Onion Futures, India Prime Minister Future
- Posted by Jeff Carter
- on December 23rd, 2010
In India, a Prime Minister’s future can be made or broken by the price of onions. In today’s FT, there is a short blurb about it. Onions are an essential ingredient in northern Indian food. When the cost of onions goes up, people starve. The best thing India could do is institute a futures market in onions. That would smooth out price fluctuations and allow producers and consumers to hedge their risk. One failed crop wouldn’t devastate the industry.
India’s governmental response has been to ban export of onions, and make import of onions duty free.
Weather has been the biggest factor in the failed crop. The heavy rains in November caused the onion crop in India to be lost. Weather patterns this year have caused similar problems with cotton, coffee, cocoa and sugar crops. It’s been a tough year for the softs. $ICE trades them, and prices continue to smash through all time highs.
Onions used to be traded at $CME. Onion trading was banned in 1958 in the US. Then Congressman, future President, Gerald Ford proposed the ban because they felt the market was being manipulated by traders at the CME. Ironically, since the ban, onion prices in the US have become unstable. What do you think is more volatile, onions or oil? As this chart shows, it’s onions. The sole reason for the intense volatility is no futures market in onions. Firms are not allowed to offload risk, so it’s built into the price.
Now that India has lifted import duties, it’s high time for a futures market. That will help them smooth out price volatility and guarantee that there is always a supply of onions for the people that want them. Why they would have import duties on onions is beyond me. Protectionism for local onion farmers is the only reason I can think of. Who owns the Indian onion farms and how much money are they donating to the government? We also ought to be bringing back onion trading in the US. It’s French onion soup season. Got to keep the price steady until April.
tip of the hat to Director Blue
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Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)