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Today, we'll discuss how one man cornered the onion market, and more, in just 4 minutes to read 📖

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“The men on the trading floor may not have been to school, but they have Ph.D.’s in man’s ignorance.”

— Michael Lewis

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THE ONION KING

A tear-inducing legacy

Onions. We rarely consider them as anything more than culinary devices, items to be sliced, diced, and tossed into a hot pan to serve as the aromatic backbone of a savory dish.

But the unassuming onion once proved quite controversial, its bulbous form the unlikely epicenter of a financial drama.

The tale begins with a man named Vincent Kosuga. Although Kosuga was an onion farmer, he’s remembered as the “Onion King,” not for his agricultural feats but rather for his financial market exploits.

In 1955, Kosuga teamed up with a Chicago-based commodities trader named Sam Siegel.

With his in-depth knowledge of the Chicago Mercantile Exchange, Siegel brought financial acumen, while Kosuga brought onions – a whole lot of onions.

Together, they concocted a plan to corner the onion market.

Setting the stage

Kosuga began by hoarding his own supply of onions before expanding the scheme, secretly buying millions of onions nationwide.

As Keith Romer, a reporter at NPR, put it: “That still wasn't enough. Vince wanted to own all the onions, even the ones that were still in the ground growing. “

To do that, he needed to tap into the futures market.

The onion futures market was, in essence, a platform where buyers and sellers agreed to trade a certain quantity of onions at a predetermined price on a future date.

For farmers, futures contracts offer a way to hedge against unpredictable crop prices. For traders, it's a way to (hopefully) profit by betting on commodity prices.

According to Romer, by buying a futures contract, “you're essentially making a deal with farmers to buy the onions they haven't even harvested yet…In the trading pits of Chicago, Vince and his business partner, Sam Siegel, bought up all the available futures contracts for onions. By the winter of 1955, they had done the impossible.”

Kosuga and Siegel’s buying frenzy attracted the attention of other speculators who, in turn, started buying onion futures, hoping to profit from the rising price.

Cornering the market

At the height of this hysteria, they held contracts for 98% of the available onions in Chicago. This resulted in them storing more than 30 million pounds of onions in the city.

Romer explains that by cornering the market, “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.”

Yet, 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.”

Kosuga sprung his final trap in March 1956.

Says Romer, “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.”

In fact, the price of a 50-pound bag of onions dropped from $2.75 to just 10 cents, cheaper than the actual bag they came in.

The fallout

The market was in chaos. Farmers, unable to sell their crops at a profit, were forced to dump millions of pounds of onions into the Chicago River, and many went bankrupt.

The spectacle spurred public outrage and calls for reform.

Kosuga, however, mode off with over $8.5 million — a fortune in 1955. He had taken a system designed to stabilize prices and twisted it into a weapon for personal gain.

Eventually, Congress stepped in. Representative, and future President, Gerald Ford, sponsored a bill in 1958 banning onion futures. Known as the Onion Futures Act, it was the first law of its kind.

The Chicago Mercantile Exchange (CME) president, E. B. Harris, lobbied hard against the bill. Harris described it as "burning down the barn to find a suspected rat."

Harriss’ stance was unsurprising given that onions futures contracts were the most traded product on the CME, accounting for 20% of its trades in 1955.

But the bill passed, and onions became the only agricultural product illegal to trade futures for in the U.S.

While the ban ensured there’d never be another onion corner, it also made life more difficult for farmers and consumers. Without a futures market, it’s harder for onion farmers to plan and budget around expected crop yields.

Ironically, as a result, onions likely cost us all a little more.

Final thoughts

Perhaps it’s fair to blame Vince Kosuga for this. But the cornering of a staple commodity market was likely to eventually happen, so you might also blame Congress for its rigid, narrow response.

Regardless of who you blame, there’s one thing you certainly won’t be doing: buying or selling an onion futures contract.

Some believed this debacle was a one-off event – the result of a cunning farmer exploiting a relatively small and obscure market.

Ultimately, the saga exposed just how easily commodities markets could be manipulated, leading to questions about the integrity of other markets.

Meanwhile, the Chicago Mercantile Exchange, tainted by the Onion Corner scandal, was at a crossroads.

It needed to restore faith in its operations, and quickly. This imperative led to the Exchange evolving, innovating, and diversifying its offerings.

Before long, it was trading in everything from pork bellies to interest rates, becoming one of the largest futures and options markets in the world.

Kosuga later returned to New York and focused on his local business interests and philanthropy.

He opened a restaurant next to his farm called The Jolly Onion Inn, where he served as a chef. Despite his exploits in other ventures, he was forever known as the Onion King.

Decades later, the Onion Futures Act still stands, and the word 'onion' still elicits a smirk from Wall Street veterans. Yet, beneath the chuckles lies a sobering truth: it only takes one bad bulb to spoil the batch.

Dive deeper

For more, listen to Planet Money’s podcast on the “Onion King.”