A review of the infant formula shortage (and some factors discussed previously) and the larger pattern present across industries that can lead to similar self-induced black swans.
https://watchingtheherd.blogspot.com/2022/05/a-formula-for-f…
WTH
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When you see a market failure this large, the market mechanisms clearly aren’t working and cannot correct for a failure overnight. In the formula market, suppliers have little motivation to be compete on an ongoing basis or maintain spare capacity to take advantage of a mistake by a competitor.
Spare capacity raises costs. Ask any Texan that lost power in the winter. Ask the people who died because Boeing made the attitude control on the 73 dependent on only one AOA vane, when triple redundant flight control systems used to be SOP on airliners.
So, when something goes wrong, and the system blows up in the “JCs” faces, blame “intrusive, burdensome, big gummit overreach”.
…because this is Shinyland.
Steve
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The OP article says “nearly fifty percent of the formula market involves product purchased through the federal government’s WIC program which requires states to operate the plan in each state, bid out ALL purchases within a state and select a SINGLE vendor”.
Penny-wise and Pound-foolish. In hindsight, this is an easy fix. Critical items need second sources. Two vendors should be contracted with in each State, for different quantities. The second vendor’s quote might be a little higher, but competition will result in lower long-term prices. This would allow WIC participants to purchase either of the two brands. The infant formula rebate program started in 1988.
Winner Takes (Almost) All: How WIC Affects the Infant Formula Market, September 01, 2011
“Each State awards a sole-source contract to a formula manufacturer to provide its product to WIC participants. As a result, WIC participants can only redeem their WIC voucher for formula made by the manufacturer that holds the contract for that State. In exchange for this exclusive sales arrangement, the manufacturer provides the WIC State agency with a rebate for each can of formula purchased through the program. The rebates are large. ERS estimated that among contracts in effect in December 2008, rebates averaged about 85 percent of the wholesale price”
https://www.ers.usda.gov/amber-waves/2011/september/infant-f…
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Why is about fifty percent of infant formula purchased through the WIC program? Proper infant nutrition is certainly a good investment. This program is limited to income below 185 percent of the federal poverty income guidelines. Women have to be young to have children, and having children means less time for work. Both youth and less work time contribute to lower income for new parents.
This is about 50%:
half of single mothers + a third of married parents = 20% + 20% = 40%
United States in 2020:
3.6 million births
40 percent to unmarried women.
$49,000 median income for families led by a single mother.
$40,182 income eligibility for household of 3 for 185% of federal poverty level.
$102,000 median income for married couples.
$48,470 income eligibility for household of 4 for 185% of federal poverty level.
Income Standard. The state agency’s income standard must be between 100 percent of the federal poverty guidelines (issued each year by the Department of Health and Human Services), but cannot be more than 185 percent of the federal poverty income guidelines.
“The American Academy of Pediatrics recommends infants are exclusively breastfed for about the first 6 months with continued breastfeeding while introducing complementary foods for at least 1 year… Breastfeeding rates in 2017: 58% breastfeeding at 6 months, 26% exclusive breastfeeding through 6 months.”
https://www.cdc.gov/breastfeeding/data/reportcard.htm#:~:tex….
Birth rate in the United States in 2017, by household income
“In 2017, the birth rate in the United States was highest in families that had under 10,000 U.S. dollars in income per year, at 66.44 births per 1,000 women. As the income scale increases, the birth rate decreases, with families making 200,000 U.S. dollars or more per year having the lowest birth rate, at 43.92 births per 1,000 women.”
https://www.statista.com/statistics/241530/birth-rate-by-fam…
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borisnand
Great post on a key neglected datum as to why this market screwed up and how easy the fix could be.
How many other market problems are anchored in such misconceptions?
Thank you.
david fb
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Critical items need second sources.
DoD used to have a second source policy for major items. The costs were astronomical for multiple sets of tooling, multiple production lines, and subject to political influence.
Seems a more direct approach would work better: contract with lowest bidder, with an escape clause if the bidder can’t deliver the goods.
Steve
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There is no reason to not allow ALL brands to be sold under the WIC program in every state. This would also encourage non-US manufacturers to enter the US market–using both US and international production. This would bring prices down because there would be more product available in a desired market. Most big companies already operate at the international level, so this is nothing new for them.
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