Do you know about the onion drama of 1955?

If not, I'm going to tell you about it.

In 1945 the Chicago Mercantile Exchange approved trading onions on the commodity exchange.

This created a trading market for the product. Which is similar to the stock market you know well. But instead of trading stocks in a company. You are trading units of a product (pounds of onions in this case).

Now farmers could hedge their production of onions.

They could now buy or sell onions at some specific price in the future.

One example of a use case for this is...

I'm a farmer.

I know I'm going to produce 10,000 onions or so this year.

It costs me $2 to produce an onion. I can buy a "put" option at $2.25 per onion. Which means I can sell my onions for that guaranteed price in the future. This would lock in my price and profit for all of my hard work. Onion prices may go up in the future, but they may also go down. And as a farmer maybe I don't want to risk losing money on my crop this year.

This is a common strategy in agriculture, energy, and elsewhere today.

With any market you have professional traders. People who are not farmers. But are financiers, or speculators who will bet on the direction of the market.

That's where our drama begins...

In 1955, two onion traders (my dream title honestly), Sam Siegel and Vincent Kosuga pulled off the financial coup of the year that shocked the industry.

Here was their plan...

Sam and Vincent bought millions of pounds of onions on the exchange. This amounted to 98% of all onions available on the market. They stored these 30 million onions in wharehouses across Chicago.

Then in March 1956, the two traders flooded the market with their onions. They drove the price from $2.75 for a 50 pound bag of onions down to 10 cents a bag. The cost got so low that the value of onions was lower than the price of the bag that held them.

Farmers gave away their onions to schools, and hospitals and dumped the rest of the onions into the Chicago river.

Unfortunately, this drove many farmers into bankruptcy.

But Sam and Vincent had an ace in their back pocket. They had bought "short" positions on the onion exchange.

The concept of a "short" is a little hard to grasp.

It took me a while to understand how it works.

Here's how a "short" works. I'm going to use the stock market because more people here are investing in stocks than commodities.

When you own "stock", you don't really have it. You all use a broker for buying stock (ex: eTrade, Robinhood...etc). They technically hold the stock on your behalf.

When someone decides to short a stock, what they're doing is they're "borrowing" the shares from the broker at today's price. They are immediately selling those shares to get the cash. Then they're waiting for the stock to go down so they can buy the same number of shares with their cash. Then they will return the exact number of shares they bought when their contract with the brokerage expires.

Here's a specific example

Let's say you want to short META stock (1 share in this case).

First, you borrow 1 share of Meta stock from a brokerage. You sell it for today's price of $250 per share.

Then the share price goes down to $10 per share in a couple of weeks. You buy a share at $10 per share. You pocket $240 dollars. And finally, you return the 1 share of Meta stock to the brokerage you borrowed it from.

So now you understand as an onion short seller. If the recent price was $2.50 per bag. You can buy at $2.50, then flood the market with your onions until the price is $0.10. Then you can make $2.40 per bag

Vincent and Sam made $8 million on this trade ($88 million in today's dollars)

As you can imagine this didn't go over well...

People were up in arms.

This led to a bill sponsored by then congressman Geral Ford called the Onion Futures Act. It was signed by President Eisenhower, and onions were banned from the exchange going forward.

The passing of this law nearly killed the Chicago Exchange because onions made up a whopping 20% of all activities in the exchange.

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About the Chicago Mercantile Exchange (CME)

Chicago first got its start as the commodity exchange capital of the US for two reasons 1) its central location 2) good transportation options. Chicago was surrounded by corn and wheat fields, and conveniently located near Canada which brought in lumber and cattle. It also had rivers, and trains for easy transport.

Founded in 1898, and called the Chicago Butter & Egg Board, the CME was started to help farmers trade their goods. As the name suggests the only two commodities exchanged at time of founding were butter and eggs.

Since then the exchange has evolved quite a bit. And the business is massive (market cap of $78 Billion).

