Global Food Crisis: From Urgent Short-term Responses to Viable Longer-Term Solutions Presentation to the Kennedy School Spring Exercise April 23, 2009.

Global Food Crisis: From Urgent Short-term Responses to Viable

Longer-Term Solutions

Presentation to the Kennedy School Spring Exercise

April 23, 2009

Christopher Delgado

Strategy and Policy Adviser

Agriculture & Rural Development

World Bank

First, the Global Food Crisis… What’s Happened & Happening?

Global Prices Again Increas-ing, Likely to Remain High

Commodity price indices in current US$ to Feb. 2009 (2000=100)

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Fertilizer

Rice

EnergyGrains

Vulnerability of Poor to Volatile Grain Prices is High

• Almost one-sixth of humanity, 1+ billion people, chronically malnourished (FAO)

• In Sub-Saharan Africa 1 in 3 people still do not have enough to eat

• And relative grain and fertilizer domestic price levels still “high” and rising again

• But the true enemy of both the poor and investors is increased grain price volatility

For the Poor: Mechanisms of Vulnerability to Grain Prices

• The poor in developing countries spend well over half their income on food staples, and have no choice but to respond to higher prices by reducing consumption even further

• In Ethiopia, grain prices are 80% of family food cost; in the U.S. they are less than 5%

• Even the mass of smallholder farmers are in trouble with volatility: few have the resources to take risks, and input prices in 2008 increased much more then output prices

Financial Crisis Exacerbates Vulnerability to Food Prices

• Agricultural exports very important to income of the poor in Africa and poor Asia, but falling due to falling demand and prices under global recession

• Employment opportunities falling and fiscal space severely constrained (GEP 2009)

• Inflation rising• Other coping mechanisms such as remittances to

developing countries of over US$250 billion in 2007 have started to decline for first time in 4 years

• Prospects for aid inflows are uncertain

Global Grain Price Volatility (the Real Spoiler)

Grain Price Volatility Seems to be Increasing

• Grain price volatility for cereals is thought to have decreased along with real prices since 1970s to 2000

• Yet global price volatility has almost doubled for corn and wheat over the last 10 years (and for rice in the last year)

• Price volatility adds important elements of uncertainty and risk to the already difficult issue of high food prices, especially when financial resources are scarce

• Whether or not increased global food price volatility is transitory depends on the drivers of change in volatility

Drivers of Price Volatility (1)

Hypothesis: The higher price volatility of oil markets was transferred to corn markets as oil prices rose above $50/barrel and corn-based ethanol use increased over the past 3 years

• Metal and oil prices were more than twice as volatile as corn prices since 2000

• The correlation of corn prices with oil prices is much higher (75%) when the oil price is high (>$50) than otherwise (5%)—especially if oil is high relative to corn

y = 2.117x - 3.3959

R2 = 0.7527

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Drivers of Price Volatility (2)

Hypothesis: Food futures are increasingly tied to the more volatile behavior of non-agricultural commodities.

• Inflow to commodity index funds of US$250 billion in the 2003 to 2007 period, and 27% of total U.S. agricultural futures included in index funds end 2007 (Masters, 2008)

Source: Michael Masters, U.S. Senate testimony

Drivers of Price Volatility (3)

Hypothesis: Global carryover grain stocks in the range of 14% to 20% of total usage now, compared to 30% to 35% in the late 1980s and 1990s, have been associated with more defensive policy stances (such as trade barriers, price wedges)

• Events in Asia have been determinant for some time

World Grain End Stocks-to-Use

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1960 1970 1980 1990 2000

Drivers of Price Volatility (4)

Hypothesis: Climate events are becoming more extreme under climate change, especially in the tropics, and these are likely to accelerate, leading to much higher volatility and even lower viability of grain self-sufficiency strategies

• Fact: higher temperatures very unfavorable to agriculture in tropics

• Fact: large share of developing country agriculture is rainfed or lowland coastal, vulnerable to climate-change induced droughts and floods

Longer-run Impacts of High Food Price Volatility

• Unless high grain prices engender productivity growth in developing country agriculture, they tend to raise costs more than overall HH income

• Volatile grain prices tend to discourage investment in increasing food productivity or labor-intensive enterprise that would help solve long-term problems

• Volatile food prices also tend to encourage over-investment by poor people in developing countries in backyard subsistence food production for risk mitigation, further cutting their incomes (well established in 1970s, 1980s)

Reducing Poverty When Faced With Increased Food Price Volatility

Short-run Responses

Getting in Gear….

