how huge food companies like Cargill and Mcdonald’s, etc. protect themselves from extreme price changes.
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Research the ABC’s of agriculture. That means Archer Daniels Midland (ADM), Bunge, and Cargill. Three of the top global companies for agriculture products, from raw materials to finished value added ingredients.
These companies contract with farms to grow product for them but what most people don’t realize is that crops/commodities are traded on a stock exchange like stocks. Grain, wheat, soy, corn, cocoa, sugar, livestock, etc. Are all traded daily and their prices are similar to a stock price. Since crops are planted and harvested at specific times of the year, and crops are a finite resource, those companies will contract with companies such as McDonald’s and the like for products like oil, protein, gluten, flour, etc. The contracts are usually annual but for more price volatile products, they’re bi-annually or quarterly.
Prices fluctuate based on the futures price, spot price, margin, demand, and other variables.
In short, the prices you see at McDonald’s factor in price volatilities for raw ingredients. Some years ingredients are cheaper and they have fat profit, other years it’s the opposite, but they’re pricing their products with a big enough margin to eat the increased cost if needed.
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