Adam Smith Institute

In certain quarters people keep arguing that the surging oil and food prices are caused by speculative international investments in these commodities. People who understand how the market is working have always maintained that the principle effect of commodity futures is beneficial because they smooth extreme swings of prices that tend to hurt consumers. A fairly convincing case can be made for this with regard to the market of the one commodity which has been exempted from the future markets: onions.

• Onions are the only commodity for which futures trading is banned.
  
• Back in 1958, onion growers convinced themselves that futures traders (and not the new onion farms sprouting up in Wisconsin) were responsible for falling onion prices.
  
• They lobbied Gerald Ford to push through a law banning all futures trading in onions, and the law still stands.

As a result of that we have seen extreme swings in onion prices over the last two years. Whereas oil prices have risen 100 percent and corn 300 percent - thanks to the future markets - the volatility in onion prices was even more extreme: they soared 400 percent between October 2006 and April 2007, only to crash 96 percent by March 2008 and then rebound 300 percent,

...reinforcing academics' belief that futures trading diminishes extreme prices, says Fortune. The volatility has been so extreme that many onion growers now believe the onion market would operate more smoothly if a futures contract were in place.

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