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Searching for a Cause to the Formula Shortage
The White House is calling on quick action to address the nationwide infant formula crisis, but producers see this issue lasting throughout the rest of the year. Datasembly is an agency that tracks how much of various products are on store shelves. During the first half of 2021, the out-of-stock rate for formula was relatively stable and fluctuated between 2% and 8%, but last summer saw the start of a slight increase that hit 11% in November. The out-of-stock rate in the second week of May 2022 climbed to 43%. Retailers have responded by limiting the amount people can purchase in their transactions:
The November 2021 concerns were attributed to continued supply-chain disruptions associated with the pandemic. At the time, it was just one of the items listed among all the other items that shoppers had trouble finding including cream cheese, maple syrup, and wine. Now, the problem has been exacerbated by a massive decrease in supply due to a product recall of the nation’s largest manufacturer: Abbott Nutrition.
The recall came following concerns about bacterial contamination after four infants fell ill and two died. Shortages occur when prices are below some equilibrium level in a market. In this case, a decrease in supply would typically result in an increased price, however, prices have been slow to adjust as retailers fear being labeled as price gougers. As a result, the quantity of formula parents are demanding is larger than the quantity the market is able to supply currently. The result: empty shelves.
This current shortage is unlike many of the others from last year. Yes, the supply chain disruptions are still affecting many products, but product recalls are fairly common and happen regularly without resulting in a nationwide panic and lockdown-inspired rationing. What else might be causing this sudden panic in the supermarket aisles?
Typically, when American producers are unable to meet the demand of their domestic consumers, foreign producers would sell their products to fill that gap. The United States, however, heavily regulates infant formula to the point that many European brands are not legally able to be sold in the United States despite being better for children in some ways. Even if the foreign-produced formula does meet FDA guidelines, the import tax on such formula can exceed 17%. The revised North American trade agreement goes so far as to actively discourage formula imports from our largest trading partner, Canada:
Canada will apply export charges to its exports of skim milk powder, milk protein concentrates and infant formula at volumes over agreed threshold, which will allow United States producers to expand sales overseas.
There are a handful of globalization skeptics who believe the United States would be better off if everything was produced domestically. The current infant formula shortage suggests otherwise. The four largest producers of infant formula in the United States make up close to 90% of the US market. When one of them is suddenly no longer producing, and we reduce the ability for foreign producers to send their products here, we become vulnerable to nationwide shortages.
One proposed solution addresses the shortage by altering the demand for different sized products through the Women, Infants, and Children (WIC) program which supports low-income parents by subsidizing baby formula. The program is traditionally pretty stringent on the size and type of formula that parents can purchase. The USDA is urging states to allow WIC recipients to use their benefits on a wider variety of products so that if certain sizes or types of formula are out of stock, they can use their benefits on those that are in stock.
Abbott has announced that even if the FDA were to approve reopening its Michigan facility, it would take about two weeks to restart the manufacturing process and still months before the baby formula is back on the shelves. To help fill the gap today, the United States is working with manufacturers to increase the amount of imported baby formula on store shelves. Abbott said on Friday it has already shipped millions of cans of infant formula powder into the United States from its Ireland facility.
In the first week of April, there were 7 states that had out-of-stock rates above 40%: Connecticut, Delaware, Montana, New Jersey, Rhode Island, Texas, and Washington [Datasembly]
About half of the infant formula in the US is purchased by those using federal WIC benefits, which allow them to obtain the formula for free but restrict what type, size, and brand they can select [CNN]
Infant formula accounts for 13% of the most stolen items from retail stores [National Retail Federation]
The total number of food recalls in the U.S. increased by 10% between 2013 and 2018, hitting a peak of 905 in 2016 [TIME]
In 2021, the United States imported about $49,660,330 worth of infant formula from Mexico, the largest trading partner in this category [CATO Institute]