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FTC says WIC may make infant formula market ‘more fragile’
The Federal Trade Commission (FTC) finally released a much-anticipated report on the market factors that may have contributed to the recent infant formula crisis.
Why? Several lawmakers asked for a deep dive on the market way back at the height of the infant formula shortage in 2022. At the time, FTC announced it would look into the factors that “have led to concentration in the infant formula market and the fragility of the supply chains.”
As FTC Chair Lina Khan said in a statement at the time: “The FTC will do everything within its power to ensure the markets for other life-sustaining and vital products are competitive and resilient, protecting the ability of Americans to access critical goods even amid disruptions.”
Because this FTC has been pretty active on the antitrust front, some thought the agency might come in hot with its report, perhaps calling for a major shakeup in the highly concentrated infant formula market. Two players – Abbott and Mead Johnson (owned by Reckitt) currently control more than 80 percent of the market.
However, the report the agency released on Wednesday is pretty measured. The agency ultimately found that infant formula isn’t your typical story of unfettered capitalism, or mergers and acquisitions runamok, but one where government programs play a big role, too.
The special role of WIC: The Special Supplemental Nutrition Program for Women, Infants, and Children (known as WIC), which helps low-income pregnant women and young children get the nutrition they need, has long enjoyed near-sacred status with bipartisan support in Washington. It doesn’t spark much controversy, particularly compared to other safety-net programs. It’s viewed as highly effective. It’s been shown to improve health outcomes for low-income babies, and probably even saves the government money overall through healthcare savings. However, it’s also pretty clear that the program distorts the U.S. infant formula market.
More than half of all infant formula is purchased through WIC at no cost to participants – either through vouchers or an EBT benefit card. It’s a great deal for very low-income consumers who would likely struggle with the cost of formula, which can run hundreds of dollars per month.
In its report, FTC takes issue with the way WIC procures formula – through sole-source state-level contracts that usually make Abbott or Mead Johnson the exclusive supplier for WIC participants in a given state. The companies offer extreme discounts to get these contracts, selling the formula at near break-even for WIC – an arrangement that saves taxpayers more than $1 billion each year, while also giving the manufacturers preferential treatment at retail within the state.
“While cost effective, the current single-supplier WIC contract mechanism may make the U.S. infant formula market more fragile,” reads the report. “The single-supplier contract mechanism, combined with the size of WIC in the infant formula market…means that the manufacturer holding each state’s WIC contract dominates that states’ market with an average of 84% market share.”
In other words, whichever company gets a state’s WIC contract is also likely to hold a near-monopoly position in that state. You can often tell whether your state has a WIC contract with Mead Johnson (Enfamil) or Abbott (Similac) based on which product boasts the most shelf space in your local stores. FTC determined that this set up “can make it more likely that a lone contaminant outbreak or incident will have cascading and outsized effects leading to serious supply disruptions.”
The higher the concentration, the higher the risk. The FTC notes that high levels of market concentration come with greater risk of disruptions when issues arise, whether due to food safety (like the recent U.S. infant formula crisis), natural disasters or other extreme events.
“Policymakers may want to consider that state single-supplier WIC contracts are contributing to high levels of concentration at the state level, which can leave states extremely vulnerable to supply disruptions,” the report says.
WIC isn’t the only government program contributing to concentration. The FTC report zeroed in on WIC contracting practices and FDA’s regulatory requirements for infant formula as contributors to market concentration.
The FDA has strict rules about what kinds of studies need to be done before a new infant formula can be marketed in the U.S. – a process that’s lengthy and costly. It can take several years and millions of dollars of investment before a company gets to market. There’s also the massive cost of building the highly specialized manufacturing capacity required to make safe infant formula at scale.
“Expanding consumer access to infant formula products, while also ensuring they are safe and nutritionally adequate for infants continues to be one of the highest priorities at the FDA,” an agency spokesperson said. “The FDA welcomes collaboration with FTC, other federal partners, and industry as we continue this work to ensure that we have the safest and most resilient infant formula market in the world.”
