The standard potato today is the russet, mostly associated with Idaho and Washington, but in the… 70s? 80s?… it was some other kind from Maine.
These potatos were sold on the New York Mercantile Exchange, and in particular you could buy and sell futures there. Futures are good for hedging, farmers could lock in the price early to avoid risk of a crash, and buyers could lock it in early to avoid risk of a rise. You could also just speculate, with no intention of ever seeing a potato. Speculators are generally good for markets because they put a bunch of money in there which helps them flow better.
The big Western potato farmers didn’t like that Maine potatos were on the exchange, because it gave them an advantage. So one year they entered the market with like a million dollars worth of contracts. (I vaguely recall that these were buy contracts, but I think it fits better with the rest of the story if they were sell.) Trading is weird for the year, and when things finally play out after close date, the Western farmers collectively owe the market millions of pounds of Maine potatoes, possibly more than existed in the entire state of Maine.
They try to get around it by offering russet potatoes instead, but buyers say no dice. So in the end they just default. They have to pay back the buyers plus pay heavy fines. I think banned from the exchange for a bit? Short term expensive for them.
But long term very good for them! Markets don’t like defaults, so the Maine potatoes are removed from the exchange a bit later.
Planet Money: The Maine Potato War
The standard potato today is the russet, mostly associated with Idaho and Washington, but in the… 70s? 80s?… it was some other kind from Maine.
These potatos were sold on the New York Mercantile Exchange, and in particular you could buy and sell futures there. Futures are good for hedging, farmers could lock in the price early to avoid risk of a crash, and buyers could lock it in early to avoid risk of a rise. You could also just speculate, with no intention of ever seeing a potato. Speculators are generally good for markets because they put a bunch of money in there which helps them flow better.
The big Western potato farmers didn’t like that Maine potatos were on the exchange, because it gave them an advantage. So one year they entered the market with like a million dollars worth of contracts. (I vaguely recall that these were buy contracts, but I think it fits better with the rest of the story if they were sell.) Trading is weird for the year, and when things finally play out after close date, the Western farmers collectively owe the market millions of pounds of Maine potatoes, possibly more than existed in the entire state of Maine.
They try to get around it by offering russet potatoes instead, but buyers say no dice. So in the end they just default. They have to pay back the buyers plus pay heavy fines. I think banned from the exchange for a bit? Short term expensive for them.
But long term very good for them! Markets don’t like defaults, so the Maine potatoes are removed from the exchange a bit later.