What Can Onions Teach Us About Oil Prices?

Onions have no futures market, yet their price volatility makes the swings in oil look tame.

Fortune Magazine (June 30, 2008) -- "Before the government starts scrutinizing the role that speculators may have played in driving up fuel and food prices, investigators may want to take a look at price swings in a commodity not in today's news: onions. 

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders 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, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April (see top chart above, click to enlarge)."

MP: The bottom chart above shows the monthly percentage changes in oil prices and onions prices. Between 2000 and 2011, onion prices have been 7 times more volatile than oil prices, based on the difference in the standard deviations of monthly price changes.   

See John Stossel's related column today "Gasoline and Onions."