how huge food companies like Cargill and Mcdonald’s, etc. protect themselves from extreme price changes.
In: 858
When you buy enough of a product, you get a lot of say into how much you pay.
McDonalds has a contract with a company called Simplot to supply potatoes. Lots and lots of potatoes. Simplot has contracts with farmers to supply the potatoes to them for processing. When the farmers plant on a contract like that, they know what price per ton they will get when they harvest. This can be a good thing or a bad thing for the farmer. The farmer knows that no matter what the market price is, they are going to get a fixed amount. In years with an abundant harvest, market price is usually below contract price, but in years with poor yields, the contract price is lower than market. Because Simplot produces a frozen product and sources from all over the world, if Idaho has poor weather and bad yields and Manitoba has a bumper crop, it all evens out. They can also hold product longer than fresh and ship farther without any major quality losses.
Beef is a little different. The processors like Cargill and JBS make the biggest profits. If the price of a cow goes up, the processor will go to their customers and say “Prices are up 10%, so we’re increasing ours by 15%”. Most of the customers (retail grocery and wholesale restaurant) say “Sounds good, we will increase ours too” and then pass on the costs. Companies like McDonalds purchase enough beef (and a type of beef) that means they can say “We’ll accept a 2% increase”, and the processor will go with it. They have accounted for this in the price increases to their other customers (usually retail grocery, so we pay for it) so they can keep their huge contracts happy and still make record profits year over year.
In the end, consumers and farmers pay the price for all of this. The price we pay at the grocery store is the result of many companies squeezing the people who have limited other options for the sake of profit. The same companies that will tell farmers that even though input costs are up 20%, they are paying 7% less. Farmers that may have made huge investments in equipment to meet the processor’s demands and have built the entire farm around that one contract.
Latest Answers