Food Insecurity and the Baby Formula Crisis
regulation is very important
Domestic protectionism, global trade, and babies deserving more.
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Domestic protectionism is a big thesis - the U.S. and other countries are going to reshore elements of production and rotate away from a globalized economy. This will lead to a less productive world - but what are the broader implications of that? We are seeing some elements of what this could look like with the baby formula crisis.
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*this piece is going to be gloomy for a bit but i have potential solutions at the end
Domestic Protectionism and the Age of Scarcity
Bloomberg had a really great article titled “The Age of Scarcity” (which details why their forecasters cut global GDP by $1.6T(!)) and talks about how we are running out of everything. And there are a few core drivers around this -
Strained resources and supply chains: Supply chains were disrupted by the pandemic and exacerbated by the war. They rely on just-in-time everything, which only works if everyone is at least pretending to get along - and that’s really no longer the case.
The pandemic: The pandemic put tremendous pressure on the world economy, energy production, and more. All of that has led to a mismatch between supply and demand, both in terms of the labor force and actual physical production, contributing to inflationary pressure.
Monetary policy: Fiscal and monetary policy was very easy during the pandemic (and rightly so) but it has now created an inflationary bullwhip. Part of this is due to lack of leadership clarity at the Fed, but part of it is due to the sheer amount stimulus that was unleashed.
War and wartime sanctions: Turns out when you invade your neighbor, it causes disastrous consequences. The loss of human life is number one.
Russia and Ukraine are both large producers of resources - fertilizer, wheat, oil - and a war disrupts the flows of all of that, putting even more human lives at risk.
Domestic protectionism: There is a tendency for nations to start protecting their stuff when things get weird. As a result of mass shortages, countries say “well hm, I’ve got to protect my people, therefore, I need to stockpile and not export”
Climate risks and natural disasters: The temperature in India is currently hell. The problems of water scarcity, lack of arable land, etc continue.
Lack of investment: As I always say, “you can’t have green energy policy without green energy investment” and you really, really can’t have any policy without money helping to guide it along
The world is a puzzle, and some of the pieces are going missing.
Reliance on instability: We have relied on just-in-time inventory, rickety supply chains, and efficient global trade (which relies on us being buddies with everyone!) - and all that is at risk now for a variety of reasons.
Whether it be supply chains, domestic protectionism, energy costs, natural disasters, autocracies vs democracies (or the potential dissolution of democracies in the case of the United States), wartime sanctions - there is a deteriorating environment among deteriorating global relations.
In a globalized world, everything impacts everyone.
Some core examples
War: Several cities in Ukraine are going to miss their sowing season which is usually completely by the end of April.
Many countries, such as Egypt, are reliant on Ukrainian wheat imports, which leaves them really vulnerable to food shortages.
Weather: All of this is compounded by droughts in the Americas, impacting both the wheat and corn harvest.
Supply chain bottlenecks: Boats are stuck, China’s COVID-Zero policy, and more have all led to the chains no longer chugging
Reallocated production: This is all made worse by energy costs, with a core example the Brazilian mill diversion of sugarcane to produce ethanol which will work to reduce global sugar supplies.
And it’s potentially a changing global order (maybe in terms of power dynamics, but also in terms of the ~act~ being played on the global stage). Zoltan has written extensively on the concepts of “restocking, reshoring, rearming, rewiring” (I’ve written on him writing about it) - but what does that actually *look* like?
Why does this matter?
CAVEAT: all of this is written in the most extreme way. none of this is going to happen overnight, it’s just things to keep an eye on
Well, comparative advantage (pretty much the opposite of domestic protectionism) is sort of the core driver of a lot of global growth.
Comparative advantage: Countries that are good at one thing produce that thing and trade with other countries that are good at other things - and that’s great!
It’s going away? But as countries shift towards domestic protectionism or conduct “friendshoring” as Secretary Yellen said, we are going to see comparative advantage begin to fade away.
Oh: Thus the shining beacon of productivity will begin to dim, trade will be reduced, and tensions between countries begin to rise - because if you’re not buddies with someone, might as well battle them.