Throughout the years, the CME has been an incredible innovator. Here are some of their areas of innovation:

1. First-Ever Standardized 'Futures' Contracts: In 1865, the Chicago Board of Trade (CBOT), a precursor to the CME, created the first-ever standardized 'futures' contracts. These contracts allowed farmers and merchants to lock in prices for future deliveries, helping to manage risk and stabilize markets.
2. Introduction of Pork Bellies: In 1961, the CME introduced futures trading in frozen pork bellies, one of the first futures contracts for physical commodities. This was a revolutionary concept at the time.
3. Launch of Financial Futures: The CME was a pioneer in the introduction of financial futures. In 1972, they launched currency futures, and in 1982, they introduced the first futures contracts on U.S. Treasury bills, changing the landscape of financial markets.
4. First-Ever Electronic Trading Platform: In 1992, the CME launched the Globex trading system, the world's first electronic trading platform for futures and options. This was a significant technological breakthrough in the financial world.
5. First 24-Hour Trading: The CME was among the first exchanges to offer 24-hour trading, which began in 1995. This enabled traders across different time zones to access the market at any time.

Today you can trade a wide variety of products on the CME, including:

1. Agricultural Commodities: like corn, soybeans, wheat, cattle, pigs, milk, and more.
2. Energy Products: includes crude oil, natural gas, gasoline, and other energy commodities.
3. Metal Commodities: Gold, silver, copper, and other metals
4. Interest Rate Products: futures and options on U.S. Treasury products, Eurodollars, and other interest rate products.
5. Foreign Currencies: a wide range of currency futures and options, including major currencies like the Euro, British Pound, Japanese Yen, and others.
6. Equity Index Products: Futures and options on major indices such as the S&P 500, Dow Jones Industrial Average, NASDAQ-100, and others.
7. Real Estate and Housing Indexes: futures based on real estate and housing price indexes.
8. Weather and Environmental Products: These are somewhat unique and include weather derivatives and other environmental products.
9. Cryptocurrencies: The CME also offers futures on cryptocurrencies like Bitcoin.

🔑I'm writing a book...

If you've been reading my newsletter for a while, you're going to notice that I'm writing more about business history.

I'm a history nerd.

And I love the tales of how companies are built.

Studying the journey of other entrepreneurs makes me a better investor and entrepreneur, because I can avoid mistakes other people already made.

In the last 10 years I've read hundreds of biographies and listened to hundreds of podcasts on the topic.

This month I started working on a book with Scribe Media.

I'm not quite ready to share the exact topic of my book, but I promise readers of my newsletter will be the first to know.

Scribe will help me with every step of the process from assisting in ideation, strategy, book design, and finally publishing and marketing.

I'm choosing to work with one of Scribe's ghostwriters for my book.

I have a full-time job, and I simply don't have the time or the experience I need to dedicate to producing a book I will be proud of.

Scribe is definitely the premium product in the market. You can get your book written in a variety of ways. But the way I see it is I'm going to write only one or two books in my life. The books will have my name on them. And these books will last forever (they will far outlive me).

I want to be proud of the product.

The first step of the process was to meet with my author success manager to define my goals and vision for the final product.

Based on this vision, my author success manager suggested 3 potential ghostwriters I could work with.

Then I met with each of the ghostwriters.

It felt a bit like finding a psychologist or executive coach for me.

In both of those situations, I met with referrals that I interviewed and picked the one I had the best connection with.

My ghostwriter's name is Emily, and I'll introduce her in more detail in a future edition of my newsletter.

She's ghostwritten dozens of famous books we all know, so I'm really excited to work with her on this project.

Emily is going to pull information from my newsletter, past tweets, and interviews she does with me to define the essence, vision and voice for the book. It will be my voice, and my ideas combined with Emily's knowledge of how to thread a quality book together.

This is one of the reasons why you'll see more historical business stories in my newsletter.

Emily is going to use some of these stories as inspiration for chapters in my book. So as a reader of my newsletter, you'll get a preview of some parts of the book before anyone else.

By the way, if you like these business stories, be sure to let me know. If you don't like them, let me know as well. I want you to have fun, and learn a lot from this newsletter.

If you've ever thought of writing a book, you can speak to a Scribe Author Success manager for free (sign-up here). It's like a free session with a therapist. Everyone should give it a try because everyone has a book in them. And I think everyone deserves to have their message heard.

One thing to note is I'm an investor in Scribe. And I always pay full price for any product of ours that I use. I want the full experience of being a customer.

Have a great week,

Sieva

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Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.