Concentration not new, but long ignored. The report notes that this isn’t a new problem: The infant formula market has been highly concentrated for decades. In the 1980s, when sole-source contracting for WIC was first enacted, the formula market was slightly more consolidated than it is today. This suggests that WIC isn’t the cause, per se, but undoubtedly plays a role in market concentration because it locks in dominant players and discourages new entrants to the market.
One interesting twist here is that many other countries also have highly concentrated infant formula markets – even without having a WIC-type program. This is likely due to the high barriers to entry and the massive investment required to manufacture these types of products.
WIC saves taxpayers money, but also increases formula costs for non-WIC families. The FTC report notes that WIC may increase formula prices for non-WIC families. It’s an open secret that formula companies charge higher prices outside of WIC to make up for the lack of profit on WIC formula.
WIC also likely warps wholesale prices. The USDA – which administers WIC – put out a report a few weeks ago noting that the wholesale price of formula may be roughly double what it would be otherwise.
“The possibility that WIC increases retail prices for non-WIC infant formula purchasers is worthy of attention from policymakers,” the report says. “At first blush, it may seem to be a reasonable tradeoff given that more affluent purchasers who do not qualify for WIC are better positioned to pay more. But given that the WIC cut-off for benefits corresponds to an annual income of $32,227 for two-person household, or $49,025 for a four-person household as of 2022, it may still prove concerning.”
The report concludes: “An unintended result of the WIC program, as currently designed, may be that it exposes many non-affluent families who purchase infant formula outside the WIC program to higher prices.”
Talking about reforming WIC in any way is a super touchy subject. Throughout the report, you can tell that discussing any changes to WIC is an extremely sensitive issue. Driving this point home, all three FTC commissioners issued a statement alongside the report emphasizing the importance of WIC, saying they “unequivocally support the mission” of the program.
Still, Georgia Machell, interim president and CEO, National WIC Association, issued a statement that wasn’t exactly enthusiastic about FTC’s conclusions.
“Consolidation in the infant formula market and the broader lack of resiliency in our nation’s infant feeding systems is a concern for WIC and for the families the program serves,” Machell said, noting the group’s primary goal of expanding and preserving access to WIC.
“WIC must not be leveraged to address structural market issues at the risk of undermining access to healthy foods and nutrition support for millions of families,” Machell continued. “We look forward to productive, ongoing conversations with policymakers about how to improve resiliency in infant feeding systems – including ensuring reliable access to infant formula and improving structural support for breastfeeding families. But those conversations must begin with an unequivocal commitment to protecting access to WIC such that no eligible family is turned away from the program. We’re disappointed that the FTC’s report misses this mark.”
The view from industry: Leading infant formula manufacturers issued relatively cautious statements in response to the FTC report.
“We appreciate the thoroughness of the FTC’s report on this complex topic,” said John Koval, a spokesperson for Abbott, which makes Similac. “We believe all babies deserve to be fed, happy and healthy—and remain committed to doing our part to build a resilient domestic infant formula supply.”
Per a spokesperson at Mead Johnson: “We welcome the FTC report and support its quest to improve the regulatory environment and strengthen domestic resiliency in a manner that ensures consumers have consistent access to safe, high-quality infant nutrition.”
The Infant Nutrition Council of America (INCA), which represents the biggest players in the industry, said its members have “strongly supported” WIC for the past 50 years.
“Members support policies that bolster domestic resilience, create a regulatory framework that must be met by all manufacturers, and put the nutritional needs of infants who rely on our products first,” the group said.
TBD whether Washington cares about any of this. It’ll be interesting to see whether or not lawmakers take interest in this issue. Everyone was interested when the shelves were bare, but I hardly hear about this anymore from lawmakers. One exception is Rep. Rosa DeLauro (D-Conn.) who has long been working on legislation to bolster domestic formula manufacturing.
