Welcome to another edition of “What’s the Deal?” the blog that doesn’t realize it reduces the value of local blog production.
In this week’s post, we’ll go over a section of President Obama’s proposed FY 2014 Budget that he released back in April concerning changes in funding for food aid from the United States. The food aid reform, like any proposed change in the U.S. has its heavy supporters and detractors and is unlikely to be a part of the nation’s actual budget for fiscal year 2014.
We’ll take a look at how and why the United States has become the world’s biggest food aid distributor and funder, and what reform would mean for the participants of the process.
On April 10, President Obama released his FY 2014 Budget proposal to Congress which laid out his administration’s plan on how to pay for and run the Federal government for the upcoming fiscal year. In his budget proposal, the President laid out many plans familiar to people who have followed politics in the last four years such as raising taxes, investing in infrastructure, and cutting government spending in certain areas. While these parts of the budget have been getting significant coverage, it is a small portion of the budget which has caused a bit of a stir here in the U.S. and abroad. This small portion is the funding allocated to food aid: a policy started in the 1960′s to sell surplus American food production to the hungry around the world.
President Obama has put forth a reform to food aid funding to improve it. Several long term problems have come to light on the food aid policy of the United States which have left glaring needs for change. The first is inefficiency: food purchased for aid distribution must be bought mostly from American farms and shipped by American ships; a requirement that takes up nearly 16% of the main food aid program budget. Shipping is also an inefficient method for distribution: shipping from the U.S. can take 10 – 14 weeks to arrive at its intended destination than shipping from local distributors.
The second need for reform is the controversial practice called “monetization” which is a program where U.S. food aid is given to NGOs and international charities to sell abroad. Monetization is a big loser economically, losing 25 cents / dollar according to a study done by the Government Accountability Office (GAO) and poses a major development problem by undermining local food markets with cheaper products.
The administration proposes several solutions to these problems. The first is a direct end to monetization; a program which has come under severe scrutiny from development experts (CARE, an international NGO decided to end the practice, even though it raked in a great deal of money for them). To eliminate the inefficiencies of shipping, the food aid reform includes a variety of sourcing options including local & regional purchase options and electronic vouchers.
The issues with food aid that the administration aims to tackle are relatively minuscule compared to the log jams of revenue and spending cuts currently being debated by our representatives. But it is worth visiting why these policies were put in place if they had such a negative result for aid recipients.
The growth of international assistance from the United States blossomed out of the successes of the Marshall Plan – the financial and technical assistance to war-torn Europe administered by U.S. Secretary of State George Marshall from 1947 – 1952. Early programs were facilitated by multiple departments of the executive branch and aimed to reduce poverty and foster growth under capitalist economies (to combat the “threat” of Communist influence). These early programs set forth development efforts as part of American foreign policy.
President Kennedy recognized the need to unite American development work under one single agency and created USAID (United States Agency for International Development) by signing the Foreign Assistance Act of 1961. Part of Kennedy’s new USAID was a program called PL (Public Law) 480; legislation signed by President Eisenhower in 1954 to export surplus agricultural production to other countries with food shortages. Kennedy renamed the program “Food for Peace” hoping to use food aid as part of the effort in establishing connections with foreign nations. The idea that food aid could have deleterious effects to recipient country producers was addressed in an amendment to the PL 480 food aid legislation:
“distribution of commodities in the recipient country will not result in a substantial disincentive or interference with domestic production or marketing in that country”
The Food Security Act of 1985 created the Food for Progress program, a supplemental non-emergency food aid program that supported activities towards increasing local food production, processing, and marketing in countries that received food aid. What was the supporting activity? It was and still is the now controversial program of monetization. For the past 30 years, USAID has authorized NGOs, private companies, or governments to sell donated American food commodities with the profits used to fund programs that address food insecurity and increase food production.
Initially, the program for sale, or monetization of food, was allowed just to cover shipping costs, but in 1988 was expanded to fund food security projects and later to raise cash for the McGovern-Dole International Food Education and Child Nutrition program in 2002. Since the U.S. has not had food surpluses for many years, monetization now works by having the government buy food commercially from American producers, and ship them internationally to partners (NGOs, governments, etc.) to sell.
As the GAO report showed, the monetization program was significantly inefficient and a waste economically for both the U.S. and the recipient country. The programs inefficiency is apparent: between the years 2008 – 2010, the monetization program had an average cost recovery level of only 58% and 76% for USDA and USAID respectively. This means that for every dollar of U.S. commodity (food aid item) sold, the monetization program was only recovering a portion of the total! This resulted in reduced funding for development projects (its intended purpose) by $219 M.
Why has monetization been so inefficient in generating funds for the Food for Progress programs?
First off, both USAID and USDA only have limited monitoring of sales prices from its partners- making their influence limited on cost recovery. Ocean shipping of commodities eats up around 1/3 of the overhead costs of monetization and a requirement by the law to use American ships for 75% of the shipping makes the program expensive (not to mention time consuming). Finally, the monetization programs cannot ensure that there are no adverse local market effects (like lower commodity prices) because of weak market assessments and no post-monetization evaluations. So, monetization loses money for the U.S., doesn’t fund the programs its supposed to, and negatively affects local markets.
Speaking of adverse market effects…
USAID rules stipulate that partner organizations must make sure their sale of donated U.S. food does not undermine local markets, and that it is sold at a “reasonable market price.” This rule though has not prevented food aid (both emergency & non-emergency food aid) from depressing local food prices as this report from the National Bureau of Economic Research shows.
This has occurred mainly because the term “reasonable market price” is not well defined and food aid has contributed a significant portion of food to the total supply – specifically on certain grains, like wheat. While the suppression of food prices by food aid makes food cheaper for both poor and rich alike, this is a disincentive for local producers (by lowering their revenue). Further, the relatively inefficient methods of delivery (required delivery by ship) and logistics often result in untimely distribution of food aid – which can radically change prices during harvest and lean seasons.
Food Aid: Make it efficient to help more people
Food for Peace works by paying American farmers for food produced specifically for aid, and then using American ships to deliver the food. When U.S. food surpluses diminished, Congress was (and still is) required to appropriate a certain amount for food aid as part of the federal budget each year. Thus, food aid has become its own coordinated industry with Federal funding from producer to distributor. The food aid policy initially aimed at helping countries with food deficiencies and making food available to the hungry, has become a slush fund for U.S. farmers and American ships.
So what should be done to solve the current issues of food aid?
The President’s proposal is attempting to move the focus back to the beneficiaries of food aid with efficiency as the central theme – USAID says the new policy could help feed 4 million more people. Obama’s proposal has taken a lot of heat from the shipping industry because of the loss in business, and the proposal is not popular with food producing states (even though subsidies are place to placate them). But more should be done in conjunction with other food policies so that the food producing capabilities and generosity of the U.S. work for both producer and recipient. This means a comprehensive farm/food bill that could make drastic changes, such as an end to biofuel requirements.
But comprehensive bills are not exactly this Congress’ forte, and most of the President’s budget (including the change to food aid) is unlikely to pass anyways. This would be a shame. A well intended policy that feeds millions of people (especially after disasters) has the potential to feed more while improving local economies. Food aid is due for a change.
Until the next wheat surplus,
Your Faithful Historian,
Eric G. Prileson
Sources and Further Reads: