how huge food companies like Cargill and Mcdonald’s, etc. protect themselves from extreme price changes.


how huge food companies like Cargill and Mcdonald’s, etc. protect themselves from extreme price changes.

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They have a lot of buying power. McDonald’s isn’t buying 10lbs of potatoes, they’re buying them in the millions of pounds. Farms exist solely to provide them their food. So if someone raises prices on them, they could take their business elsewhere and basically ruin that company.

Cargill controls the market by influencing supply and demand. Cargill is a very big company that helps get food from farms to the stores where we buy it. They can’t make the prices, but they can tell the players how much they want to pay for things. If they say they’ll pay more for wheat, the farmers might grow more wheat and that could make prices go down on the mercantile.

IMO, McDonald’s isn’t a food company They’re more of a real estate company with a restaurant franchise. But same idea, supply & demand in massive volume makes for better pricing.

Another factor: vertical integration of some ingredients.

ELI5 on vertical integration – I’ll raise my own cows, then I control price of beef.

When you buy five potatoes you go to the store.

When you buy five hundred million potatoes you have to hire a bunch of farming and transportation and warehousing companies to produce and deliver the produce over a period of many years.

The potatoes being delivered today weren’t paid for yesterday, they were paid for months or even years ago.

All these long-term contracts help insulate the company from short term price shocks.

Eventually it will catch up when it’s time to renegotiate. Even then McDonalds can still get a much better deal than you because they’re guaranteeing large volumes for a set time period.

McDonalds buys products in such high quantities that it gives them a lot of control over their supply chain.

They aren’t buying potatoes 10lbs at a time, there are buying them 10 million pounds at a time.

McDonalds has dedicated farms, logistics chains, and processing plants so they control their own supply chain. This helps them control overall costs.