SYLVIE DOUGLIS, BYLINE: This is PLANET MONEY from NPR.
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AMANDA ARONCZYK, HOST:
Hi everyone. Amanda Aronczyk here. May inflation was hot. It was the highest increase in consumer prices in four decades. Food costs continue to climb, and onion prices were up 130% from last year. But the story behind the rise in onion prices is not just an inflation story. See - onions are not your average produce. Their prices are actually more likely to fluctuate wildly because they have high price volatility. Why? Well, Keith Romer and Robert Smith have the story in this PLANET MONEY classic. And be sure to stay tuned to the end for an update where we get a little bit nerdy and dig into the research. Here is the episode.
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ROBERT SMITH: If you find yourself driving around upstate New York, you should stop by the farm of Rick Minkus. He grows one hell of an onion.
KEITH ROMER: If you're on the farm, you can pull one right out of the ground and take a bite.
I'm just - I'm going for it.
RICK MINKUS: No, you're - you ain't going to do that. It's too hot.
ROMER: I mean, it's very oniony.
ROMER: Woo, woo (ph).
MINKUS: Now it's hot.
MINKUS: Now it's hot, huh?
ROMER: That's what a fresh onion tastes like, huh?
SMITH: For the record, we've made Keith do that. It's kind of a PLANET MONEY hazing.
ROMER: Oh, thanks. Thanks for that.
Rick is one of the biggest onion farmers in upstate New York these days. He grows tens of millions of onions each year.
SMITH: Yeah. He grows the onions, but he is also a businessman. Once his onions are harvested, they're just a commodity. He needs to find a market for them. And right now, the market for onions says it's $9 for a 50-pound bag.
MINKUS: Nine dollars is not great, but $9 is OK. We're making money at $9. We'll start selling, but we're not going to go crazy selling, you know? And we have bills to pay. I mean, I have notes due, and I may have to get some cash flow.
SMITH: This is how it has always been for farmers. They're at the mercy of the weather and the soil and their plants during the growing season. And then, after they harvest the crop, they are at the mercy of financial markets to buy their onions.
ROMER: Except for this one time when another farmer from upstate New York broke all the rules and made himself the master of onions and the master of markets. He was known as the Onion King of Pine Island. His farm was a little ways down the road from here. And to this day, around these parts, you don't want to bring up his name - Vince Kosuga.
Have you ever heard of a guy called Vincent Kosuga?
ROMER: Does he have some reputation in this part of the world?
MINKUS: Yeah, he's had a reputation that you don't do business with him.
SMITH: Because at one point, Vince Kosuga held the entire onion world hostage, and he made a fortune doing it.
Hello, and welcome to PLANET MONEY. I'm Robert Smith.
ROMER: And I'm Keith Romer. Today on the show, we will tell you just what it took for Vince Kosuga to become the Onion King and why his neighbors still resent it.
SMITH: It's a story about a scheme that got so out of hand, eventually, the Chicago River flowed not just with water but with America's onions.
ROMER: So many onions.
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ROMER: Vince Kosuga started out as an onion farmer back in the 1930s, and he was pretty successful at it. But onion farming was never quite enough for him.
SMITH: Yeah, after he'd finished working on his own crops, he liked to make big bets on other people's crops. He would pour his onion money into what's called the futures trading market. Basically, it's a place where you can make a bet that, oh, it's going to be a great year for wheat, or soybeans, I swear to God, are going to take a beating.
HARVEY PAFFENROTH: He was just addicted to trading. He would trade anything. I mean, you know, if it moved, he would trade it. I think he liked the action, and I think he liked being right.
ROMER: This is Harvey Paffenroth. He's a commodities trader in Chicago and the nephew of Vince Kosuga.
SMITH: For farmers, futures markets are a way of taking some of the risk out of their business. Maybe it's the springtime, right? You need money to buy seeds or to get your tractor fixed. You know you're going to have a million pounds of onions to sell in six months in the fall, but you need the money now. So you agree to lock in a price of $9 a bag. You have sold a contract to deliver the onions in the future, but you get the money now.
