5 Government Policies That Brought on the Baby Formula Shortage

Taking care of a baby can be challenging with the sleepless nights and the demands on free time. In 2022, raising an infant has become more challenging because baby formula has become harder to find. As grocery and retail data firm Datasembly shows, the out-of-stock (OOS) rate for baby formula has skyrocketed in the first half of 2022. Major distributors such as Wal-Mart, Target, and Kroger are rationing baby formula. This is significant since CDC data on breastfeeding show that a majority of infants use formula. While switching over to breastfeeding might be possible for some, other mothers might not be able to breastfeed (e.g., allergies, medical conditions) or are have time constraints. This shortage has the potential to truly impact pediatric health. 

So how did we get here in the first place? The most recent shock to the U.S. baby formula market was in February 2022 with a contamination problem at an Abbott plant that produces baby formula. This caused the FDA to recall formula from Abbott. While the OOS rates are higher in recent months, we can see from the above graph that OOS rates were still high in 2021. Part of this was due to the pandemic-induced hoarding in 2020, followed by lower demand in 2021. There is also the inflationary pressure, a phenomenon that the Federal Reserve Bank of San Francisco points out has been more prevalent in the United States than in other countries due to its larger-than-average government stimulus during the pandemic (Jordà et al., 2022). Since 2021, we have more generally found ourselves in a supply chain crisis. As I pointed out in October 2021, some of this was going to happen regardless because of the pandemic. At the same time, there was plenty of government policy that negatively attributed to the supply chain crisis. 

The infant formula manufacturer market was struggling with the same things other manufacturers were struggling with, whether that is labor, materials, transport, and logistics. The extent to which the government is responsible for the trends on a macroeconomic level does not change that the government has a heavy-handed approach when it comes to infant formula. As the New York Times reported in March 2021, "Baby formula is one of the most tightly regulated food products in the U.S." How bad is it? Here are five ways in which the government made the infant formula shortage as dire as it is. 

1. WIC Vouchers and Market Concentration. WIC stands for Women, Infants, and Children. It is a supplemental nutrition option program from the U.S. Department of Agriculture that is aimed to safeguard the health of low-income women, infants, and children. What could such a seemingly innocuous government program have to do with the shortage? Formula companies are heavily subsidized by WIC through the voucher program. In exchange for offering lower prices on infant formula in the form of rebates, the formula companies receive "the exclusive right to provide their product to the state's WIC participants." This means that the companies with the greatest number of lobbyists can vie for this exclusive right to a de facto state-level monopoly in this market segment for infant formula. This cannot be overstated since it is through these WIC vouchers that about 50 percent of infant formula is provided nationwide (Choi et al., 2020). Abbott holds 42 percent of the market share for infant formula, according to market research firm Euromonitor. This favoritism makes it hard for new companies to enter the market, which leads to market concentration. If the WIC vouchers did not attribute to this market concentration, one plant closing would not make mothers in the United States so vulnerable to such a supply shock. 

2. FDA's Non-Tariff Trade Barriers. Not only have FDA regulations gotten in the way of such things as making prescription drugs cheaper or e-cigarettes more available, the latter of which being a healthier alternative to traditional smoking. The FDA has specific labeling requirements and ingredient requirements, as well as a mandate stating that retailers wait 90 days before marketing a new infant formula. The excess of labeling regulations in particular make European infant formula illegal in the U.S. (DiMaggio et al., 2019). These onerous regulations provide little incentive to non-U.S. businesses to sell their formula to U.S. retailers. 

3. Infant Formula Tariffs. For the few brands of formula that can past the FDA gatekeeping, they are subjected to tariffs up to 17.5 percent (also see here). Looking at the economics of tariffs, tariffs are an import tax. Who pays that tax? The domestic consumer through higher costs of foreign goods or services. Between the tariffs and FDA regulations, is it any wonder that 98 percent of baby formula consumed in the United States comes from producers in the United States?  

4. Trump's Trade Deal and Export Fees. Part of the Trump Presidency was the enactment of NAFTA 2.0, which is better known as the United States-Mexico-Canada Agreement (USMCA). During the negotiations in USMCA, one of the sticking points was with the dairy industry. The U.S. dairy industry wanted certain provisions to protect themselves. Part of this negotiation had to do with China. Prior to the enactment of USMCA, Chinese baby food producer Feihe invested $225 million into building a manufacturing plant in Kingston, Ontario, Canada. Part of USMCA is limiting how much infant formula Canada can export, not only to the United States but globally. If Canada exceeds exporting 40,000 metric tons of infant formula, they are walloped with an export fee of $4.25CAD for each kilogram. While Trump was trying to screw over China, he ended up screwing over the American people by discouraging Canadians from producing baby formula that we clearly need. 

5. Marketing Orders. A marketing order is a series of price and income supports imposed by the USDA (see Cato Institute brief for more information). Looking at the economics of milk marketing orders, such orders drive up the price of milk (e.g., Chouinard et al., 2005). Since dry milk is an essential ingredient in baby formula, it is reasonable to assume that these marketing orders are attributing to the increased cost in baby formula. As Cato Institute scholar Gabriella Beaumont-Smith points out, there are import barrier provisions in the marketing orders that dampen U.S. producers' demand for foreign milk, which makes infant formula all the more scarce in a time of emergency. 

Postscript

Without a doubt, the pandemic threw the infant formula market in disarray, as the pandemic did with so many markets. The panic buying and hoarding in 2020 garbled market signals on infant formula demand in 2020 and 2021. The pandemic also had its role in contributing to the supply chain crisis and affecting various inputs of infant formula production. The factory of the leading domestic producer of infant formula in the United States does not do any favors. But make no mistake: government policy is a major culprit. USDA subsidies for large infant formula manufacturers increased market concentration. If the market were fragmented, the Abbott manufacturing plant closure would not have made the infant formula market so vulnerable. If trade barriers and FDA regulations were not so onerous and excessive, there would have been a U.S. demand for internationally produced infant formula that could have helped fill the gaps while the Abbott manufacturing plant worked on getting open again. In short, if it were not for government meddling in the infant formula market, mothers would not be scrambling to feed their children. This infant formula shortage serves as another reminder that instead of regulating its people to death, the government is much more likely to do a better job at improving our lives by deregulating and getting out of the way.