“The Federal Trade Commission has outlined what I made clear in 2022: a heavily consolidated market greatly contributed to the February 2022 infant formula shortage,” DeLauro said in a statement. “To prevent another shortage, we need to diversify the market.”
Zooming out: Even with these findings from FTC, I’m not expecting much to happen here. Congress is having a tough time moving anything forward these days, especially anything that costs money.
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What I’m reading
Kellogg’s Froot Loops made with ‘harmful additives’ despite vow to remove dyes: shareholder (New York Post). “Kellogg is injecting ‘harmful additives’ in its Froot Loops sold in America that it vowed to get rid of years ago, according to an explosive letter a shareholder sent to the cereal giant reviewed by The Post,” reports Josh Kosman and Shannon Thaler. “Kellogg investor Jason Karp, founder and chief of healthy foods company HumanCo, claimed in a note sent late Wednesday that ‘in pursuit of short-term profits, Kellogg fills its most ubiquitous cereal products in the US … with harmful artificial dyes, such as Red 40, Yellow 6, and Blue 1, as well as the preservative BHT … Following the science, the EU required food companies to put a warning label on products with these ingredients, stating they ‘may have an adverse effect on activity and attention in children,’ wrote Karp, who’s being represented by Quinn Emanuel attorney Alex Spiro — who also has represented Elon Musk, Jay-Z and Kanye West.’”
Michelle Obama’s Plezi Nutrition launches fizzy fruit drink aimed at tweens and teens (Food Dive). “Michelle Obama’s Plezi Nutrition is launching a lower sugar carbonated fruit drink aimed at convincing tweens and teens to switch from sugar-laden offerings to beverages that are healthier,” reports Chris Doering. “The drink will be available this spring in three flavors: Cherry Limeade, Lemon Lime Squeeze and Strawberry Lemonade. Sam Kass, co-chair of the Plezi board and White House chef during the Obama administration, said Plezi Fizz was tested against alternative beverages and well-known brands … Still, he added that getting young people to move away from sugary food and beverage offerings won’t happen overnight.”
Bezos seeks to revamp meat alternatives in climate push (Bloomberg). “The Bezos Earth Fund is pouring $60 million into revamping alternative proteins as part of its push to make food more sustainable,” reports Agnieszka de Sousa. “The Jeff Bezos-backed philanthropic organization will put money into establishing university research centers that will work on improving the taste, texture and nutrition of meat alternatives. The Bezos Centers for Sustainable Protein, to be set up over the next five years, will also focus on bringing down manufacturing costs and finding new ingredients, according to Andy Jarvis, director of Future of Food at the Bezos Earth Fund.”
Chile passed tough measures to combat an obesity epidemic, so why does it still have an obesity problem? (The BMJ). “A decade ago, Chile began to tackle its soaring obesity rates with a law that has proved to be a model for other countries to follow,” writes Carlyn Kolker. “Through introducing a comprehensive range of measures, including taxes on sugary drinks, warning labels on unhealthy foods, and bans on junk food in schools, it hoped to curb obesity and the debilitating diseases associated with diets high in sugars and fats that follow. … Studies show that Chileans are choosing products with less sugar, fat, and salt,1 sometimes cutting purchases of sugar in foods by as much as 25%, but the country of more than 19 million people still faces a crushing health crisis. The obesity rate for adults over 15 years old actually increased in the years after the law was implemented from about a quarter of the population to more than a third—with rates among children also rising.”
It’s not just you. Eggshells really are chipping more. (Business Insider). “Have you noticed that eggs are getting more shell bits into the bowl or pan when you crack them?” asks Katie Notopoulos. “There’s a reason — and it has to do with the same avian-flu outbreak that made eggs so pricey last year. Older hens lay eggs with thinner shells, leading to more shell bits when you crack them.”
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