Of course, that’s a pretty binary way of looking at this - I don’t think that the world is going to dissolve into disarray anytime soon, despite what people might say on Twitter. But I do think you’re starting to see lines get drawn in the proverbial sand. Everyone still needs each other, so it won’t be fire and brimstone, but it will be an important thing to pay attention to.
There are common denominators to everything in the world - and we are running out of most of it (at least in the way that we currently produce).
WATER! Water scarcity is a large problem that a lot of nations are facing - a long-term problem from environmental degradation.
Water is entirely necessary for human life and production of all goods, and because of climate impacts and irresponsible usage, supplies are increasingly at risk
Oil and energy are a baseline input to most processes. Exacerbated by the war and by post-pandemic demand, we are facing a shortage of oil
OPEC+ cannot produce more because of lack of spare capacity (but also because misaligned incentives). The U.S. shale industry is practicing capital discipline. Iran and Venezuela are politicized sources of oil, but could help stem shortages and price volatility
Fertilizer: Russia is a large producer of ingredients for fertilizer (as well as wheat and other core inputs for production). This is a dilemma for obvious reasons but its also because Russia makes so many equations whole - the inputs to fertilizer, fertilizer itself, oil, etc - and that’s all at risk.
Labor: People! People are so important.
And there are others variables too, like how we treat core inputs.
Employ America wrote a great blog post on this - The Physical Capacity Shortage View of Inflation - that described how inflation is largely a result of a shortage of physical capacity. In an inadequate summary of their very good paper - a lot of plants and equipment are abroad, rather than within domestic land so when things happen, it’s harder to control.
Inflation is most proximately a reflection of insufficient physical capacity. Additional availability of domestic labor could prove marginally helpful (especially in oilfield services and single-family home residential construction), but is nevertheless not critical to unlocking the physical capacity constraint on production.
The idea is to yes, provide more labor, but mostly reshore and *invest* in some elements of physical capacity so it isn’t as prone to shocks.
It all compounds
The problem is that all of this piles on itself - production issues, water scarcity, fertilizer shortages - so it's not as simple as fix one thing and make everything better again. According to the World Resources Institute -
By 2050, global demand for food will be ~56% higher than it was in 2010 and the world will need to feed 2 billion more people
There is a potential global food shortage, which goes hand in hand with political instability. It also highlights the deterioration of the environment, made worse by Russia’s invasion. Everything is more expensive, and food costs are expected to rise by 5-6% this year, according to the USDA.
With ~30-40% of food going to waste, there is a lot of room for improvement here.
Most developed nations are very used to a world where everything comes when needed (and we can waste thoughtlessly), but these elements of deglobalization, commodities as reserves, and a redrawing of power hierarchies challenge that.
This impacts not only food sources, but semiconductors, raw materials, and more
A really horrific example of what this kind of looks like is the baby formula crisis.
A Very Big Example: The Baby Formula Crisis
The baby formula crisis.
It began in February when Abbott recalled some Similac, EleCare, and Alimentum infant formula on reports of babies getting bacterial infections. Cronobacter bacteria was found throughout the plant, but not necessarily in the baby formula area, so Abbott said “there is no evidence to link our formulas to these infant illnesses.” Of course.
The plant is being reopened now but it will take ~2 months for the baby formula to come back online. And to note, the shutdown isn’t a core driver of the shortage.
The plant shutdown compounded the supply shock that began with the pandemic (labor, inputs, logistics, etc), and is exacerbated by trade policy.
This a core example of terrible regulation and trade policy, with a few attributes -
Contamination: Having contamination at a factory is a Very Big Deal. That’s the reason that the Abbott plant in Michigan shut down. This Michigan plant produced ~50% of Abbott’s formula (and Abbott produces ~40% of the U.S. supply of baby formula) so it was a literal recipe for disaster.
The contamination was first detected in September, as reported by Bloomberg, and the FDA waited until ~now~ to do anything about it.
That’s really bad.
Government: The U.S. government buys ~50% of all baby formula through WIC contracts, which helps lower income women get help for their babies. But the government has contracts with only two companies - and they supply 90% of the babies with formula. Parents have to get formula from these companies.
Abbott, the parent company behind the plant shutdown, has 2/3rds of these WIC contracts. Of course. And it’s made even worse by the *type* of infant formula that they produced - largely formula for babies that had special nutrition needs. So there isn’t a lot of alternatives.
