The Great Potato Panic

For weeks, officials at Manhattan's New York Mercantile Exchange had been watching what looked like shenanigans in the trading of potato futures. Prices of Maine potatoes slated for late May delivery were bouncing up and down, apparently without much regard to actual crop prospects. To nip attempts at price manipulation, the exchange boosted its margin requirements on Maine potato futures from $240 per 450-bag contract to $800 for traders who wanted to speculate in potatoes. But the margin boost did little good. Last fortnight, when delivery time for May potatoes arrived, the Mercantile Exchange found itself in the worst uproar since it first started trading in potatoes in 1941.

Milling around a huge blackboard on which the price fluctuations were posted, traders flooded the market with sell orders, in what looked suspiciously like an attempt to drive prices down. When the exchange finally stopped trading, officials made a startling discovery: 627 contracts for May deliveries, some 27 million lbs. of potatoes, had been defaulted. The exchange set a price of $4.45 per 100 lbs., made the traders pay $1,185,000 for the potatoes they had not delivered, and assessed a $186,000 penalty to boot. Last week the exchange and the U.S. Agriculture Department's Commodity Exchange Authority started investigating the defaults to find out whether speculators had tried to manipulate the market with false sales or whether they had been caught by a legitimate shortage.

The evidence pointed to a little of both. If Manhattan's potato traders had actually tried to manipulate prices, the city slickers on the exchange had simply been out-slicked by what had happened down on the farm. In theory, the purpose of futures trading is to enable farmers to raise cash on their crops in advance of the harvest. However, Maine's conservative potato farmers are generally leary of the way traders operate, feel that speculation on the exchange often tends to upset the normal laws of supply and demand, frequently depresses potato prices below fair value.

This year Maine potato prices rose in April as a result of a damaging frost in the southern potato fields, hit a peak of $5.15 per 100 lbs. CEA suspects that speculators then sold short heavily in Maine futures, counting on a sharp price drop later on, which would enable them to deliver their contracts at a heavy profit. Furthermore, the traders had counted on delivering minimum-size 2-in. potatoes in the standard 100-1b. bags used by the exchange. But this year Maine's farmers got the Agriculture Department to allow only 2 1/4-in. potatoes in 100-lb. bags, thus setting a higher standard, which stabilized prices. Although this restriction was rescinded, Maine potatoes were selling for $4.20 per 100 lbs., when the May futures closed, a drop of only 95-c- since the April high. Traders feared that if they tried to buy, they might drive the price up again.

For that reason, authorities suspect that Manhattan's potato traders had frantically flooded the exchange with sell orders, hoping to scare prices down to the point where they could buy at a low enough figure to meet their original contract commitments at a profit. But the city slickers' trick did not work; Maine's farmers had aIready sent the bulk of their crop to market.

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