ROMER: Not only does this let farmers plan their finances, it also lets them sleep soundly at night. If in the fall, the price goes down to $6 a bag, who cares? They're locked in at $9.
SMITH: But you could trade futures even if you're not a farmer. There's a whole exchange in Chicago where they do it. If you just know in your heart that the price of onions is going to go up, you can buy a futures contract when the price is low. You can sell it when the price is high.
ROMER: You can make a fortune or lose one like Vince Kosuga did early on.
PAFFENROTH: When he first started out, he was trading wheat and got annihilated. I guess he had to mortgage part of his farm, and he swore on a Bible to my aunt that he would never trade wheat futures again.
SMITH: But you'll notice he just told his wife, wheat futures.
ROMER: It wasn't long before Vince must have realized, what do I know about wheat anyway? I'm an onion farmer. I know everything there is to know about onions.
SMITH: He thinks to himself, hey, I know about onions. I know about futures trading. What if I use that knowledge to pull off the greatest onion trade that the world has ever seen?
ROMER: His idea is kind of the fantasy of all commodities traders. In 1955, he decides that he is going to corner the onion market.
SMITH: Corner the market. This is something that you mainly hear about in movies when you need some sort of motivation for the evil guy. You know, I just cornered the market in gold, Mr. Bond, and now, you will do my bidding.
ROMER: When it's not in the movies, this is really hard to do. Cornering the onion market means that Vince Kosuga needs to get his hands on virtually all of the onions in America, and he has to figure out where to put them.
SMITH: So his evil plan starts in New York with a little construction project.
PAFFENROTH: Well, he was building - it was a big shed of corrugated aluminum - I mean, huge. And he had a conveyor near, and he was filling it with onions. So he was stockpiling all the onions from his farm.
SMITH: And he's not just doing it on his own farm. All around the country, Vince starts buying up onions - millions of them.
PAFFENROTH: He was doing this in New York. 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: Warehouses everywhere filling up with America's onions.
PAFFENROTH: There was a lot of onions. I could tell you that.
ROMER: So Vince has to do all of this completely in secret. Because if he doesn't and the market finds out what he's up to, the price will go up and up and up before he has a chance to buy all the onions.
SMITH: And after he starts stockpiling onions that are already out of the ground, he looks around and says, well, wait a minute. What about those onions that are growing right now? And this is where his expertise as a trader comes in because he is able to buy futures contracts - essentially saying to farmers, as soon as those onions come out of the ground, I want them. I want to buy them.
ROMER: So Vince and his business partner, Sam Siegel - he's a produce distributor. He's a trader, too. They start buying up all of the available futures contracts on onions.
SMITH: It is amazing. By the time fall of 1955 rolls around, Vince Kosuga has wrapped up the entire market.
PAFFENROTH: So he owned all the longs in the futures market, and he owned all the onions in the United States, basically. And he cornered the market.
SMITH: He did it.
ROMER: He did it. And here's why cornering a market is such a big deal. Vince Kosuga could set the price for onions. Whatever he wants, people have to pay - otherwise, no onions on your burgers.
SMITH: And you'd have to eat scallion rings instead of onion rings.
ROMER: So, of course, Vince wants the price to go up. He keeps the onions off the market. He creates an onion shortage.
SMITH: And then when the price is high enough in December of 1955, Vince makes his move. Vince and Sam call in a bunch of onion bigwigs - growers, distributors - all to a meeting in Chicago. They say, fellas, this can go one of two ways. You can buy a bunch of our onions we've got stored up at the price that we demand, or we can just dump all these onions on the market all at once. We can destroy the price of onions for the rest of the year. It's your call.
ROMER: They don't really have a choice. They are in the onion business, and Vince is threatening to blow the whole thing up. In the end, they agreed to buy almost 9 million pounds of Kosuga's onions.
SMITH: It is amazing. And for pretty much anyone who's ever cornered a market, this is as far as it goes. He bought all the onions low. He drove the price up, and when it came time to sell, he made a killing. And if Vince had stopped here, he would have been an absolute legend.
