Supply Chain Insanity
The Market Ticker - Commentary on The Capital Markets
Logging in or registering will improve your experience here
Main Navigation
Full-Text Search & Archives
Legal Disclaimer

The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. For investment, legal or other professional advice specific to your situation contact a licensed professional in your jurisdiction.

NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.

The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.


Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.

The Market Ticker content may be sent unmodified to lawmakers via print or electronic means or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media, to republish full articles, or for any commercial use (which includes any site where advertising is displayed.)

Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.

Considering sending spam? Read this first.

2022-05-13 07:00 by Karl Denninger
in Macro Factors , 997 references Ignore this thread
Supply Chain Insanity
[Comments enabled]

All around the news media the latest problem is infant formula.

There are four (count 'em -- four!) factories that make infant formula in the United States.  A few months ago one of them was shut down after it was suspected (but not traced) that they had contaminated some of their batches and two infants died.  That was in February; today it is May and the plant remains offline.

Abbott, for its part, states that while yes, those kids were using that formula and admits that in non-processing areas of the building there was contamination, they deny it was in the formula.   I don't know if that's correct or not, but it doesn't matter because now one plant going offline has resulted in shortages across the United States.

One plant folks.  Think about that for a minute.

Then contemplate two other points: First, that we became so dependent on this in the first place that one plant could threaten the survival of children in this nation and then that the Biden Administration is shipping pallets of formula to the border for illegal immigrants who cross with young children -- and who need food.

Now granted -- babies are babies, and its would be monstrous to deliberately starve them no matter how they got here.  But when supplies are short who gets what they need first?  American citizens and their children or those who deliberately broke the law entering the US illegally and, on top of it, expected the United States to provide for the feeding of their infants?

Clearly the answer isn't American citizens and their children.

At the core of this is our government's belief that "supply chains are ok when stretched all over the place" with no capacity to be self-reliant, and then on top of it we let corporations put people into a situation where they prefer to feed formula instead of the way it has worked to feed babies since the first mammals showed up on this rock.  Certainly there are many women who can't breastfeed for one reason or another but it is also true that a huge percentage of said mothers use formula for convenience and both doctors and mothers are heavily marketed toward with the very intent of making new mothers dependent on said formula.  That crap was going on in the 1990s -- my kid was literally sent home after being born with a "free" sample of formula!

Once that choice is made for a given infant there's not a lot you can do to change it after the fact -- you're stuck with the decision to use formula quite rapidly, as a mother who doesn't breastfeed will soon have no milk to feed with at all.  Of course this suits Abbott and the other makers of formula just fine.

Would you mind explaining to me how this isn't worse than deliberately addicting someone to opiates?  In that case the victim (harmed individual) is the person addicted and as an adult they have agency.  In this case the harmed individual is an infant who most-certainly does not.  How is that not felonious?

There are no simple answers -- especially now.  But this is not the only example; we are, at present, exporting diesel fuel.  What, you might ask?  Yes, and we've been doing it for years.  It used to be that in the summer months diesel was cheaper than gasoline; the reason is that diesel is also heating oil (same thing) and of course you don't use any in the middle of summer.  Never mind that summer months are slower for truck deliveries, at least until we get into fall and the winter stock-up begins for Christmas.  Since a barrel of oil "cracks" to a relatively-fixed mixture of gasoline, diesel, lubricating oil and other components if the demand for diesel is lower then so is price and of course leisure travel by gas-powered cars rises with summer vacations.

But for the last decade or so this relationship, which was very reliable, has disappeared.  Why?  Because we're exporting the diesel.  Now, with the Russia/Ukraine war on those exports are into a bidding frenzy environment over in Europe.  Rather than keep our diesel here and keep its price under control which in turn would suppress inflation we claim there's nothing we can do -- at the same time we cancel leases for new drilling and otherwise obstruct those who would produce oil, driving up their costs.

All of this is intentional policy -- it is not an accident.

The solution to high prices is often high prices; high prices destroy demand.  But how much of that demand is inelastic and can't be destroyed?  There is no elasticity of note in baby formula; that infant needs food, and if you have started them on formula you really have little choice but to find some or else, never mind that switching to a different brand or type can be a problem too due to differences in the ingredients.

The same is true to a significant degree for diesel fuel that powers the last mile of delivery for virtually everything.  Whatever it costs, it costs -- and is reflected immediately into the price on the shelf.  If the trucking becomes uneconomic because firms have contracts and they simply can't operate without going out of business then they go out of business and the products don't get delivered at all.

Again this all comes back to a false promise we've had made to us by politicians and businesses: It's great -- and safe -- to offshore supply chains and not be self-sufficient -- that is, to eschew autarky.  Nothing bad will happen by being dependent on foreign oil, four factories that produce basically all of our infant formula, potash from other nations for fertilizer and similar.

How's that all working out and how do you feel about it when we have both a President and Congress who are willing to sit back and let it all happen, particularly when it comes to energy supplies?

This didn't happen in a week, a month or a year.  It happened over decades but government on both sides of the aisle has not only cheered it on so have you in the form of higher stock prices.  After all if it can be sold here for $4/gal or overseas for $5 then $5 it is even though that will cause the price to be $5 here too.

How wise was that, America?

View with responses (opens new window)