Pushback against just-in-time supply chains sounds appealing, but how would it actually work? Is this something we can regulate, maybe make grocery stores go through stress tests like the ones we do for big banks? Somehow I have a hard time believing practices will change.
Finland has a National Emergency Supply Agency, which maintains its own stockpile of emergency supplies including food, fuel, and healthcare supplies; they recently released respirators from the supply in response to COVID-19. (They have previously released crop seeds in 2018 after an exceptionally bad growing season had caused a shortage, and fuel in 2005 after Hurricane Katrina caused a reduction in the availability of oil.) They also actively coordinate with the private sector. I am a little unclear about what exactly that collaboration involves, but according to the news, under normal circumstances Finland’s largest grocery chains report on their supply situation to the agency twice a day.
The are also legal requirements for drug manufacturers and importers to stockpile medicine: there’s e.g. a 10 month emergency supply of antibiotics, a 6 month supply of blood pressure and diabetes medication, and a 3 month supply of respiratory and cancer medicine, among others.
Are those government-owned warehouses of grain like the ones Kaj mentioned in Finland? The US used to have a strategic grain reserve, although it looks like at the time it was liquidated in 2008 it had only 915,000 tons of grain, which would feed the country for… not even a week.
Requiring businesses that sell non-perishable food to store a few months’ supply sounds reasonable, but I’m curious if other places have used that approach successfully. I know groceries are a low-margin business to begin with.
West-Berlin had a wall around it for decades and there was a political need to not be dependent on food transport that relied on permission from the Soviets. As a result we likely had larger stockpiles of food than any other city in modern history.
Groceries are a low-margin business but if you require all the supermarkets to follow a regulation they can just pass on the costs to customers.
It’s also worth noting that we pay huge sums of money in agricultural subsidies, sometimes inducing people not to produce food. We likely want to restructure those subsidies in a way that leads to larger stockpiles of food.
My understanding is the stress tests for big banks aren’t very good- they encourage the bank to shore up against exactly the scenario they know will be tested, and no other. So I’m not very hopeful about them for grocery stores.
“Not being as robust as the stress test would seem to imply” is still consistent with “significantly more robust than they would be in the absence of such a requirement”.
Naively, forcing banks to keep enough liquid reserves to handle an imaginary crisis situation should strictly improve their ability to handle an actual crisis, compared to letting them not do that (and competition between banks meaning that they’re usually better off not keeping extra reserves available rather than gathering interest etc). I’d be surprised if it were negative on net.
The idea that having insurance from another bank counts as passing a stress test doesn’t match any source on the first page of Google search results for “stress test banks”; the more specific ones mention that the requirement is maintaining at least 4.5% capital (as Dodd-Frank requires) on hand at the peak of the stress test scenario. Is there a source which says that banks are using massive insurance policies to pass these in place of capital?
What regulators spotted a couple of years ago is that banks were buying very focused packages of insurance that would pay off in exactly the scenarios of the stress tests. They had no commercial reason whatsoever, and were in fact probably quite expensive pieces of insurance to purchase. But it meant that the bank could, with a really straight face say, ‘Well, you know what? In this stressful scenario we’d be totally fine.’ And what’s going on under the table is, ‘Yeah, because our bet that this scenario would happen would pay off, and we’d suddenly get an extra half a billion extra dollars.’
That’s unfortunate to hear, and it seems like it could have been different.
In the case of food supply chains, though, it would be just a literal matter of counting and not accepting IOUs for food in lieu of actual physical food.
One thing we can do is eliminate inventory taxes… this is one reason that companies were forced into just-in-time. We currently punish people for being prepared for any emergency ;)
Pushback against just-in-time supply chains sounds appealing, but how would it actually work? Is this something we can regulate, maybe make grocery stores go through stress tests like the ones we do for big banks? Somehow I have a hard time believing practices will change.
Finland has a National Emergency Supply Agency, which maintains its own stockpile of emergency supplies including food, fuel, and healthcare supplies; they recently released respirators from the supply in response to COVID-19. (They have previously released crop seeds in 2018 after an exceptionally bad growing season had caused a shortage, and fuel in 2005 after Hurricane Katrina caused a reduction in the availability of oil.) They also actively coordinate with the private sector. I am a little unclear about what exactly that collaboration involves, but according to the news, under normal circumstances Finland’s largest grocery chains report on their supply situation to the agency twice a day.
The are also legal requirements for drug manufacturers and importers to stockpile medicine: there’s e.g. a 10 month emergency supply of antibiotics, a 6 month supply of blood pressure and diabetes medication, and a 3 month supply of respiratory and cancer medicine, among others.
In Berlin where I live we used to have big warehouses full of grain for the case that we lose our access to outside markets.
It’s not that complicated to pass laws that force the big grocery chains to have their own warehouses with months worth of essentials.
Are those government-owned warehouses of grain like the ones Kaj mentioned in Finland? The US used to have a strategic grain reserve, although it looks like at the time it was liquidated in 2008 it had only 915,000 tons of grain, which would feed the country for… not even a week.
Requiring businesses that sell non-perishable food to store a few months’ supply sounds reasonable, but I’m curious if other places have used that approach successfully. I know groceries are a low-margin business to begin with.
West-Berlin had a wall around it for decades and there was a political need to not be dependent on food transport that relied on permission from the Soviets. As a result we likely had larger stockpiles of food than any other city in modern history.
Groceries are a low-margin business but if you require all the supermarkets to follow a regulation they can just pass on the costs to customers.
It’s also worth noting that we pay huge sums of money in agricultural subsidies, sometimes inducing people not to produce food. We likely want to restructure those subsidies in a way that leads to larger stockpiles of food.
My understanding is the stress tests for big banks aren’t very good- they encourage the bank to shore up against exactly the scenario they know will be tested, and no other. So I’m not very hopeful about them for grocery stores.
“Not being as robust as the stress test would seem to imply” is still consistent with “significantly more robust than they would be in the absence of such a requirement”.
My impression was that if anything these tests were making it worse, but I don’t have the reference to double check.
Naively, forcing banks to keep enough liquid reserves to handle an imaginary crisis situation should strictly improve their ability to handle an actual crisis, compared to letting them not do that (and competition between banks meaning that they’re usually better off not keeping extra reserves available rather than gathering interest etc). I’d be surprised if it were negative on net.
Having savings is boring and unleveraged. Buying insurance against an *extremely specific* scenario does even better on the tests and costs much less.
The idea that having insurance from another bank counts as passing a stress test doesn’t match any source on the first page of Google search results for “stress test banks”; the more specific ones mention that the requirement is maintaining at least 4.5% capital (as Dodd-Frank requires) on hand at the peak of the stress test scenario. Is there a source which says that banks are using massive insurance policies to pass these in place of capital?
Found my source.
I had misremembered the insurance as cheap.
That’s unfortunate to hear, and it seems like it could have been different.
In the case of food supply chains, though, it would be just a literal matter of counting and not accepting IOUs for food in lieu of actual physical food.
One thing we can do is eliminate inventory taxes… this is one reason that companies were forced into just-in-time. We currently punish people for being prepared for any emergency ;)