Opinion: Banking on food’s future

WASHINGTON — One billion people go hungry every day.

That’s why the development community recently welcomed a new trust fund to fight global hunger. The U.S. and other international donors have announced a combined initial contribution of $880 million for the next two years — a good start for the Global Agriculture and Food Security Program (GAFSP) that will be based at the World Bank.

It’s a generous contribution, but it amounts to less than a dollar for each hungry person.

The global food security program will provide funding for medium- and long-term development by investing in innovation and supporting infrastructure for agriculture. With any luck, this will help to strengthen agricultural markets in poor countries and reduce price volatility and food shortages.

The donors are smart to emphasize food security and the need for new ideas and action on this very important issue.

Short-term food assistance is equally important. The World Food Program (WFP) is the largest provider of food assistance in the world and is tasked with feeding 80 million to 100 million people. But because of its reliance on year-to-year contributions, the WFP buys almost all of its food when it is immediately needed on spot markets where prices and food availability fluctuate a great deal. This means that when a certain region, or the whole world, experiences a food shortage, the WFP is forced to buy less food for more money. The WFP needs an insurance policy that will allow greater predictability, both in times of abundance and especially in times of crisis.

In a new paper, co-authored with Benjamin Leo and Owen McCarthy, the Center for Global Development argues that the WFP should develop tools to manage price risk. One example is call options in which the WFP would agree to pay a specific price for a specific amount of food to be purchased and/or delivered at a future date. Private companies such as Kraft and Coca-Cola currently use futures contracts to stabilize the cost of their purchases.

For example, the WFP appropriately emphasizes local and regional procurement to help strengthen agricultural development through an excellent program called Purchase for Progress. Futures contracts and other basic risk-management tools can take this a step further by increasing the certainty of purchases for the small farmers who sell their food to the WFP.

Rich countries have generously supported the WFP but can do more. Currently, unrestricted cash contributions typically account for less than 10 percent of the WFP’s total budget and constrain the WFP’s ability to use forward-planning tools to purchase food.

Here are three complementary policy recommendations that would move the WFP in the right direction:

1. The WFP and its board should implement a forward-planning pilot program focused on chronically food-vulnerable countries. There are several risk-management instruments available for a pilot, such as physical call options, forward contracts and futures contracts. All instruments are utilized widely for risk management purposes. Key benefits include greater financial predictability, the potential for improved delivery times and increased local and regional trade, building upon the WFP’s Purchase for Progress initiative. Most importantly, contracting to buy food can provide clear and longer-term price signals to local farmers, thereby stimulating agricultural production.

2. The United States and other rich countries should commit untied cash donations — meaning no strings attached — to increase WFP operational flexibility. Contributions from the United States and other rich countries to the GAFSP could support WFP forward-planning operations. Specifically, the fund could provide a financial guarantee or modest credit line, which would enable it to contract for food for up to one year in the future. With appropriate policies in place, the practical financial impact would be very modest.

3. The United States should also utilize forward purchases for its own in-kind contributions to the WFP, increasing certainty for the WFP and for American farmers. Currently, U.S. in-kind contributions are appropriated based on food price instead of food amount. This makes it impossible for the WFP, and food beneficiaries, to know ahead of time the amount of the food the U.S. will donate. The United States could procure part of its in-kind contributions to the WFP through forward purchases. As this would provide increased price certainty for American farmers, it may be politically palatable to Congress. Other countries which make in-kind purchases might also consider this approach.

I am well aware that in the wake of the 2009 financial crisis, the appetite for financial innovation is not large. But the very conservative proposals described here are a far cry from the risky derivatives that fueled the crisis.

Simple call options and futures instruments are well proven in large-scale commodity exchanges. The WFP can use these instruments to counter the effects of high and volatile food prices and in turn, feed many more hungry people around the world. Rich-country donors can and should use their newly expressed collective will on food security to make it happen.

Vijaya Ramachandran is a senior fellow at the Center for Global Development.