So this really impacts lower income families because they don’t have the resources to go to eBay or pay for other solutions.
Market consolidation: Part of the problem with the baby formula situation is that 4 companies control 90% of the supply (???) due to a combination of tariffs and restricted trade leading to a pretty concentrated market.
Yes: So of course, there is going to be a lack of supply so when one plant shuts - and all the sudden you don’t have baby formula.
Concentration: The way that US regulation happens in the baby formula market is not a result of capitalism, it’s actually a result of terrible regulation that theoretically prevents capitalism from doing what it’s supposed to do (theoretically). Because the regulations are so stringent and inflexible, there is little room for new entrants or innovation in the space - because like, why would you deal with that?
Protectionism: Ah! We restrict imports of formula from everyone - the EU, Canada, etc, and tack tariffs on top of it. The U.S. doesn’t want to import formula from Europe because of the regulatory aspect of it (also because profits or whatever) and also apparently the labeling is weird (it’s of course more than that, but like, come on)
Europe: The EU is the world’s biggest producer of baby formula and regulation is like “nope that’s not for us”.
You might say, “well, what about Canada?” The United States-Mexico-Canada Agreement (USMCA) of the Trump era (a byproduct of the lobbying of the dairy industry) has restrained how much baby formula Canada can export to the entire world - and actually kneecapped their entire industry in the process, because why would you build in an industry that can’t really export its product anywhere?
Regulation: The FDA heavily regulates the space to the point of making it move backwards. And to caveat, regulation is important! And regulating things babies eat is very, very important.
Lots of parents are resorting to drastic means to try and find solutions to feed their babies. Babies need all the nutrients they can get as they develop, and cows milk is not a great source of iron, as Bloomberg points out, diluting formula dilutes the nutritional value, and more.
Breast feeding is not as easy as many people seem to think it is. Breasts aren’t just spigots that you can turn on and have milk come out - and some babies need the supplements of formula, have allergies, etc and some parents have to use formula because they simply need to. And all of them should have access to formula when they need it, no matter what.
The Biden adminstration flew in 70,000 pounds of formula from Europe, which will address 15% of supply needs, which is very good! But the thing is - it just didn’t have to be this way.
We keep learning how important it is to have resilient supply chains. It’s a combination of a diverse set of producers, supportive trade policy, and probably also we should throw in paid paternal/maternal/parent leave, just for good measure.
But I do think what we are seeing with baby formula could be a microcosm (and a very important microcosm at that) for what a world could like if we do go into full domestic protectionism mode. What if Europe didn’t swoop to our rescue?
That’s what Zoltan has been calling for, that’s what the U.S. sort of has seemed to lean for over the past few years, and we are seeing the consequences of that play out in real time.
Like I said, I don’t think its 0-60 in terms of domestic protectionism. Everyone still needs each other! But it’s important to watch this stuff.
I do actually think the government has a role here.
As we have seen with the crypto industry, the baby formula industry and more, proper regulation is key to an industry being successful (or not completely shuttering down when one of their plants goes offline). The government needs to just be better but we all know that human nature prevents a lot of politics from being… successful (the paradox of progress).
Redesign: The answer isn’t to abolish the FDA but redesign incentive systems, understand why they didn’t move on Abbott (probably because Abbott is so much of supply) and create a space where alternatives can come in.
Lobbying: This is yelling into the void but the U.S. lobbying system is not great! It’s great for those that get their little fingers into what they want but it clearly is detrimental to everyone else.
Private markets: I know I’ve harped on this before but what is going on in the venture capital space? I understand that we have to have consumer social, gaming etc but it just seems like a strange allocation of capital sometimes. It doesn’t make sense to say that “companies inventing in the deeptech or agtech etc space don’t have high enough exit multiples for investment” - I get it, but I don’t.
Unnecessary soapbox: In times of emergency, which we have been in for the past two years, I think that capital allocators have a responsibility to invest in emergency things that will make the world truly better.
Finally, there is a lot we can do to make the world better. Reuse wastewater. Stop wasting food. Use different types of greenhouses, seawater farming, alternative protein sources, vertical farming, hydroponics, etc. Improve logistics, import streams, and invest in new agriculture technology.
The world is as good as we make it.
Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.