledged to end the speculation in oil futures that even he doesn't claim has made the price of gas more expensive. According to Obama's politics – which amount to a stubborn belief that Americans are as ignorant of the law and easily propagandized as they were in 1935 – this is a smart move. But it's a vacuous proposal that will not stop price swings in oil, and it could even make oil pricing more erratic.

Mark J. Perry, redoubtable AEI scholar and professor of business and finance at University of Michigan Flint, put together this chart to show how oil pricing stacks up against pricing of a product so common we tend to ignore it even though, unlike oil, it can easily move us to tears.

By law, there is no speculation in onions, and yet the price of the kitchen staple goes up and down with enough energy to make Marlon Brando in The Formula chortle with piggy glee. Says CNN

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.

The volatility has been so extreme that the son of one of the original onion growers who lobbied Congress for the trading ban now thinks the onion market would operate more smoothly if a futures contract were in place.

"There probably has been more volatility since the ban," says Bob Debruyn of Debruyn Produce, a Michigan-based grower and wholesaler. 

While there's no reason to regulate futures speculation in anything, I don't see why Debruyn's special pleading deserves credit here. Do people understand that rapid up-and-down price swings are a sign that a market is working the way it's supposed to? Does America need to move away from the prix fixe and adopt Arab-style haggling to get this very basic economic point? Have these people ever been to a yard sale? Trying to maintain price stability is like expecting to remain the same age for the rest of your life.