Global Food Crisis: The Search for Viable Long-Term Solutions

1. Global Food Crisis: The Search for Viable Long-Term Solutions Swiss Global Economics Presentation Hani Selim Chief Executive Officer September 22, 2011

2. A New Food Crisis In The Horizon? • There is no straightforward technical or biological answer • Elements of global food crisis gathering steam: expanding biofuel production; rising oil prices;$US depreciation; and panic purchases Higher food P. • The diversion of crops from feed to biofuel production, applies a significant amount of demand-induced pressure.(R1). • Key positive and negative changes since 2007-08: • Grain production and stock levels in developing countries are higher. • Excess liquidity in both China and India is leading to inflationary pressure with a spillover effects on the prices of food. • Rising oil prices, the expansion of biofuel production particularly Maize Ethanol, are raising the odds for future increases of global food prices. • Varying transmission effects from global prices to domestic prices: traded volumes of food commodities; trade policies; partial protection via exchange rates. .(R2). • The excessive price volatility in both the input & output markets, is reducing farmers’ profit margins, distorting long-term planning, and dampening the incentives to increase investment in productivity and enhancement of supplies. • The global population is expected to rise to 7 billion by the turn of 2011-2012 stirring Malthusian fears that the continuing price rises will plunge more people who spend more than half their income on food into poverty. • Because food is so important, agriculture—more than any other form of economic activity—is expected to achieve a series of competing and overlapping goals that change over time and from place to place. • Given the conflicting goals of farmers and agriculture, the food crisis has produced contradictory accounts of the main problem and radically different proposals for solving it.

3. Will There be enough food to go around in 2050?

4. Framework for Food Security Analysis

6. 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

7. 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

8. 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

9. Global Grain Price Volatility (the Real Spoiler) • 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

10. 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

11. 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

12. 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

13. 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

14. 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 foodproduction for risk mitigation, further cutting their incomes (well established in 1970s, 1980s)

15. 4 concerns with respect to impact on Human Capital of higher and volatile food prices • Poverty increases – headcount and income gap • Risk to malnutrition – • lesser access to food via price effect and • to basic health care via income effect • Risk to schooling • Via income effect. • Offsetting price effect may not obtain in this situation, though it did in many macro and fiscal crises (East Asia, Tequila, etc) • Loss of assets to sustain livelihoods

16. Reducing Poverty When Faced With Increased Food Price Volatility • 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

17. 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.

18. 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?

19. 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

20. 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

21. 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

22. 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.)

23. 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

24. 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

25. External Trust Funds: EU • 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 € 110.8 million : • Batch 1: Ethiopia, Gambia, Guinea-Bissau, Honduras, Mali and Kenya • Batch 2: Benin, Kyrgyz Republic, Lao PDR and Yemen

26. Short-run Responses Getting Results….

27. 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 taxesfor 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

28. 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

29. GFRP Has Been Rapid • 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.

30. 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??

31. World Bank Group Food & Agriculture View Longer-Term Sector Strategy: Reaching The Rural Poor (2003) Ag ActionPlan: Go from $4 Billion to $6 Billion Annually By Operations That: Reduce risk and vulnerability Raise agricultural productivity Link farmers to markets and strengthen value chains Facilitate rural non-farm income and diversification/exit Render environmental services Economic and Sector Work (ESW): World Development Report 2008: Agriculture for Development

32. Key Points • Strong reasons to think that increased volatility of global grain prices is here to stayfor 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

33. Policy Recommendations : The Need For A Comprehensive Approach • Adopt effective policies and technology investments strategies • Objective: Curtail and reform existing biofuel policies to minimize biofuel demand’s impact on the volatility of international and domestic food markets. • Accelerate the establishment of social safety nets with agricultural support intervention. • Objective: Increase the productive capacity and improve both the health and nutrition of vulnerable households. • Liberalize and enhance the efficiency of global agricultural markets. • Objective: Bolster domestic production response and reduce the risk of implementing policies that could further destabilize world food markets.(R1) • Create a Global Emergency Grain Reserve System. • Objective: Mitigate the impact of price volatility and calming the food markets. (R2) • Adopt investment strategies to promote agricultural growth. • Objective: Improving the productivity of small farmers by improving their acces to inputs through lower transport and marketing costs, improved market infrastructure, and greater competition. • Establish an International Task Force to regularly monitor the World Food situation. • Objective: work in a coherent, coordinated, transparent, and timely fashion to prevent excessive price volatility.