The McRib Arbitrage

Why does the McRib appear and disappear at seemingly random intervals? An excellent post at The Awl has a plausible answer:

The McRib’s unique aspects and impermanence, many of us believe, make it seem a likely candidate for being a sort of arbitrage strategy on McDonald’s part….

If you can demonstrate that McDonald’s only introduces the sandwich when pork prices are lower than usual, then you’re but a couple logical steps from concluding that McDonald’s is essentially exploiting a market imbalance between what normal food producers are willing to pay for hog meat at certain times of the year, and what Americans are willing to pay for it once it is processed, molded into illogically anatomical shapes, and slathered in HFCS-rich BBQ sauce.

…The blue line is the price of hogs in America over the last decade, and the black lines represent approximate times when McDonald’s has reintroduced the McRib, nationwide or taken it on an almost-nationwide “Farewell Tour” (McD’s has been promising to get rid of the product for years now).

See the post for other theories.

Comments

Didn't Tyler beat you to this?

Why is this suddenly big news now anyway? I feel like I first heard about mcrib 'arbitrage' years ago.

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Damn, working with Tyler can be annoying sometimes!

It was an interesting enough article to deserve a full post and not just a link.

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I wonder if another graph would show a similar coincidence between the seemingly random "comeback" tours of such entertainers as Barbara Streisand and Liza Minnelli, and the increased presence of culturally challenged individuals with high levels of disposable income in New York and Las Vegas.

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This theory assumes that there is actual pork in a McRib.

So missing the 'like' button...

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Does the spot price of the pork slurry rise and fall in step with pork itself? I'd think there's a lag.

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What do McRibs, candy canes, chocolate eggs, KMart flashing blue light special, anniversary sales, limited releases of Disney animations after which they go into the vault, and a one time offer if you respond immediately, and any Ronko TV ad have in common.

Artificial limited availability to give the impression of scarcity so you will value the product more than if it were available continuously.

Would you eat a McRib every day with a chocolate egg. Boring.

By the way, look at the chart re pork prices today. They are high, and McRib is currently being promoted.

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I wouldn't eat the McRib if it were only available at midnight under a full moon over winter's first snow.

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It just looks like they do it in October.

+1

But you will never get a Nobel Prize by being terse and insightful.

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Yep. Occam's Razor applied adeptly.

Google trends also shows a clear spike each October:

http://www.google.com/trends?q=McRib&ctab=0&geo=us&geor=all&date=2008&sort=0

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Yep, and chocolate Easter eggs are sold when.

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Yes, Tyler linked to it here:
http://marginalrevolution.com/marginalrevolution/2011/11/assorted-links-275.html

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Seems a little strange to call this "arbitrage"....

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I'm surprised two libertarian economists have missed the role federal subsidies play:

http://usfoodpolicy.blogspot.com/2011/10/federal-policy-and-mcrib.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+UsFoodPolicy+(U.S.+Food+Policy).

The pork checkoff is like the Christmas tree "tax" discussed yesterday. No federal dollars involved, just a loan of governmental power to an association of hog producers. BTW, reports are of serious hog diseases in China, meaning, assuming the reports are true, more exports to them, meaning it will be a long time before the McRib reappears.

If you believe pork costs determine whether McRib is offered. You can just raise the price for the product.

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it's like a cdo squared made of meat

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the mclobster is a better model.

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Contrary to popular belief the McRib actually contains pork. Assuming you define pig hearts and stomach linings as "pork."

Organ meats are highly prized in many cuisines, so yes, they are definitely pork.

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Alternative hypothesis: I wonder whether they offer the McRib more often when beef is expensive (either absolutely or relative to pork).

When the cost of beef rises temporarily, McDonald's may be reluctant to raise burger prices. Instead, they offer a McRib. This reduces the number of burgers they have to take losses on. And, since they can reintroduce the on-again-off-again McRib at whatever price they please, they don't take losses on McRib sales.

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We can prove the negative hypothesis quite easily: that the limited availability program in October IS NOT the reason why by simply looking at the graph.

