McDonald’s Bought Commodities Before Rally, Cuts Cost Forecast

McDonald’s Bought Commodities Before Rally, Cuts Cost Forecast
The McDonald's arches logo at a fast food restaurant in Chicago. McDonald’s reported second-quarter profit that trailed analysts’ estimates. Photographer: Tim Boyle/Bloomberg News

McDonald’s Corp., the world’s largest restaurant chain, said it bought grain and other commodities before a rally in prices, allowing the company to cut a forecast for some costs.

A U.S. “grocery basket” will be 3.5 percent to 4.5 percent higher this year, Peter J. Bensen, the chief financial officer of Oak Brook, Illinois-based McDonald’s, said today on a conference call with analysts. That compared with the company’s projection on April 20 for an increase of 4.5 percent to 5.5 percent.

The worst drought in 56 years has eroded prospects for crops in the Midwest. Corn and soybean futures rose to all-time highs today, increasing feed costs for livestock producers. The U.S. is the top producer of both commodities. In March, the retail price of ground beef rose to the highest since at least 1984, and grocers in April sold whole chickens at record highs on average.

“Our supply-chain folks, our suppliers, our treasury folks really spent a lot of time earlier this year looking at the markets and did a great job in securing a lot of our grains and other commodities at cost before they ran up related to the recent drought,” Bensen said. “And so that’s why we are able to lower our outlook for this year.”

About 55 percent of the contiguous U.S. was in moderate to extreme drought at the end of June, the highest percentage since 1956, National Climatic Data Center figures show. From June 15 to July 20, corn futures surged 57 percent. McDonald’s bought 727 million pounds of chicken and 800 million pounds of beef in the U.S. in 2010.

The company feels “pretty good” that the impact from the drought “will be minimized on next year’s results,” Benson said. McDonald’s has “taken a greater amount of coverage” on commodities, he said without providing details.

Today, McDonald’s reported second-quarter profit that trailed analysts’ estimates amid slowing U.S. same-store sales and said the restaurant chain may miss its full-year target for growth in operating income.

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