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The Great Onion Corner And The Futures Market


Now we have the story of a person who cornered a market. That's when you get control of the supply of some commodities so you can charge any price you want. You have the market in a corner. Students of history read of the time in the 1800s when financiers tried to corner the gold market. It was notorious. Today's story is a more recent effort to corner a market, one that succeeded, a very unusual market. Here's Keith Romer of NPR's Planet Money team.

KEITH ROMER, BYLINE: When economists sit around telling scary stories, inevitably, someone will bring up the Great Onion Corner.

SCOTT IRWIN: Do you remember what happened to onions? Let me tell the tale.

ROMER: Scott Irwin is an agricultural economist at the University of Illinois Urbana-Champaign, and he says that it is not easy to corner a market like onions. You have to get your hands on pretty much every onion in America. In 1955, a man named Vince Kosuga decided he was going to try. He was an onion farmer in upstate New York. His nephew, Harvey Paffenroth, remembers when his uncle started hoarding onions.

HARVEY PAFFENROTH: Well, he was building - it was a big shed of corrugated aluminum - I mean, huge - and he had a conveyer in there, and he was filling it with onions. So he was stockpiling all the onions from his farm.

ROMER: And it wasn't just his farm. Vince Kosuga was secretly buying millions of onions all around the country.

PAFFENROTH: I understand he was doing it in Michigan, Texas, and I think he had a partner or two out in California. So they were doing this throughout the United States.

ROMER: But that still wasn't enough. Vince wanted to own all the onions, even the ones that were still in the ground growing. There's a way to do this. It's called the futures market. When you buy a futures contract, you're essentially making a deal with farmers to buy the onions they haven't even harvested yet. It just so happened that Vince was also a commodities trader. In the trading pits of Chicago, Vince and his business partner, Sam Siegel, they bought up all the available futures contracts for onions. By the winter of 1955, they had done the impossible.

PAFFENROTH: So he owned all the longs in the futures market, and he owned all the onions in the United States, basically. He cornered the market.

ROMER: Here's why cornering a market is such a big deal. Vince Kosuga could charge any price he wanted for onions. And, of course, he chose to set the price very, very high. Vince made a lot of money. But he didn't stop there. He knew that not only could he make the onion price go up, he could make it go down. And there's a way in the futures market to profit off of that, to make a bet about prices falling. In January, you say, I'll sell you a bag of onions in March for $3. If in March the price is only $2, you get to keep the extra dollar. Vince made of lot of these bets. And then in March of 1956, Vince sprung his final trap. All those onions he'd been hoarding, he flooded the market with them. In Chicago, where the trading happened, the loading docks were piled high with 50-pound bags of onions. Boxcars filled with onions clogged the railyards. The price for onions fell through the floor.

PAFFENROTH: The mesh bag that you put 50 pounds a bag of those onions in, the bag alone empty costs 20 cents. A 50-pound bag of onions, they went to 10 cents a bag.

ROMER: As long as there had been futures trading in onions, no one had ever seen a price that low. Traders who were stuck with onions literally couldn't give them away, and they tried.

PAFFENROTH: They called orphanages. They called hospitals, schools, whatever. They tried to get rid of as many onions as they could, and the rest of them, they dumped in the Chicago River.

ROMER: All those big bets that Vince had made about the price of onions, they paid off.

PAFFENROTH: He made a fortune. He made $8.5 million. That's a lot of money in 1955.

ROMER: Traders were badly hurt. Farmers couldn't sell their crops. And they complained enough that Congress ended up outlawing futures trading in onions forever. It's the only agricultural product that it is illegal to trade futures in. The ban ensured that there would never be another onion corner. But, Scott Irwin, the economist, he says it also made life harder for farmers and for you and me, the onion buying public.

IRWIN: Basically, the real losers are everyone in the form of producers and consumers.

ROMER: Without a futures market, onion farmers have a harder time planning out their crops. Onions end up costing us all just a little bit more. Now you can blame Vince Kosuga for this, or you can blame Congress. But what you can't do is buy or sell a futures contract in onions. It's against the law. For NPR News, I'm Keith Romer. Transcript provided by NPR, Copyright NPR.

Keith Romer has been a contributing reporter for Planet Money since 2015. He has reported stories on risk-pooling among poker players, whether it's legal to write a spin-off of the children's book Goodnight Moon and the time one man cornered the American market in onions. Sometimes on the show, he sings.