Economics | World

High Food Prices: An Opportunity for the WFP

The FT reports that an upcoming OECD/FAO report predicts food prices “will not drop back to pre-crises levels for at least the next 10 years.” So why did India’s latest budget waive 600 billion rupees in agricultural loans to help indebted farmers? More curiously, why do farmers in India continue to commit suicide to escape crippling debt (between 2002 and 2005, 86,922 farmers committed suicide). Perhaps the oddest is America’s new farm subsidy bill, which will pay rich American farmers USD 40 billion more in taxpayers money.

How is one to reconcile these contradictions? And, to answer Natasha’s question - what can the World Food Programme do about it?

This is more than a rhetorical question because the World Food Programme matters to a lot of people. It is the frontline agency feeding the world’s hungry and in 2004 delivered almost 50% of global food aid (7.2 million tons valued at USD 3.2 billion). With prices up to 40% higher, the WFP is reporting that it will be forced to cut back on the number of people it feeds. According to Josette Sheeran, Director of the WFP, this “silent tsunami” threatens up to 100 million people unless the agency receives an additional USD 700 million.

So, what is the WFP to do?

Greater funding of the WFP is not a solution. Though grain prices have fallen recently (wheat is 40% below its February peak), the spectre of sustained high prices suggests the WFP and national governments will have to seriously reconsider their long-term strategy for ensuring food security. But any strategy or solution will have to account for two factors.

First, that volatility is up. The sudden spikes and falls in food prices suggest we are far from an equilibrium. Data from the Chicago Board of Trade (CBOT) indicates that volatility in wheat prices, for instance, has risen (see chart). This suggests that long-term consumers of grains would do well to heed the call of Goldman Sachs’ oil analyst Murthi who suggests only buying long-term crude oil.

Second, the problem has many reasons. On the demand side greater demand and changing consumption patterns in China and India; on the supply side a shift of agricultural land towards biofuels and urban expansion and lack of research since the last green revolution. Agricultural commodities have also become an investment class contributing to higher volatility. There is no one culprit. Rather, the entire value chain of food markets is riddled with government intervention and inefficiency.

These problems will remain for the forseeable future therefore any solution will have to account for the fact that it cannot change the system. International grain prices will always be subject to domestic politics, such as the US farm subsidy bill; faced with high gas prices rich countries will still promote ethanol; urban expansion will continue; and climate change in the north will receive more funding than agricultural research in the south. The WFP cannot address the problem by throwing more money at it - even the entire USD 1.2 billion it was criticised for possessing.

Purchase for Progress

The good news is that, as one of the largest global consumers of food, the WFP is in a position to bypass the system. The Purchase for Progress program of the WFP does just that. It aims to increase farmer productivity in the developing world by creating market linkages, acting as a guaranteed buyer, and providing futures contracts to farmers to encourage long-term investments.

The concept is intriguing. Not because it is new but because it mirrors a similar move in India by retail giants such as Reliance and Walmart. As they execute plans to open hundreds of stores to serve millions of middle-class consumers in India, they are bypassing local agricultural markets, choosing instead to buy directly from the farmer.

Thinking Bigger: Building Markets

In the long-term, then, the WFP has a shot at putting in place long-term purchase contracts that help WFP as well as local farmers. And by buying locally, the WFP can reduce its dependence on national contracts - always a risk when governments can renege on export contracts as they did in this current crises.

But why stop there? Indeed, if the WFP can show that efficient markets are in the farmer’s and consumer’s best interests, it provides a strong incentive for local governments to dismantle the controls that hold back global grain trade (e.g. less than 8% of the global crop of rice is traded internationally). Done right, the Purchase for Progress concept could - and possibly should - be expanded into an Alternative Investment Market for agriculture - a global market for small-holder farmers.

With that in mind here is a more ambitious Purchase for Progress (P4P) 2.0.

• Create an internal marketplace: The whole point of purchasing locally should be to turn food scare areas into food exporting areas. While the FAO and IFAD, amongst other agencies, try to increase productivity, the WFP is in the priveliged position of having the money to put where its mouth is. As local production increases beyond local needs, create an internal marketplace that trades the suplus to other parts of the world. Grow in Africa, send to Burma - and vice versa when disaster strikes Africa.
• Become a clearing house: While I do not know the details, in its current avatar the P4P program partners with several organizations. However, it can go further offering for instance to be a local clearing house for retail giants such as Reliance. As the retail business in India is currently structured, farmers transact with multiple companies bilaterally. While this works for now, the scenario needs an intermediary market in the long term. The WFP can be that market, at least in some places. Not only would it offer its logistics experience, it could benefit by buying any surplus or at least having a better insight into supply and demand.
• Use that investment fund: That USD 1.2 billion fund, for which the organization was criticized, can be put to good use. By all means, keep the reserve. In fact, create a long-term endowment because the world’s hungry are not going away anytime soon. But use part of the money to invest in agricultural SME funds such as Aventura or to provide loan guarantees to businesses that are needed to boost agricultural productivity. Why keep all that money in cash and cash reserves?

The high food prices have illustrated much about our inability to feed a substantial portion of the world’s population. However, this problem is not one of supply. Rather, it shows deep rooted problems in an international system of distribution. When such a system does not serve one’s ends, it is often easier to bypass it rather than fix it.

The WFP is in the ideal position to do just that. It has the purchasing power to be a market shaper with enough resources to push through changes further down the value chain (much like Nike does with its suppliers). It also has a special legal status that can allow it to bypass national laws - such as those banning independent agricultural markets or futures. And finally, it is not so big that anyone would actually notice a disruption in the overall market.

Indeed, that a substantial portion of WFP’s donations are tied is a good thing (Canada required 50% of wheat be bought from Canada, and the US generally provides in-kind donations). Not only is that food subsidized, but so long as the WFP meets those commitments both national governments and international commodity businesses (such as Cargill) will allow the WFP to build its own parallel system. Such a system can, one day, rival any national or international trading platform. It is in the benefit of WFP, but also in the interests of shifting agricultural trade in favor of poor developing countries.

© 2008 The Discomfort Zone.