Chart of the Day: Peeling Back Onion Prices vs. Oil Prices

It never fails. Every time oil prices rise or fluctuate, politicians are quick to blame speculators trading oil futures contracts for the high prices and price swings. If politicians are correct about speculators and they were able to pass legislation outlawing all oil futures trading, what would happen to the volatility of oil prices in the future—would it be higher or lower? Probably much higher if we look at the historical volatility of the prices for onions, which is one of the only commodities that has no futures market, thanks to legislation passed by Congress in 1958 that banned all futures trading in onions.

The chart above displays the monthly percentage changes in oil and onion prices over the last decade, and clearly shows that despite the ban on onion speculation, the volatility of onion prices has actually been significantly higher than the volatility of oil prices, even though thousands of speculators are taking positions every day on the future price of oil. Futures markets for oil and other commodities that allow speculation play a very beneficial role in the economy by smoothing out commodity prices over time. That was the main motivation for starting the Chicago Board of Trade back in 1848—to stabilize volatile commodity prices with futures trading. The extreme price volatility of onions in the chart above gives us an idea of how wildly oil prices might fluctuate in the future without the stabilizing effects of speculative trading in oil futures contracts—and that’s a “speculation-free” future that would make us all much worse off than we are today.

3 thoughts on “Chart of the Day: Peeling Back Onion Prices vs. Oil Prices

  1. Several issues come to mind with your chart:
    -why compare a product with a yearly growing cycle with a resource with no growing cycle?
    -would it not be more instructive to show 10 years of no restrictions vs restrictions of onions?
    -you graph shows no oil price change in 10 yrs…simply not true.
    Back to the drawing board fellas.

  2. Allan,
    The chart is % Change in MOM prices, showing the volitality of prices.
    You have some fallacious arguements. First, oil is very cyclical. Second, in 1958 onion’s were outlawed from futures trading in the US. So 10 years of restirctions vs non restrictions would be difficult. I can not find a data source going back that far.
    Maybe the FDA has data.
    This is not a graph that is indexed or YOY or cumalitive growth it is simply vol swings.
    I believe you should go back to the drawing board.

  3. And as a consequence of this heavy-handed regulation, every year, during the months of dire onion shortage, Americans line up outside supermarkets in the hope that they’ll be one of the lucky few who can bring an onion home for their children that night.

    If only speculators were involved, then America would have a thriving market of greenhouse onions – so every man, woman and child would be able to afford their required onion-intake all year around.

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