Consensus of April 2008 on Immediate Needs

• Work with the UN and other stakeholders under the Secretary-General’s High-Level Task Force for the Global Food Crisis (HLTF) established in Berne in late April 2008

• Partner on the UN Comprehensive Framework for Action launched at the UN General Assembly in Sept. 2008

• Priority to support fundraising by WFP for humanitarian assistance

• Need for rapid financing to countries to support policy changes

• Social protection• Risk mitigation using financial tools as well as physical

hedging• Maintain productive capacity and transit to longer term

food production viability

The Bank’s Global Food Crisis Response Program

• Approved May 29, 2008 (see Bank website “ImageBank”) • Umbrella for providing rapid Bank support for a

comprehensive response to the crisis• Provides balance between short run food stabilization and

measures to ensure countries able to cope better in medium term, including longer term action and lending to enhance agricultural productivity

• Fast-tracking of up to $1.2 billion of Bank resources: existing country envelopes, re-programmed funds, regional IDA funds where appropriate, a new $200 million trust fund from IBRD surplus (Food Price Crisis Response Trust Fund)

• Greatly expedites procedures for rapid response—approval by Bank Management and 5 day no objection period at Board, takes 3 Chairs out of the 24 to bring to the full Board, otherwise considered approved.

The GFRP Business Model

• GFRP seeks to:– Minimize threat of rapid unforeseen increases in food

and agricultural input prices to poor people– Help clients avoid short term responses that are

counterproductive in the longer term (e.g. export bans, price regulation, etc.) by offering other assistance

• Board agreed to greatly streamline their turnaround time for approvals, but…

• What about staff procedures?• What lessons?

Menu of GFRP Components

• Component 1: Food price policy and market stabilization– Examples: Support for grain stock management,

improved use of market-based instruments to manage food prices, tax and trade policies

• Component 2: Social protection actions to ensure food access and minimize the nutritional impact of the crisis on the poor and vulnerable– Examples: Cash transfer program (CCTs, food

stamps), school feeding, targeted food supplements and micronutrients

Menu (continued)

• Component 3: Enhancing domestic food production & marketing response– Examples: Seed and fertilizer supply and market

development, Rehabilitation of small-scale irrigation, Strengthening access to finance and risk management tools

• Component 4: Implementation support, communications and monitoring and evaluation

People: The GFRP team

• The 6 Regions (44 country teams involved in roughly 60 actual and planned projects)

• A broad GFRP Secretariat housed in the central Ag. & Rural Development Dept. (ARD)—called the “ARD Anchor”– also involving staff from Operations Policy (OPCS), Partnership & Trust Funds (PTP), and the Managing Director’s Office

• A sub-group of staff in ARD:– supporting regions, fundraising, tracking, monitoring,

lesson-learning, and reporting GFRP project activity– providing outreach to global partners (in-posting from

WFP in Rome and out-posting to UN-HLTF Rome) and external AAA/messaging

GFRP Governance

• The Secretariat, including both analytical and operational skills, is coordinated by a Work Program Agreement leader who has a budget, and reports to the Sector Director of ARD

• The Secretariat does all the consultations, checking, etc. and makes recommendations to a Steering Committee

• The Steering Committee—composed of the Managing Director and 6 network Vice Presidents covering the administrative and topical sides of GFRP operations acts on the recommendations

• The Secretariat facilitates implementation by the regions• Operations are “recipient executed” by the countries

involved (unlike many technical operations such as increasing bird flu preparedness that are often “agency executed” by UN agencies.)

Funding Mobilized to Date

• $916 million in 40+ Board-approved projects in 31 countries since May 29, 2008

• $734 million of this has been disbursed (80%)• $258 firm Bank funds pipeline in 9 countries• Overall, $1.174 billion in Bank funds approved and

planned in 36 countries worldwide• Additional pipeline of $187 million in external

trust funds (Australia, Russia, EC) directed to 17 countries

• GFRP is presently a $1.4 billion effort targeted to 44 separate countries

External Trust Funds: MDTF

• Food Price Crisis Response Core Multi-donor Trust Fund

– US$33 million contribution from Australia has been allocated

– Investment operations and DPOs for 5 countries: Cambodia ($8m), Solomon Islands ($3m), Kiribati ($2m), Senegal ($8m) and Zimbabwe ($7m)

– Technical assistance for Pacific Islands ($1m) and AAA on food security in Vietnam ($0.25m)

External Trust Funds: Russia

• Russia Food Price Crisis Rapid Response Trust Fund for Tajikistan and Kyrgyz Republic– US$15 million pledged by the Russian

Federation for assistance to Tajikistan and the Kyrgyz Republic under the GFRP

– The Trust Fund is anticipated to become effective in April and US$7 million has already been received

• European Union Food Crisis Rapid Response Facility

– The World Bank is implementing part of an EC €1 billion European Food Facility in collaboration with UN System

– Initial support through the World Bank totaling EUR 110.8 million :

• Batch 1: Ethiopia, Gambia, Guinea-Bissau, Honduras, Mali and Kenya

• Batch 2: Benin, Kyrgyz Republic, Lao PDR and Yemen

External Trust Funds: EC

Short-run Responses

Getting Results….

