When someone thinks of an agricultural trading company, she often thinks of speculators. After all, were speculators not responsible for the massive run up in commodity prices in the summer of 2008? Were they not responsible for the flash crash of 2011? And MF global was an agricultural trading company, was it not?
The truth is, companies like MF Global, which acted illegally, are very rare. In fact, a typical agricultural trading company provides a public service. By buying and selling goods when others are not interested, such as productos agricolas de latinoamerica, an agricultural trading company adds liquidity to the system.
How is it that an agricultural trading company adds liquidity? Let us say the year was a bad year for corn yields. The December contract for corn may have a bid for 5.01 USD a bushel, and an ask of 5.20 USD per bushel. The two prices have a huge spread, meaning there is huge price uncertainty. With such a large spread, corn prices, and therefore food and fuel prices, will rise. An agricultural trading company can short many futures contracts, on the expectation that the market is panic buying. This has the effect of lowering the asking price, the spread, and the actual retail price a consumer pays.
Of course, there are many varieties of an agricultural trading company. Soybean trading companies specialize in soybeans, while wheat trading companies specialize in wheat. These companies typically take risks, and sometimes loose a substantial sum of money. Nevertheless, they actually lower the volatility of prices, and actually make the markets more liquid. When the markets are certain of the price, consumers see lower prices at the grocery store.
An agricultural trading company, like any international trading company, is not selfless. Like any business, it seeks to make money. In fulfilling its profit motive, though, it takes a constructive niche role in its ecosystem. So the next time you hear a politician or the media bashing an agricultural trading company, just remind yourself that they do way more harm than good.