What We Can Learn from the Baby Formula Debacle

Unless you’ve been living under a rock lately, you’ve heard the news about the baby formula shortage. As a father, I thought I’d leave it to the mothers to cover the whole conversation. I’ve seen a lot of very, very bad uninformed opinions from men on social media. However, I did a lot of feedings, and baby formula was critical. I feel like I should be able to avoid those “bad takes.”

If you haven’t heard, the problem is that one of the major factories that makes baby formula was shut down due to possible contamination. There are only a few companies that make baby formula and those companies consolidate their manufacturing in a few facilities. When one company or one factory is shut down there’s a lot less supply.

There’s more to the story than just that. NPR has a great article on the things that have gone wrong.

Money Lessons from the Baby Formula Debacle

One of the most basic lessons in investing is diversification. It’s okay to buy one company if you are a 6-year-old who loves Disney. Aside from that, most people should be low-cost mutual funds or ETFs that hold hundreds or thousands of companies. Many people may be too young to remember the collapse of Enron, but many of the employees had their retirement money in Enron’s stock. Not only did those people lose their job, but they lost a lot of their retirement money.

There’s not enough diversification of companies nowadays. It’s most profitable for baby formula companies to consolidate their operations in one place. It’s fundamental capitalism to pursue the most profit. However, it seems like there’s not enough competition in the baby formula space. Maybe smaller companies can’t get their products space on store shelves? Maybe they don’t have the big advertising budgets? Maybe they don’t have the scale to produce their products at competitive prices?

I think that if capitalism was really working we’d have competing companies jump into the baby formula space to fulfill demand. I’m not sure that other companies can jump into the space quickly. If the problem is temporary then by the time the new companies get up to speed they might be crowded out by the existing factory coming back online (which it already is).

The lack of diversification isn’t limited to baby formula. As the NPR article above mentions the meatpacking company JBS’s ransomware attack stopped 20% of America’s beef and pork industry temporarily. We also saw that a similar ransomware attack on the Colonial Pipeline cause gas prices to go up.

Baby Formula, Politics, and Common Sense

When the problem happened with the suppliers, one of the first places people turned was the government. The popular cry, “HOW CAN THIS HAPPEN IN AMERICA?!?! WHAT IS THE GOVERNMENT DOING ABOUT IT!” It’s a natural reaction.

However, should the government be regulating the baby formula supply chain to make sure there is ample capacity? I think most people don’t want the government to be involved with private businesses. Some may argue that there should be a national stockpile of baby formula. That’s reasonable, but it does expire and the government will need to be continuously buying up whatever the available supply is and then discarding it… unless we also create a program to give free baby formula (before it expires) to people below a certain income level.

The NPR article mentioned another issue – the problem of importing baby formula. High tariffs are making it not worth importing baby formula. There are also labeling laws that make it impossible to import some baby formula. Hopefully, common sense will prevail and these artificial, man-made restrictions can be lifted in times of emergency.

A friend of mine sent me a message about a news story. It was a famously conservative publication, but I don’t think she was aware. The Republican politician in Florida said she had a friend at the Texas border who sent her pictures of pallets of baby formula for potential immigrants at the border. What struck me as interesting was that there was no journalistic integrity. The “news” article was simply that a politician Tweeted something that may or may not be true. No one in Texas was reporting it. No Texas Republicans were in the report. No organization said that they did a fact check. The only thing that made sense to me was that a politician was trying to score some political points by increasing social media outrage.

Final Thoughts

There are a lot of things we take for granted. Perhaps we shouldn’t. On one hand, the supply generally works so well that we expect that it is infallible. It’s a good thing that it is this reliable. On the other hand, when the supply chain does have a problem, it can be an emergency.

I’ve long felt that there wasn’t enough competition among companies. There has been a lot of consolidation over the years. The stories that companies tell us are that they can be more efficient at a larger scale and pass better prices to the consumer. However, I think we are seeing that once the competition is gone, companies can raise prices. Over the long term, the market may correct itself, but sometimes consumers can’t wait for the long term.

I wish we could start to have discussions about this under different circumstances. Once the immediate emergency is over, I’m hoping we can focus on some long-term solutions.