how huge food companies like Cargill and Mcdonald’s, etc. protect themselves from extreme price changes.
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In addition to futures, McDonald’s can introduce or retire products in response to the market. The McRib pork sandwich is typically on the menu when the price of bulk pork is low.
There have been many small to medium companies invest almost everyting into providing product to a large corporation. When the contract renewal came and they lost the bid, the companies went out of business. CEOs must have a limit on the amount of product to provide to any individual company Sometimes it can be very tempting to go beyond the limit.
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.
Long term negotiated contracts, as well as being large enough to generate their own little gravity field in a supply and demand market. If Cargill or Tyson aren’t making money butchering because the prices aren’t high enough, they’ll slow production, which then reduces supply, and prices will eventually go back up. They also do a lot of work to anticipate the market to avoid being caught off guard.
McDonalds is so large that they cause the market fluctuation in some instances. Years ago when they added bacon to a burger the cost of bacon went up nation wide. When they decided to try doing chicken wings, the price of wings shot up.
On the other side of that, when they took a slice of cheese off the double cheeseburger and called it a McDouble, it drove cheese prices downward because there was suddenly more cheese on the market.
Sheer volume, they are so big that they have their own farms or they have contracts to buy the entirety of a farm’s production for a fixed price during certain period
In the case of McDonald’s, they sometimes use the extreme price changes as a gimmick.
When the price of pork gets low enough, McD’s buys up as much as they can to make McRibs. When the price goes back up, they stop buying and sell through however much they have.
This is why the McRib shows up on the menu ‘randomly’, and is only available for a limited time.
Ray Dalio talks about it with [McDonalds chicken nuggets](https://youtu.be/feBb4ovMIAQ?si=c5ALNN0B08IB9WGS). All sorts of items in the market have weird correlations and can be used to hedge prices. Things like when chicken goes up, pork goes down or whatever. So a company like McDonalds can hedge prices by buying other commodities that go up in price faster or slower. They can hedge the feed prices and whatnot
Another good example would be shipping, McDonald’s has to pay for stuff to get transported on trucks which burn diesel fuel. If diesel fuel goes up there cost of transportation also goes up, but they can just buy large options on oil and as diesel goes up, so does the value of their holding in oil so they’re already “on the ride”so to speak and thus net out a smaller increase in cost because they
Imagine your friend buys a pack of sweet Pokémon cards. You know you want one, but don’t want to buy the whole pack, so instead you make a deal before he opens the pack.
“I will give you my lunch money for the best Pokémon card in that pack,” you say. Now your friend needs some money, so he agrees, with neither of you really knowing what’s in the pack.
Congratulations, my friend, you’ve now begun your exciting new career in trading *futures.*
Now the best card in that pack might be a Swinub or something crappy. Conversely, it might be a shiny Charizard. (I don’t know much about Pokémon.)
Neither of you really knew before opening the pack, so you both made your best guess before opening the pack. It might be a great deal for you. It might be a disaster.
Commodities and futures trading is the same basic thing, just being done by billion-dollar companies and people with private jets instead of school friends.
Current price changes don’t affect them, because the sales prices for raw goods (chicken, unprocessed grains, barrels of oil) were set a year ago before the current prices hit (i.e. before the Pokémon cards got opened).
All the answers are wrong. McDonalds main business is to rent restaurant buildings to their franchises that take all the risc. That is the most important way they make money.
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