Why are we having an infant formula shortage?

By design, the US has a massive dairy surplus every year.  Yet we saw in late 2021 a shortage of cream cheese and now we see parents at wits end searching for infant formula.  How can this happen in a country awash in dairy products?  

From the research I have done so far, there seem to be three main drivers:

1) Corporate failure: Abbott Nutrition had to recall three different types of formula manufactured in its Sturgis MI factory in February.  Four babies were hospitalized after consuming formula made in that plant; two of them died.  The plant remains closed until it resolves all the issues raised by recent FDA inspections.  So far a whistleblower at the plant has been fired (who gave the FDA a heads up about food safety issues last October), but I am not aware of any other dismissals.  

2) Market concentration: Two firms, Abbott and Mead Johnson, account for 80% of the baby formula market in the US.  So losing Abbott's throughput for three months is going to be noticed.  

3) Government failure: Baby formula is subject to a 17.5% tariff.  This helps explain why almost all baby formula sold in the US is produced in the US. 

Add panic buying to the situation and, voila, empty shelves and very concerned parents.  Abbott claims it can resume production in two weeks, once they get the go-ahead from the FTC.  It will take another 6 to 8 weeks for new product to get to retail.  In the meanwhile, Abbott and other manufacturers are doing their best to expand capacity.  

Price-cost margins have been growing

A new study by Harvard Business School economist Alexander MacKay shows that profit margins rose by 25 percent between 2006 and 2019.  They find profits are rising because of cost reductions, not rising prices.   

Textbook economic models predict that firms should lower their prices when costs go down.  By doing so they can increase profits by selling the cheaper goods to more price sensitive customers.  But prices would stay the same, or even increase, if customers become less price-sensitive.  MacKay's study shows consumers have become more brand-loyal and less likely to use coupons.  

This could have implications for the high inflation rates we see today.  We know that costs are rising because of supply chain issues and labor shortages.  If consumers continue to become less resistant to price increases, then we could expect firms to respond accordingly.  

Was it smart for states to cut UI benefits?

Last year about half of the states eliminated the supplemental unemployment benefit program that was launched in reaction to the pandemic.  The logic in these states, most of which had Republican governors or legislatures, was that the extra UI benefits discouraged job search.  

New research by a team of economists, including a Harvard Business School professor, indicates that only 20 percent of the unemployed workers were employed three months later.  More alarmingly, the cuts in UI benefits led to reduced spending in these states.  The math is pretty simple.  There were 1.1m newly employed workers who collectively made $900m in the states that cut benefits.  At the same time there were 3m unemployed workers who did not get to collect $7.6b in benefits.  The overall result is less spending in those states, which in turn no doubt led to reduced employment.  

So much for stakeholder capitalism?

It is one thing for CEOs to give speeches saying that employees are critical stakeholders in XYZ, Inc.  But what do large corporations do when the company gets sold?  WSJ reports that three law professors examined 116 takeovers worth $1b+ since April 2020 and examined how the proceeds of the sales were distributed.  

As you might imagine, shareholders and executives made out fine across the board.

Guess how many provided job guarantees after the sale.  Guess how many guaranteed severance payments to those laid off.  

The answer in each case: zero.  

Which corporations are really socially responsible?

Yale b-school prof and former dean Jeff Sonnenfeld has composed a spreadsheet listing the American companies that are still doing business in Russia.  That got me wondering how many of those companies signed the Business Roundtable's manifesto on the Purpose of the Corporation, a document in which 181 CEOs pledged that they would lead their companies for the benefit of all stakeholders.  These companies showed up on both lists:

• AmerisourceBergen
• Caterpillar
• Citi
• Coca-Cola
• Deere
• Honeywell
• Marriott
• McDonalds
• Pepsico
• Starbucks
• Yum! Brands

I expect they will start getting pressure from their US customers soon if they do not pull out of Russia.  Choices have consequences.