Commodities Speculation: A Valuable History Lesson

Today’s WSJ provides a great example of how government never learns from its past mistakes. In their lust to villainize anyone but the true culprit in rising energy prices (apparently there are no mirrors in Washington, DC), politicians are eagerly scapegoating the speculators in the commodities market.

But this is nothing new, and the WSJ points out what happened the last time politicians wanted to "reign in the excesses" of the speculation market:

"As it happens, though, there’s a useful case-study in the relationship between futures markets and commodity prices: onions. Congress might want to brush up on the results of its prior antispeculation mania before it causes more trouble.

In 1958, Congress officially banned all futures trading in the fresh onion market. Growers blamed "moneyed interests" at the Chicago Mercantile Exchange for major price movements, which could sink so low that the sack would be worth more than the onions inside, then drive back up during other seasons or even month to month. Championed by a rookie Republican Congressman named Gerald Ford, the Onion Futures Act was the first (and only) time that futures trading in a specific commodity was prohibited, and the law is still on the books.

But even after the nefarious middlemen had been curbed, cash onion prices remained highly volatile. In a classic 1963 paper, Stanford economics professor Roger Gray examined the historical behavior of onion prices before and after the ban and showed how the futures market had actually served to stabilize prices."

The reader is then provided with this simple summary of why speculators simply can not drive up the price of any commodity:

"Futures trading can’t drive up spot prices because the value of futures contracts agreed to by sellers expecting prices to fall must equal the value of contracts agreed to by buyers expecting prices to rise. Again, it merely offers commodity producers and consumers the opportunity to lock in the future price of goods, helping to protect against the risks of future price movements."