ROMER: And maybe even a hero to his neighbors - the man who made onions worth a fortune.
SMITH: Kosuga did not stop there. He didn't just want to make a killing. He sees that he can make two killings. He has such a powerful hold on America's onion supply that there is this second opportunity to make money. It's just waiting for him if he plays it right.
ROMER: If you control all of America's onions, you can make the price go up.
SMITH: Which he did.
ROMER: But you can also make the price go down.
SMITH: And he thinks about this. And there is a way in the futures market that you can basically short the market. You can make a big bet that the price will go down. And once again, Vince Kosuga can make the price go down.
ROMER: So he starts to quietly make bets against the price of onions - that the price will go down.
SMITH: And he's making these bets day after day after day, and when March hits, Vince Kosuga springs his second trap.
ROMER: He stabs his fellow farmers in the back, and he floods the market with onions.
SMITH: And when we say flood the markets, we're not meaning this in this theoretical inside markets kind of way. No, he physically takes his onions from his secret warehouses, he loads them up, and he basically says to all the other traders in Chicago, surprise.
PAFFENROTH: What they didn't count on was him delivering the onions to the exchange.
SMITH: But wait a minute. Does this mean there are physical trucks filled with onions driving into downtown Chicago?
SMITH: No. Where would you put them?
PAFFENROTH: I'll get to that.
SMITH: Trucks, train cars - all of Vince Kosuga's onions coming into Chicago. And of course, the onion market goes haywire.
ROMER: Normally, if you are a futures trader and because of your contract, you get delivered a bunch of onions, you just sell them on to someone who wants them - a produce distributor or someone.
SMITH: That's the way the market normally works. But with all these onions coming into Chicago, the price falls through the floor. Onions are basically worthless. No one wants to get stuck with Kosuga's onions.
ROMER: You can imagine all those traders walking to work the streets of Chicago every morning, seeing these huge bags of onions piled on every loading dock, the train yards filled with onions, everywhere, onions.
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.
SMITH: As long as there had been futures trading in onions, no one had ever seen a price that low. You couldn't sell onions. You could not give them away.
ROMER: So what do you do with your onions?
PAFFENROTH: They called orphanages. They called hospitals, schools, whatever. They try to get rid of as many onions as they could, and the rest of them they dumped in the Chicago River.
SMITH: And of course, there was one man who had made a huge financial bet that the price of onions would drop to nothing. And that man was Vince Kosuga.
PAFFENROTH: He made a fortune. He made $8 1/2 million. That's a lot of money in 1955.
SMITH: That's a lot of money now. And a lot of people took a beating on Vince Kosuga's onion corner. Other commodities traders, farmers who had counted on being able to sell their onions for a profit, now were growing a worthless crop.
ROMER: People went bankrupt because of Kosuga. There were stories of suicides.
SMITH: Yeah, onion farmers were really upset. And in Michigan, they, in fact, called their congressman, a gentleman by the name of Gerald Ford future president, and they said, Gerry, we have got to stop this craziness with the onion futures.
ROMER: Ford says, sure. He gets Congress to hold hearings. They talk to economists. They talk to onion farmers. They talk to Uncle Vince.
SMITH: Kosuga's lawyer tells him, listen, no matter what you do, do not perjure yourself. Do not lie to Congress.
PAFFENROTH: He was on the stand, raised his hand and said, is your name Vince Kosuga? He said yes. He said, you live in Pine Island, N.Y.? Yes. You have a farm there? Yes. They said, Vince, we understand that you own 97% of the onions in the United States. He said, that's incorrect. I own 98%. He corrected them so he didn't perjure himself, is what I'm guessing was in his mind.
ROMER: But after all this outrage, it was hard to really pin down the crime Vince had committed.
SMITH: There were laws against market manipulation, but they were super vague and hard to enforce. And Vince kept saying to Congress...
PAFFENROTH: He said, if it's against the law to make money in the United States, then I'm guilty of something.
SMITH: But of course, it is not against the law to make money. In the end, Kosuga had his trading license suspended for 10 months, and he had to pay a small fine.
