US baby formula crisis holds lessons for reshoring dangers

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93 shares, 154 points

Walking into the baby aisle of my local New York pharmacy these days feels like entering a Soviet supermarket in the 1970s. Shelves usually jammed with cans of powdered baby formula are empty save for a notice warning customers they can buy a maximum of three tins each.

This shortage has fuelled such a national crisis that the White House is scrambling for a response. Formula is out of stock in 43 per cent of US stores and rising. Medical professionals are having to warn desperate mothers not to risk their children’s health by diluting or making their own formula.

The troubles are rooted in a highly concentrated domestic market that was distorted by government intervention and disrupted by pandemic-related hoarding, supply chain issues and safety concerns. This tangled tale holds important lessons for policymakers everywhere as they look to bring production of essential goods closer to home.

The US formula market has long been dominated by just three players: Abbott, Gerber and Mead Johnson, who account for the lion’s share of sales in what had been a sluggish market. The trio owes its strength to the US government. An estimated two-thirds of all formula is purchased through the Women, Infants and Children nutrition programme, a federal funding scheme for low-income families which contracts solely with these three domestic makers. Tight safety restrictions and import duties have squashed competition from Europe and Canada. Fully 98 per cent of US formula is made domestically.

The combination encouraged steady production but left the industry with little reason to invest in additional capacity. Then came Covid and an unexpected dip in the birth rate. The number of daily births had been falling by an average of 0.39 per cent annually from 2000 to 2019, before dropping precipitously in the winter of 2020-21. In the early months of the pandemic, Americans hoarded baby formula along with toilet paper and pasta, but then store orders fell as the birth rate dropped and parents started using up their stockpiles.

Since then, formula makers, like almost everyone else, have struggled to find workers and trucks to make and transport their product. So they were ill-equipped to ramp up when the birth rate recovered and demand surged.

The pressure was felt everywhere, but especially at a Michigan plant belonging to Abbott, the largest supplier. A Food and Drug Administration inspection last year revealed poor practices that failed to control microbial growth, and a whistleblower alleged shoddy record keeping and lax cleaning. Abbott failed to make changes, and tragedy struck. Several babies fell ill, at least four were hospitalised and two died. The plant was shut down in February and Abbott recalled several brands of formula. Price gouging and shortages followed.

On Monday, the FDA and Abbott reached an agreement that could lead to the plant’s reopening. The federal government said in court documents that both the FDA and Abbott’s own sampling found potentially deadly cronobacter bacteria at the plant, although no links were established between the formula and the actual illnesses.

Once the FDA agrees the plant is clean, the company forecasts it will take at least two weeks to restart production and eight weeks for formula to reach supermarket shelves. Danone, which makes a rival formula, has predicted that supplies will remain tight until at least August.

There is a warning in this. US authorities were simply trying to ensure that American babies were fed safe, locally produced formula from reliable sources when they put up trade barriers and limited purchasing contracts. But their interventions left the country dangerously dependent on a small number of suppliers who in turn relied on very few manufacturing plants.

In a positive step, the FDA this week announced plans to loosen the rules on imported formula, and Abbott has been flying in supplies from Ireland. Permanent changes that drop barriers while still protecting babies are needed to give families more options and bring flexibility to the US supply.

The formula debacle could easily be repeated as authorities bring back local production of critical, highly regulated supplies, such as vaccines and personal protective equipment. Government contracts and protectionism can help jump-start production and provide a necessary base, but left unchecked they can lead to complacency and under-investment.

Stimulating a lively market with lots of credible competitors must be the long-term goal, for baby formula and everything else too.

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Source: Financial Times

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