Ray Dalio and the McNuggets

I recently read about how Ray Dalio helped McNuggets come to market. It struck me as a really interesting story, so I figured I’d write about it.

In the early 1980s, McDonalds invented Chicken McNuggets. However, they were hesitant to launch the new food given concerns about the volatility of poultry prices. A spike in ingredient prices meant they would have to raise menu prices, creating uncertainty and agitation for consumers. 

McDonald’s solution came from an unlikely source: Ray Dalio, founder of the investment firm Bridgewater. Dalio had spent the early part of his career trading commodities. He recognized that McDonald’s could hedge volatility in poultry prices by buying futures contracts for chickens’ feed ingredients (corn and soybeans): increased feed prices drove higher poultry prices so, even if poultry prices increased, McDonald’s would be able to offset the greater costs via their profits from the price appreciation of corn and soybean.

This struck me as a very cool intersection of two seemingly unrelated industries: hedge funds and food corporations. Hedge funds emerged as ways to capitalize on arbitrage opportunities, but a particularly productive byproduct was their ability to help food companies manufacture greater stability in the prices of their ingredients. The result was smoother pricing for consumers.   

I don’t know if this was the first time a food corporation had attempted to hedge their prices, but it certainly wasn’t the last. Following McDonald’s, Bridgewater went on to work with Nabisco. Today, major food manufacturers like Tyson, Nestle, General Mills, and Kraft Heinz all engage in hedging to preserve price stability. Some even employ in-house commodity traders.

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It’s fascinating to think about the ripple effects that come from applying knowledge in one industry to processes in another. Dalio and the McNuggets is a case of hedge funds and food corporations. Recently, I’ve seen folks start to explore the vast opportunities presented by the intersection of crypto and AI: crypto rails can preserve the ability to run AI models of all natures (e.g. via persistently accessible compute), AI can benefit from the open data structures propelled by crypto, thoughtful incentives can catalyze creation and aggregation of new and valuable datasets, and more. I’m sure there are many other interesting industry convergences. 

Yet it feels quite challenging to spot the most interesting nuances of these intersections proactively. Futures contracts were created in the 1850s, major food corporations started to emerge in earnest in the 1870s, and hedge funds began developing in the 1940s. But it wasn’t until the 1980s – 30+ years after the birth of hedging – that the two industries meaningfully intersected. 

Luckily, there’s some hope. My takeaway from the story of Dalio and the McNuggets is that there are a few tips for starting to spot these convergences:

• Talk to people outside of your industry, frequently and with great attentiveness. Reading online, watching videos from experts, and listening to podcasts feels an ok second, but nothing beats talking directly with someone who has daily boots on the ground.

• Try to break down the inputs into as singular components as possible in order to understand how modifying each impacts the final product. Dalio looked at McNuggets not as a whole, but as the sum of the parts. He then looked at each ingredient (e.g. chicken) again as a sum of parts. This led to the insight that hedging corn and soybeans – components of chicken – could provide price stability for the overall McNuggets product.

• Consider looking at things that have been around for a while. The hedging insight Dalio discovered for McNuggets (which then seemingly trickled through the rest of the food production industry) theoretically could have been discovered 30 years earlier. But it wasn’t. I think sometimes folks will write off an application, implementation, or intersection after a certain period of time if there’s no obvious result. That feels like throwing the baby out with the bathwater. Sometimes industries need to mature or hit certain inflection points before an idea will be given credibility or can be reliably executed. Hedge funds weren’t particularly popular for their first few decades of existence. It’s possible that negative public perception may have tainted interest in exploring ways such financial constructions could be applied to opportunities with productive byproducts (like menu price stability) – and only a forcing function like the McNugget, or a gradual shift in public perception, created the space for convergence.

All of this to say: I found the story of Dalio and the McNuggets to be very cool. It was unexpected, helped creatively pave a path for a now iconic American food, and sparked a host of productive byproducts within the food manufacturing industry. If you know of other similar stories – especially about the convergence of two seemingly unrelated industries – please share them in the comments!