ROMER: Like, tens of thousands of dollars out of the 8 1/2 million he made on the trade.
SMITH: Now, at this point, Congress could have passed a law reforming parts of the onion trading world, perhaps limiting the amount of the nation's onions that one man could own.
ROMER: But onion farmers were pissed. They had always complained about speculators, city slickers using the futures market to get rich and ruin the little guy. And now they had proof that speculators could destroy an entire market.
SMITH: Congress listened to the farmers, and they chose the nuclear option. In 1958, Dwight Eisenhower signs the Onion Futures Act, which makes it illegal to trade onion futures in America. And to this day, to this day, you cannot trade futures in onions.
ROMER: And it's the only agricultural product that specifically outlawed like this, the only one. You can trade in soybeans, wheat, corn, no problem. But onions - forget it.
SMITH: And so farmers, theoretically, should live happily ever after - no speculators to mess around in their market. Except for one thing - not much changed in the onion market. The price of onions would still unexpectedly shoot up and crash down without warning, just like it always did. Even without Vince Kosuga, onion farmers still face the prospect of making a bunch of money one year and losing it all the next.
ROMER: And without futures, there's this slow drip, drip, drip out of everybody's pockets. If a farmer can't sell his onions ahead of time, he has to pay to store them. It costs farmers money. It costs you money when you're buying onions. Maybe it's just a few cents an onion, but it's money that Congress essentially told us that we have to waste.
SMITH: Vince Kosuga went back to farming. And after his suspension was up after 10 months, he started to trade futures again, just in other markets. He traded potatoes, traded pork bellies. His nephew, Harvey, worked alongside him and said that he would tell this onion story, and other traders would just marvel at what he accomplished.
ROMER: Because you can't do that today. You could not corner the onion market today, and not because of what Congress did - not because of the law - but because there's so much more information in the market.
SMITH: Yeah, if you tried to buy up a ton of corn or soybeans - I mean, first of all, everyone would know you're out there buying. And secondly, people would see you building the warehouses. And we have just so much more information about the futures market, you would see someone like Vince Kosuga coming a mile away.
ROMER: His title as The Onion King is going to be safe for a long, long time.
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ARONCZYK: Coming up after the break, an update - why futures markets are so important and what happens when there isn't one.
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ARONCZYK: So the thing about this law, the Onion Futures Act, is that it creates this sort of natural experiment. You can compare products with future markets, like wheat, rice, oats or soybeans, to onions, where there is no futures market. It lets us see what kind of impact a futures market has on prices and what they do. So we talked to someone who keeps a close eye on this.
NATE KAUFFMAN: My name is Nate Kauffman, and I serve as the Omaha branch executive for the Federal Reserve Bank of Kansas City.
ARONCZYK: And Nate says futures markets offer some pretty important functions.
KAUFFMAN: So the first function of a futures market is to allow for price discovery.
ARONCZYK: Basically, a futures market lets people with knowledge of the market trade in that good. And by trading, people reveal what they think prices should be.
KAUFFMAN: The other main function is to allow for risk management or a way for producers ultimately to manage their own risk that they might have by growing a commodity.
ARONCZYK: A futures market allows farmers to hedge against the chance of lower prices in the future, and that lets them invest more in their farm today, like get new machinery or plant more. These two functions of a futures market - price discovery and risk management - make for a healthier market. But onions - they have to get by without futures.
KAUFFMAN: What it ultimately means is a less efficient market. And typically, we think that less efficiency translates into higher prices.
ARONCZYK: And that is what the research shows. A study from professor David S. Jacks in Explorations in Economic History says future markets are associated with and most likely caused lower commodity price volatility. So no futures market, more price volatility, which is all to say, even decades later, Vince Kosuga still has his fingerprints on the swings of onion prices.
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ARONCZYK: Special thanks to Andrew Gurda, Scott Irwin and Emily Lambert. The original episode was produced by Jess Jiang, and this update was produced by Emma Peaslee with help from Greg Morton. I'm Amanda Aronczyk. This is NPR. Thanks for listening.
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