Ending the Baby-Formula Crisis
The baby-formula shortage was created by the government, and its persistence is the result of failed leadership. Food products, especially baby formula, are heavily regulated by the Food and Drug Administration (FDA). Despite experts and parents clamoring for months for the White House, the Biden administration ignored the cries of parents until the shortages reached crisis levels.
The shortages stem from the FDA’s February 17 recall of baby-formula products after a lethal bacterial strain was discovered in some products at the Abbott Nutrition plant in Sturgis, Mich. An anonymous whistle blower had previously reported problems with the plant, which the FDA did not act on for months. Months later, the FDA shut down the plant. However, the Abbott plant will soon reopen as the Centers for Disease Control and Prevention (CDC) found no link between the bacteria and the plant. Still, it will take time before the plant returns to normal production.
The Abbott recall was not the only cause of the shortage. During the COVID-19 lockdowns, scared parents hoarded baby formula. As parents worked through their stockpiles into 2021, manufacturers reduced production. Last year also saw a 1 percent increase in birthrates. If that trend continued in the early 2022, it would have created a perfect storm: insufficient supply and surging demand.
The U.S. Department of Agriculture (USDA) is the largest purchaser of baby formula. The department’s Women, Infant, Children (WIC) program provides baby formula for low-income families. The existence of this program, and the relatively few suppliers with which it contracts, creates a winner-take-all dynamic in the market, resulting in the over-centralization of production.
Three major companies are responsible for 90 percent of baby formula sold in the U.S.—Abbott, Nestlé, Mead Johnson. The big three companies also supply the formula used by other brand labels. The shutdown of the Michigan Abbott plant disrupted a substantial portion of the baby-formula supply. According to Datasembly, baby formula was out-of-stock across more than 40 percent of the country in the beginning of May. Demand isn’t rational, and the product itself is nonfungible, so the supply termination from the Abbott plant caused a run on baby formula.
This crisis is the second time in the Biden administration’s tenure that it has displayed department-wide incompetence. The first was the supply-chain crisis and Secretary of Transportation Pete Buttigieg’s inability to resolve the problems associated with offloading shipping containers. In this case, the FDA knew exactly when Abbott would be capable of restoring production at its plant. There are hundreds of statisticians and economists available to identify other causes of the supply shortage. The resulting shortage was an example of a lack of communication across government and ignorance in the White House.
Despite experts’ concerns about the upcoming shortage, the Biden Administration sat idle until May 18, 2022, when it invoked the Defense Production Act (DPA) and launched “Operation Fly Formula.” The DPA compels suppliers of critically needed products to direct the necessary supplies to those producers, incentivizing producers to make more of those products. Operation Fly Formula is a joint operation of the Departments of Defense, Agriculture, and Health and Human Services, which picks up formula overseas and delivers it to the U.S. The airlift bypasses airfreighting and importation rules. The White House hopes this operation will pick up the slack in baby formula supply until producers can meet demand.
Using the DPA is always risky. Misusing the program or using it for too long will cause an oversupply problem in the market. Oversupply would decrease prices, potentially causing producers to lower production, exaggerating the crisis further. Fortunately, in this case at least, the market is centralized, meaning the government can more easily exert control over the supply chain in a crisis event like this. Centralization nevertheless comes with risks and can cause shortages like the one we see here.
The government’s airlift plan raises questions about overseas formula supplies. Much overseas baby formula comes from the overseas factories of the same big three formula manufacturers. European formula, however, is made differently than the American formula. The FDA must approve new formulations before manufacture and sale, in effect homogenizing the products in the U.S. market and shutting out foreign alternatives. We need a more nimble FDA responding to public food and health crises. The FDA needs to look to approve more formulations to increase product diversity in the market. Variety of formulations alleviates risks associated with overconcentration and outlier supply shocks.
Additionally, the United States imposes a substantial tariff on foreign-produced formulas, pricing most foreign formulas out of the U.S. market.Tariffs protect the domestic supply chain, allowing for a more stable supply of formula in the market and maintaining price stability for producers and consumers. However, given the dramatic, temporary loss of domestic production, the United States needs to consider pre-approving European baby formulas. The federal government needs to create new policies to allow emergency importation of formula to the United States if possible.
Additionally, the USDA should consider reforming the baby-formula-supply contracts for the WIC program. The fact that the government contracts with so few suppliers is partially responsible for overconcentration in the baby-formula market. Giving a small group of producers government contracts leads to few producers operating few factories, creating easily disrupted supply lines. Decentralizing the production of baby formula will make the United States more robust and better able to respond to a crisis. Congress and the USDA need to look at capping sales with suppliers and awarding new contracts to new facilities if the cost difference is negligible.
Those two policies alone may help to abate the crisis. Some argue for further trade liberalization and place greater blame on the states. For example, former Treasury Secretary Larry Summers recently argued state governments lack sufficient procurement rules to combat problems like the baby-formula shortage, making the shortages worse. Indeed, many state governments cannot react to emergencies effectively or are dependent on stronger regional economies. Summers further goes on to call for increased trade liberalization. However, as seen with the supply-chain crisis, the United States must tread lightly; otherwise, the country will be again at the mercy of other nations’ domestic policies, but for critical food supplies.
But while procurement rules can be improved on a state-by-state basis, the federal government alone is responsible for regulating national baby-formula supply chains and interstate commerce. It, along with the private sector, are primarily responsible for solving this crisis. By reducing artificial barriers, improving regulatory agency capabilities, and restructuring government contracts, future crises in the baby-formula industry can be avoided.
Adam Korzeniewski is a Marine Corps combat veteran and a former Trump Administration official in the Treasury and Commerce Departments, who specializes in fiscal and economic policy, and national-security topics.
This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.