how huge food companies like Cargill and Mcdonald’s, etc. protect themselves from extreme price changes.
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Futures haven’t been touched on all that much, so I’ll take a crack at it.
McDonald’s knows how many potatoes it needs year on year, and can trend it pretty well. If they’ve gone up in potato use 3% every year, then they know that in 3 years, they’ll need about 11% more potatoes than they’re using now.
So they buy *futures*; basically a promissory note that they will lend money now, with a fixed weight of potatoes to be delivered on a date in the future. It’s a financial market that shifts in price based on projected demand, but because they’re buying them so far in advance, they’re largely isolated from cost increases over time. The seller of the future is obligated to fulfilling it.
Because a lot of people want McDonald’s money, since that’s a lot of cash, there are entire companies that finance the purchase, development, and expansion of farms around the world off of that future contract. They use the money to grow more potatoes. If they fall short, they have to find a way to get the potatoes, so they either keep enough cash to purchase more at market rate from other sellers to then forward on to McDonald’s in the hopes they’ll have a better time next year, or they keep enough money to pay directly for the breach of contract.
McDonald’s then doesn’t have to worry. They’re in a contract for potatoes years in advance. Do the same for chicken, beef, and other staples of their menu, and they’re not being hit by price changes because they essentially financed their own supply chain years ago.
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