Adaptation…

• Budget support for Government policies and institutional actions in 12 countries (carried out by country staff in the Poverty Reduction and Economic Management Network (PREM) to:– Reduce import duties and taxes for food e.g. in Guinea, Burundi

– Develop, scale-up and enhance targeting of social assistance programs e.g. in Bangladesh enabled scale-up of 7 safety net programs and introduction of a new 100 day employment guarantee scheme

– Strengthen and/or initiate policy dialogue on agriculture and social protection e.g. in Haiti and Djibouti

– Improve agricultural productivity e.g. in Rwanda, Bangladesh, Mozambique

• Country specific AAA related to the food crisis in more than 40 countries—big demand for technical advice

Mitigation…

• Social protection and nutrition (carried out by regional staff in the Human Development Network (HD) at the Bank)– Investment operations approved in 15 countries are expected to reach 2.8 million people

– Supplementary rations & nutrition: 1.3 million vulnerable mothers and children under 5, e.g. Moldova procured supplements for 8,434 children under 2 & approximately 6,000 pregnant and lactating women

– School Feeding: 600,000 primary schoolchildren, e.g. monthly school feeding provided to 60,000 children in Liberia since October 2008

– Cash-for-work, food-for-work & cash transfers: 900,000 people, e.g. in Sierra Leone 119 cash-for-work projects have been approved, providing 42,000 person-days of employment for more than 5,300 people

Prevention…

Agricultural investment operations approved in 19 countries, are expected to reach 5.5 million farmers, carried out by regional staff in the Sustainable Development Network (SD) Family

– Fertilizer procurement and distribution: approximately 280,000 tons to date, e.g. Niger and Kyrgyz Republic already sold and distributed fertilizer, Ethiopia has imported 50,000 tons, currently bringing 220,000 tons through Djibouti, tendering for another 180,000 tons

– Seed procurement and distribution: more than 2,000 tons to date, e.g. Tajikistan distributed 1,265 tons of high quality winter wheat seeds to 71,500 households

– Rehabilitation of small-scale irrigation schemes, e.g in Afghanistan 191 community projects benefiting 154,000 people

• GFRP Investment Lending operations were prepared and delivered in record time– Average time from concept to approval to

effectiveness for all GFRP IL operations was 85 days, with the minimum processing time being only 21 days.

• Preparation & delivery of Development Policy Operations was even faster– Average time from concept to effectiveness for

GFRP DPOs was 75 days, with some delivered in as little as 22 days.

GFRP Has Been Rapid

Evolving Mechanisms…

The Vulnerability Financing Facility (VFF)• GFRP put together by the ARD Anchor in

SDN : Ceiling lifted April 16 2009 to $2 Billion by June 30, 2010 (end of FY10), moving to more emphasis on agriculture for prevention…

• The Rapid Social Response Program put together by the Social Protection Anchor in HD: 200 million Sterling in trust funds pledged by the U.K. at G20 meeting and Euros 20 million by the Netherlands--will they agree on an MDTF or two SDTFs? How will both SP expertise in SP responses and ARD expertise in running GFRP be used for RSR??

World Bank Group Food & Agriculture View Longer-Term

Ag Action Plan: Go from $4 Billion to $6 Billion Annually By Operations That:

1. Reduce risk and vulnerability

2. Raise agricultural productivity

3. Link farmers to markets and strengthen value chains

4. Facilitate rural non-farm income and diversification/exit

5. Render environmental services

Ag Action Plan: Go from $4 Billion to $6 Billion Annually By Operations That:

1. Reduce risk and vulnerability

2. Raise agricultural productivity

3. Link farmers to markets and strengthen value chains

4. Facilitate rural non-farm income and diversification/exit

5. Render environmental services

Sector Strategy: Reaching The Rural Poor (2003)

Economic and Sector Work (ESW): World Development Report 2008: Agriculture for Development

Status of the Scale-Up

• New World Bank Group annual lending to agriculture, agribusiness, plus food crisis related social protection/nutrition in FY09 is projected to be close to $7 billion– $3.5 billion for agriculture– $2 billion for food related social protection– $1.4 billion for agribusiness Through the

International Finance Corp. (IFC)

Take-Home Messages

• Strong reasons to think that increased volatility of global grain prices is here to stay for a while

• The impacts on the poor in developing countries are devastating and need immediate attention

• The penalty for not acting is going up• Risk management is vital at all levels in transition

to longer term• Investment in the productivity and sustainability

of agriculture in developing countries is key for the longer term and good for everyone

• Also need focus on empowerment and access of the poor to inputs, services, and markets