Background
American grocery stores offer customers a variety of foods, allowing for significant options year-round, and in 2020, the average American spent only 11.9% of their disposable income on food. This sort of reliable and affordable food supply contributes to a robust food system and increases food security. However, these advantages are not felt evenly across incomes. Those in the lowest income quintile spent, on average, over 25% of their income on food in 2020 and according to the U.S. Department of Agriculture (USDA), 10.5% of households in the U.S. were affected by food insecurity. Additionally, recent increases in food inflation (alongside inflation in the larger economy) have created issues for American consumers, especially low-income consumers, though this inflation has been caused by a number of outside factors, including the COVID-19 pandemic and the war in Ukraine. The American food system is thus characterized both by generally affordable, accessible and varied food options, and food insecurity rooted in inequality.
This juxtaposition between positive and negative aspects in the food system is reflected in the supply chains that make up the U.S. food system. The U.S. infant formula and meat supply chains are useful examples. The latter is not a solitary system, but a number of different chains that make up the meat-product elements of the U.S. food system (and contribute to the global food network in which that system is embedded). Beef, poultry, and pork, for example, each have their own supply chain, though there is some overlap between the companies that operate in each industry. Both the infant formula and meat supply chains are characterized by significant concentration in market share and concentration in production facilities, meaning there are a relatively small number of large firms that are responsible for a very large amount of production, in addition to there being a relatively small number of factories that are responsible for a very large amount of production. Both must strike a balance between the useful aspects of this concentration, and the drawbacks it produces.
Infant Formula Supply Chain
Around 98% of infant formula consumption in the U.S. comes from domestic production, with a very small imported portion. Domestic production is done mainly by four large firms: Abbott Laboratory, Nestlé, Mead-Johnson, and Perrigo. In August of 2020, market concentration in these firms was very high, with Abbott Laboratories holding 48.1%, Mead-Johnson 20%, Perrigo 11.6%, and Nestlé 7.7%. The remaining 12.6% of U.S. production comes from small, independent operators. The industry’s high concentration creates some serious vulnerabilities to the food security of those who use infant formula—though there are other sources of vulnerability in the system as well, such as issues with bacterial infections in infant formula—, as seen in the baby formula shortage that occurred in 2022.
The crisis began when Abbott Nutrition Facility in Michigan was temporarily shut down by the Food and Drug Administration (FDA), because of formula contamination and unsanitary conditions. It was reopened under strict oversight in early June 2022, but had to be closed again soon after due to serious flooding in the area. The facility was responsible for an estimated 43% of domestic infant formula consumption. The industry’s concentration has a number of different causes, including tariffs and quotas on infant formula imports, and the process by which the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) obtains the baby formula that it offers WIC recipients. WIC is a nutrition support program that provides services to almost 8 million women, children and infants. About 50% of the United States’ formula consumption comes from purchases of infant formula through the program, and as such, the program plays a massive role in the industry.
In order to facilitate this large expenditure, WIC utilizes an extremely competitive bidding process. Each state (in addition to a number of American territories and Tribal organizations) operates its own WIC agency to administer the program and utilize the funds given to it by the federal government. In addition, each state WIC program allows different infant formula companies to compete to become the sole-source provider of infant formula to WIC recipients in that state. This means the brand that wins the bid becomes the only brand that can be purchased through that state’s WIC program. The companies compete to offer the lowest wholesale price and largest rebate to the state’s agency. The rebates are sums of money that companies give to state WIC agencies, essentially allowing the state WIC agencies to acquire infant formula at a significantly reduced cost. The rebates are very large, accounting for up to $2 billion in savings each year for the WIC program overall (meaning every state WIC program combined). Without them, the program would either need to receive far more government funding, or serve 2 million fewer people.
The winning formula brand, in turn, receives significant rewards. Because the company that wins in a state’s bidding process becomes that state WIC agency’s sole-source provider, retailers recognize that there will be a guaranteed volume of product sales. As such, retail outlets (e.g. stores in which infant formula is sold, such as Walmart) give the brands that win state WIC contracts eye-catching product placement and large amounts of shelf space. Additionally, winning a state WIC contract may lead physicians to be more likely to refer patients to the corresponding brand. These market impacts appear to make it more difficult for new companies to enter the infant formula industry.