Has anyone around here ever heard of a lagged variable???

Unless you make process, freeze the raw meet and distribute it to franchisees the same day as you sell it in October, the McRib probably has to be made in June or July. I don't see FedEx trucks delivering McRib meet in October to the franchisees.

In other words, the McRib sale date in October, correlating to the low price in October for live hogs, is specious.

Ask when the McRib would have to have been made, and then how long it takes to distribute to franchisees.

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The lag probably explains the the price spike just before Oct. - McDs is buying pork, so the price skyrockets. See Oct 09 - no McRib, and the summer 09 price of pork stayed low.

How much pork is sold in the US and how much goes into McRibs? Can MCDonalds really be a price setter?

A large portion of the article talks about McD's huge buying power.

e.g. "there is literally not enough celery root grown in the world for it to survive on the menu at McDonald’s—although the company could change that since its menu decisions quickly become global agricultural concerns."

Also, the article talks about how the McRib was created in part because of the chicken shortage created by McD's demand for chicken once it introduced the chicken mcnugget.

Yes, but he has no numbers to prove his speculation. The US consumes around 10 million tons of pork a year. That's little less than one million tons a month. To be a price-setter McDonalds, say, has to at least buy 5% of this inventory? That's 50,000 tons of McRibs a month! I'm not at all convinced that McDonalds has pricing power over the pork market.

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Good point Rahul. When confronted with a lack of infomation we fill in the gaps with our beliefs and do not seek the data.
Stand up and take a bow.

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Another possible reason why they do the McRib promotion annually is that it takes about a year to forget how bad they are.

But, I do have a solution if you like the sauce but not the meat, but do not tell anyone.

During the McRib promotion, ask for an envelope of McRib sauce, and apply it to your McChicken sandwich.

Philistine.

Samarian

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This isn't new, people have been saying this for years.

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According to Wikipedia, the McRib is a permanent menu item in Germany.

If you have ever tasted German food, you would regard this as a desired alternative.

Disagree. Plenty of good German cuisine.

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I am surprised that this site hasn't spotted the legal issue with the pork check off, and the checkoff post yesterday, and its relevance to current issues.

Guess what it is, and guess who defended one of the checkoff programs in federal court.

Bill, don't take this personally but view it as a career alternative. I will write you a large personal check to stop posting on MR. Alternatively, I will pay someone to write a Firefox script that blocks Bill's comments. Respectfully, why do you post so many strings of comments on one post? Can you just ponder the post and make one comment?

How much you offering?

Also Bill makes multiple comments on multiple facets of the program. I don't mind it. If you really want someone to write a Firefox script, I suggest odesk. Lotsa good-n-cheap labor on that site.

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No. You don't control anyones speach.
Second, other than looking for my name, you should note that comments relate to aspects of subjects or are in response to other comments.
For example, the first comment related to "availability" and "scarcity" as a driver of consumer demand rather than promotions being related to commodity costs.
Second comment showed that the chart did not show what the author claimed.
Third comment, after thinking about it some more, the lagged variable effect no one had discussed.
Later, someone commented on the pork checkoff and its relation to this promotion.-which, ironically, tied back to yesterdays posting about similar programs for x-trees.
You are free to post and free to ignore.

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A friend of mine recently tweeted the following alternative, and very plausible, theory as to why the McRib is rolled out on a temporary basis:

"The McRib is available for a limited time only because eventually even dumb people get tired of sh*tting blood"

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All business is arbitrage: take some inputs of lower value and turn them into something of higher value.

If the inputs price becomes too high relative to the price you can sell your end product, then you stop doing it, as it is a waste (instead of creating value).

Also, there is no such thing as "risk-free arbitrage" as the author suggests.

Aside from that correlation in the data, the rest of the post is a garbled mess of opinionated value judgements. Hardly much economics content in there.

