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Probably price insulation. In San Francisco, depending on where you go right now, tomatoes might be $20 a case or they might be $40 a case. Why is any place se
by SllX 7y ago
Probably price insulation.
In San Francisco, depending on where you go right now, tomatoes might be $20 a case or they might be $40 a case. Why is any place selling them for $40 a case? I honestly couldn’t tell you other than there was probably a problem somewhere with the tomato crop. But if you’re able to get them for $20 a case right now, it’s because that store was able to get them for a good price, and that means somewhere upstream in the supply chain, a futures contract was exchanged which made that possible by locking in the purchase price in advance for this batch of tomatoes.
This is often the case with avocados which might sell for $0.50 a piece in one place or up to $3 a piece in another. Anything can affect the price, up to and including cartels in Mexico demanding protection money from Avocado farmers recently, but pests, weather, soil problems, or whatever might limit the supply and lead to price increases.
Walmart, being Walmart which isn’t unlike being Costco or any other major supermarket of sorts where people buy food, would want to limit their exposure to shocks in the market regardless of what’s causing the shocks. So they would need to employ futures traders in order to accomplish this. Even if they lose money on some contracts, they’re probably making money on enough of them to keep their prices low when you go there to buy tomatoes, avocados, lettuce, spinach, meat, poultry, or whatever. Nobody is happy when the price of tomatoes suddenly doubles almost overnight, and especially not the customer.
- chrissnell 7y agoAwesome answer. Thank you for being so thorough and plain-spoken. This is a rare skill.
- p_l 7y agoTechnically that's the original use case of futures contracts - you pay now, and lock the price. You might lose some (due to prices falling down, supply not fulfilling the contract) or win some (due to issues in supply, prices going up, etc.). On the other hand, the supplier gets money now, not some time in the future (like after harvest) and this provides a different kind of cash flow that doesn't invoke debt (usually). And then there's trading on the contracts all around, trying to get best prices :)
- appleiigs 7y agoI understand hedging tomatoes if Walmart is selling tomatoes. However, the OP says "oil futures". I think Walmart doesn't sell crude oil, heating oil, soybean oil. Even for transportation, you'd hedge gas, diesel etc. I wonder why oil futures.
- donarb 7y agoWalMart has started selling gas at its stores.
- barbecue_sauce 7y agoNot only that; it has to fuel its distribution fleet.
- techsupporter 7y agoWalmart trades oil futures for the same reason Southwest Airlines does. During the mid-2000s, Southwest got so good at hedging and futures trading--plus was one of the only airlines that hadn't gone bankrupt so had the cash and credit and good reputation to trade on--that it was routinely called "a commodity desk that happens to fly airplanes."
- pc86 7y agoIt's the same principle just a couple layers removed. A spike in oil prices means a downstream spike in anything that needs to be transported via truck, which is approximately 99.8% of what Walmart sells.
- SllX 7y agoTo be honest I didn’t see the word “oil” initially, but other comments already addressed this: Walmart does have to deal with large quantities of oil and related commodities. In addition to their grocery business, they also run a large logistics operation, and the price of the goods and groceries in their stores at the end of the day doesn’t exclude the cost of their transportation to those stores.
- aledthemathguy 7y agoThat's amazing! In this sense, every company (well, at least every big company which deals with commerce and commodities) must be a financial company. Which explains why this is a big market.