President Biden has used the Defense Production Act to give infant formula companies preferential access to resources vital to formula production, and the Food and Drug Administration (FDA) announced a decision to exercise case-by-case discretion on enforcing certain infant formula production requirements, which could increase the amount of formula the U.S. receives from foreign manufacturers. The Access to Baby Formula Act – which gives WIC recipients greater flexibility in using WIC to purchase infant formula – was also enacted in an effort to address the infant formula shortage. These actions were designed to both bolster domestic production, and potentially increase imports (temporarily at least), while increasing WIC recipients’ options without significantly changing the WIC competitive bidding process.
Meat Supply Chains
Much like the infant formula industry, meat supply chains each experience significant market concentration. In the beef supply chain, the top 10 largest processing facilities are responsible for 47% of average daily beef slaughter. Because firms can own multiple facilities, the concentration among firms is higher than concentration among facilities, and the four largest cattle processing firms are responsible for 85% of annual slaughters in the U.S.
Figures for the pork industry are similar to that of the beef industry, although concentration among firms is lower: the four largest firms are responsible for only 67% of total annual hog slaughter in the U.S. The poultry sector is less concentrated in terms of facilities, with the ten largest poultry processors responsible for only 13% of total annual chicken slaughter in the U.S., but its firm concentration rate is more in line with that of beef and pork, with the four largest processing firms responsible for 53% of total annual slaughter. Additionally, the way in which livestock are grown has moved towards an increase in the size of farms and a decrease in the number of farms.
There are sources of vulnerability in U.S. meat supply chains that are not directly tied to concentration, including a lack of a steady labor force in processing facilities and the threat posed by diseases that target farm animals. Additionally, some of the meat supply chains’ characteristics may improve food supply issues overall by allowing for highly efficient food production, but also have some negative impacts on specific groups, such as small farmers. For example, it has been argued that vertical integration in meat processing increases efficiency by allowing the owners of processing facilities to have greater control over the characteristics of the livestock they are processing and the rate at which those animals are processed. But it has also been argued that these increases in efficiency come at a cost to family farms.
Understanding the Tradeoffs
In the meat industry, as in the infant formula industry, there is a tradeoff between the benefits offered by concentration, and the challenges that it creates. Because people need to eat every day, any disruption in a food supply chain will have an immediate impact on American consumers, making vulnerabilities in supply particularly important. The concentration in meat supply chains appears to make them more vulnerable to these sorts of disruptions, thereby exposing consumers to food insecurity. For example, during the COVID-19 pandemic, several big meat processing facilities were closed due to illness among workers, which caused temporary, but major, disruptions in the supply chain and led to price volatility (meaning the prices of meat products became less stable). Some have also expressed concerns that facility concentration will result in increases in food prices for consumers (and lower prices for meat-producing farmers). USDA funds have been used to support local, regional, and diversified processing facilities through loans, grants, and technical assistance; in addition, there are measures designed to encourage competition in the meat industry, such as passing new rules under the Packers and Stockyards Act in order to improve its antitrust enforcement. These measures reflect the federal government’s intention of addressing market concentration in meat supply chains.
On the other hand, it has been argued that the level of concentration in food supply chains in general has, overall, not resulted in higher prices for consumers, and that concentration is at least partially responsible for the affordability of food for the average American, as well as for the range of year-round food options that American consumers are able to access. It has also been argued that the practices of large food retailers like Walmart have driven down the food prices of competitors, and their participation in global supply chains allows for access to a wide variety of foods. In addition, large food retailers have complex disaster alert infrastructures that can be a useful tool in managing environmental threats to the food supply. As such, the meat supply chain, like the infant formula supply chain, faces the challenge of balancing the gains it receives from concentration against the vulnerabilities concentration can create.