+1

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OK, the issue was whether the state could compell you to purchase r&d for your industry through market order assessment, which the Court has upheld, But, more recent challenges concern "compelled" speach: whether the state could compell you to speak--support a message you didn't agree with--through a private association. The court said no. Programs were redrafted to make the government the speaker

However, on May 23, 2005, the Supreme Court ruled that the beef check-off does not violate the First Amendment. In its decision, Johanns v. Livestock Marketing Association and Nebraska Cattlemen v. Livestock Marketing Association (Nos. 03-1164 and 03-1165), a majority of the Court agreed with check-off defenders that the programs are in fact "government speech" (an issue that was not considered in the mushroom decision).
"Compelled funding of government speech does not alone raise First Amendment concerns,"..."Citizens may challenge compelled support of private speech, but have no First Amendment right not to fund government speech."[1]

The relevance to compelled purchases without a speach component is healthcare.

The attorney for the parties favoring checkoffs was an attorney named Roberts who subsequently became Chief Justice.

Bill-plz explain slowly.

OK.

The first issue is can the government mandate you to buy something. If you use the argument that pork or dairy producers can compelled to purchase something, benefiting themselves, then you are dealing with the issue of whether the government can compell you to purchase health insurance.

The other issue I didn't want to make a point of, but will now, is Alex's characterization of the Christmas tree, and in this case, the pork programs as a "Tax". That's interesting, because one of the ways to get around the argument that the government can't get you to buy something is to say "well, the government can tax you" and this is the equivalent to that.

Third, the irony is that Roberts represented the farmers favoring the mandatory checkoff. He distinguished an earlier case which held that the government could not force you, or compell you, to "say", in this case, pay for a message you disagreed with. Roberts argued that this was not compelled speach, but rather the government speaking.

I just thought it was interesting how people recognized collective action problems when talking about check offs, christmas trees or pork advertising programs, but didn't see it in a different context, and didn't recognize some of the identical issues.

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One other point: Alex is not the only one who should see the irony of his position. The other is Adington. Note how in the last paragraph Adington says Obama has the authority to compel a purchase of healthc...sorry, Christmas tree advertising, but shouldn't:

"Acting Administrator Shipman had the temerity to say the 15-cent mandatory Christmas tree fee “is not a tax nor does it yield revenue for the Federal government” (76 CFR 69102). The Federal government mandates that the Christmas tree sellers pay the 15-cents per tree, whether they want to or not. The Federal government directs that the revenue generated by the 15-cent fee goes to the Board appointed by the Secretary of Agriculture to carry out the Christmas tree program established by the Secretary of Agriculture. Mr. President, that’s a new 15-cent tax to pay for a Federal program to improve the image and marketing of Christmas trees.

Nobody is saying President Obama doesn’t have authority to impose his new Christmas Tree Tax — his Administration cites the Commodity Promotion, Research and Information Act of 1996. Just because the Obama Administration has the legal power to impose its Christmas Tree Tax doesn’t mean it should do so."

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Burger King used to jazz up their chicken sandwiches occasionally with a marinara sauce, a whole lot better than the plain sanwich. Maybe the marinara suppliers wouldn't give them a break?

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I wonder what percentage of McRib consumers believe they are actually eating a pork rib.

I became disillusioned when I discovered that chickens don't actually have anything called a "nugget".

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quit cribbing from the smart one's homework

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why is it only in October? Is there something in the hog cycle production? Or is it just October for no good reason?

In any case, it is certainly not being introduced at "seemingly random intervals".

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If the theory is correct, McDonald's is i the wrong business. They should be in commodities trading.

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I have always enjoyed my theory better than others I've heard about the McRib. My take is that McDonald's product tested these things regionally in the 80's, thought they had a blockbuster product and ordered a bunch for a nationwide menu addition roll out and promotion. When they didn't sell, they removed them from the full time menu, but still had a huge supply sitting in a vast warehouse freezer. Solution? Offer limited time to move a few million every couple years until the supply runs out...

+1 That's been my take on it for the longest time as well.

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If only the McRib didn't come with this awful BBQ sauce.

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