Why Is There a Baby Formula Shortage?

The news media are full of reports of a baby formula shortage. Political leaders are beginning to take action on it, blaming the usual suspects. Under the circumstances I thought it might be interesting to dig into the baby formula shortage ab it. Here’s CNN’s report:

A nationwide shortage of baby formula has spurred a response from several House committees in an effort to figure out what’s caused the issue and how the government can ease the problems causing the shortages.

Two House committees announced this week they are looking into the issue, with a spokesperson telling CNN that the House Committee on Oversight and Reform on Friday morning sent letters to four separate companies that produce baby formula requesting information about the supply chain issues.

Additionally, a House Energy and Commerce Committee spokesperson announced a hearing on baby formula for May 25 and told CNN they plan to call representatives from the Food and Drug Administration and Abbott, a major baby formula producer, to testify.

American stores have had a hard time keeping baby formula in stock for months due to a recall, inflation and supply chain problems. Manufacturers have said they are producing at full capacity, but it’s not enough to keep up with demand. While this has become a bipartisan issue on Capitol Hill, lawmakers are pointing fingers at different parties for the issue, with Democrats blaming the companies and Republicans blaming the Biden administration and FDA.

I remain skeptical there’s an actual shortage. I would say there were an actual shortage if consumers, retailers, and wholesalers had no inventories, manufacturers were at full production, and consumers, retailers, and wholesalers were just buying for near-term consumption. I do think that inventories are presently lower than is expected which is causing people to panic. That’s leading to panic-buying, hoarding, speculative buying, and price increases (“price gouging”). It has been suggested by some that a previous round of panic-buying, hoarding, speculative buying, and price increases, followed by a slow using of the hoards have left producers largely in the dark about the actual size of the present U. S. baby formula market. That could be true and I have no idea of the degree to which that affects the present situation.

Let’s assume there’s an actual shortage. What’s behind it? Like everything else it’s undoubtedly multi-factorial. Many are pointing to a bacterial outbreak in a single production plant in Michigan. Some point to COVID-19. More should be wondering how taking a single plant offline could cause a national shortage?

The answer is imprudent regulation over a period of years. 98% of all of the baby formula sold in the U. S. is made in the U. S. and nearly all of it is produced by just three companies (Abbott, Mead Johnson, and Nestle). Get that? We don’t import baby formula. Canadian, Irish, Dutch, French, and German baby formula is just as wholesome as American-made if not more so. Indeed, I trust their products more because EU requirements tend to be more stringent than ours. The pretext for the protectionism is helping family farmers but, again, I’m skeptical. It’s hard to ferret out but I believe that most of the benefit accrues to those mega-producers and family dairy farmers are actually hurt by our import regulations, mostly by the reciprocal limits imposed by our trading partners.

Why are there so few U. S. producers? Again I would say consolidation and regulation. Defenders of industry consolidation generally point to economies of scale but I’m a skeptic about those. I think that most economies of scale have been fully realized much earlier than people think and may even reverse at some point. That’s something that was suggested to me when I accidentally received an invoice that should have been sent to one of the largest companies in the world from one of my suppliers. I learned that I was paying the same price as they were despite being 1% of their size.

There are two areas in which I definitely believe there are economies of scale: finance and government regulation. It’s a lot easier for a $50 billion company to borrow or do financial planning than it is for a $50 million company. It’s also a lot easier for a big company to conform to government regulations than it is a small one. That is not accidental. As I’ve said before big government prefers doing business with big companies. There are many reasons for that but among the most important is that it’s easier. The total volume of the U. S. baby formula market is about $4 billion annually. It’s easier for a FDA bureaucrat to deal with three companies doing $1.3 billion each than it would be to deal with 100 companies doing $40 million each. Over time regulations tend to get tailored to suit the big guys. That’s part of what’s called “regulatory capture”.

It’s not that we should have no regulations. It’s that regulations should be appropriate to the actual requirements and not in a perpetual state of flux. Most developed countries require much more cost-benefit analysis for new regulations than we do.

I wanted to make one last point before I left this subject. Since there are racial/ethnic differences in patterns of breastfeeding. There are economic, practical, and social reasons for it. As a general rule babies should be breastfed for their first six months but most black babies have been completely weaned by six months. That means that any shortage of infant formula has a disparate impact on black mothers and babies.

What do I think should be done about all of this? In the near term we should drop all barriers to importing baby formula from Canada and stop complaining about “price gouging” or “greedy corporations” but start complaining about hoarding or speculation. In the longer term we should figure out why there are only three baby formula producers in the U. S. and reverse it, examine dropping import restrictions on baby formula from EU countries, start using cost-benefit analysis to evaluate new regulations, encourage employers to provide private areas for pumping or actual breastfeeding if appropriate, and encourage black mothers to breastfeed their babies. Beyoncé has done some good work in that area.

In the even longer term we need to abandon the ideas that more regulations are always good or that regulatory agencies can be left on their own recognizance to come up with regulations.