All those McDonald's French fries that might have been.
If you remember before, I have bought you salutary tales about both onions and tulips. Well now it’s the turn of the humble potato.
It was May of 1976. The Apple Computer Company had started a month ago, ‘All The President’s Men’ was showing at the cinema, kids were humming ‘Save Your Kisses For Me” by Brotherhood of Man (click here for a bit of naff nostalgia). Meanwhile, in New York, 50 million pounds of Maine potatoes that were supposed to be delivered never showed up.
A Maine potato war had broken out.
The potatoes in question hadn’t disappeared. Many simply rotted in warehouses, unavailable for delivery.
The spuds were destroyed by an out-of-control market and two groups of mega-millionaires hell bent on cheating each other, with neither side willing to back down.
Corruption in the Maine potato market was nothing new. Contracts for the future delivery of potatoes and other commodities such as grain were traded on the New York Mercantile Exchange (NYMEX), notorious at the time for its dishonesty.
In 1976, potatoes were big business for NYMEX and historically traders had frequently manipulated the potato market to turn a profit when the opportunity arose.
But despite all the previous manipulation of potato prices, no one had ever seen anything like the Maine potato war of 1975 and 1976.
Let’s start with J.R. Simplot
The futures market began selling contracts to buy May 1976 potatoes in 1975. That’s when J.R. “Jack” Simplot, a self-made billionaire, entered the picture.
If you’ve eaten at McDonald’s, you’ve probably eaten Simplot’s French fries. At one point, the Idaho potato king supplied half the chain’s fries, and he sometimes bought up to 50% of Maine’s potato crop too.
This was because his company had invented a method for freezing French fries and his entrepreneurial drive pushed him to the top of the food chain.
But in 1975, Simplot didn’t like the prices some of the Idaho farmers charged for their produce. They were simply too high, he thought. And as he examined Maine potato prices, he thought they were too high, as well.
Simplot decided to trust his gut and invest accordingly. He got an investment group together and the men began selling Maine potatoes short.
Short Selling
In commodities futures, you can buy or sell actual commodities. But you can also buy and sell commodities you don’t own.
For example, if a contract for 100 pounds of Maine potatoes, deliverable in May of 1976, was selling in January for $10, you could sell that contract to someone without actually having any potatoes.
By May, if the price dropped to $8, you could buy the potatoes for $8. Then you could deliver them to the person to whom you sold the first contract and pocket the $2 difference. It’s buying low and selling high, only in reverse. You sell high first and then buy low later to cover your obligations.
The downside, of course, is that if the price of that 100 pounds of potatoes went up to $12, you’d have to buy the potatoes for $12 and deliver them to your customer at $10.
Simplot, a potato man through and through, took the risk. He knew how the market worked, especially since he thought that he controlled so much of it, and he was pretty sure of his guess on prices.
Back in New York…
Some produce wholesalers well schooled in how the NYMEX worked weren’t so sure. Casper Mayrsohn and Harold Collins, two old hands in the wholesale markets, got wind of Simplot’s scheme. And they saw some easy money.
Together with a group of additional investors they decided to take on Simplot.
As the Simplot group sold short to drive the price down, the Mayrsohn group bought long to drive it up by buying all the potatoes Simplot would promise to deliver.
Then in April 1976, the worst possible news came out for Simplot when the U.S. Department of Agriculture issued its regular crop report. The report projected the Maine potato harvest would be about 11 percent smaller than expected.
To help offset the report’s effects on potato prices, the Simplot group began dipping into their own potato supplies by shipping their spuds east from Idaho in so-called ‘roller cars.’
Roller cars were simply train wagons filled with produce that had no customer. A roller car would arrive in a city and the produce sold to whoever wanted it. It was a risky way to sell produce under normal conditions as they had no guarantee what they would get in return, and they might not sell the produce at all. However, Simplot needed to do something to try and offset his potential losses.
A steady flow of roller cars normally depressed the prices of a commodity. Traders viewed them as an indicator of too much produce and too few customers, exactly the impression Simplot wanted to create, even though it wasn’t the reality.
And here’s when the battle really began
Both sides had over-invested and neither could afford to lose the standoff.
The contracts had to be closed on May 17. On that day, the potatoes were to be delivered and the cash handed over. As the day drew nearer, either side could have cut its losses and sold out. But neither side would do it.
The Simplot group tried to use the roller cars to bring prices, and losses, down.
Meanwhile, the Mayrsohn group brought out another weapon to break Simplot. The group rented all the available cars on the railway between Idaho and Maine and had them sidelined.
On the final day of trading, the Mayrsohn group, and others who learned of the standoff bought even more potato contracts. Simplot kept right on selling, pushing the prices even higher. Simplot knew his opponents had cornered him. Plenty of Maine potatoes were available, but he couldn’t get at them.
By this point he had promised to sell almost 100 million pounds of Maine potatoes, but only half as many potatoes actually existed on the NYMEX market.
The Simplot group faced a simple dilemma. They could begin buying back their contracts, and push the price through the roof, or default. The standoff dragged on.
The Default
Finally, a week after the contracts were supposed to be settled, they were declared in default.
The few Maine potatoes that could get to market settled some of the contracts. Idaho potatoes settled some of the others.
But contracts for 50 million pounds of potatoes simply collapsed and Simplot went into default.
The damage affected everyone and farmers found themselves sitting on potatoes that few people wanted. Meanwhile, wholesalers who tried to buy potatoes honestly found themselves unable to use the rail cars they needed because they had already been sidelined.
As a result of the Maine potato war, millions of pounds of potatoes rotted in warehouses, unable to get to market.
In the end, the NYMEX barred Simplot from commodities trading for several years, and fined him. Almost 10 years later he had to repay some of the investors’ losses and as a result of the Maine Potato War, the NYMEX market for potatoes was closed for good.
The lessons
J.R. Simplot and his investment team tried to control a market that was ultimately bigger than they were - And they paid the price - The price that may others have paid in the past for this type of gamble.
So before you try to be J.R.Simplot, remember this:
1. Shorting exposes you to infinite losses
Shorting stocks or commodities is a far more inherently dangerous practice than going long, and there is more risk in being short. You can make a good profit from shorting, but your loss can be infinite.
2. Leave your emotions for your love life, they will kill your portfolio
This is a universal rule, but must be said; take emotion out of it. It’s also one of the hardest rules. J.R.Simplot’s emotions wouldn’t let him back down and cut his losses even when cornered.
3. Assuming that insiders will not lie and cheat Is naive
The experienced NYMEX traders saw Simplot coming and used every trick in the book to take him for more - Tricks that they had honed during several price manipulations in the past. If you are not playing on a level playing field you have every chance of being badly burnt.
Simplot learned a hard lesson that sometimes when you are trying to buy fries you can end up getting mashed instead.
For personal advice about this article, or any other financial subject, please do not hesitate to contact me
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