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Summary of full report
Food Aid and Agricultural Trade Reform by David Harris
August 2007
RIRDC Publication No 07/136 RIRDC Project No DAH-3A
From a welfare perspective it is seen as a humanitarian response to human suffering from food shortages.
A substantial amount of food aid is provided in ways that has market distortion effects on the rural industries of recipient countries. It has unintended consequences in the form of lower prices and lower farm incomes which disrupts industry development. This occurs when the aid becomes an alternative source of food supplies in the commercial market place and distorts market signals.
In many low income developing countries the rural sector is generally dominated by small scale, semisubsistence farmers. They consume much of what they produce and rely on limited off-farm sales to meet their non-food needs. Food aid that is sold or distributed in non-targeted ways in the local market will penalise farmers and work against efforts to alleviate rural poverty.
Food aid can also have trade distorting affects. It is mostly directed into food deficit countries and there are often commercial imports already contributing to the nation’s food supplies. If the aid becomes an alternative source of supply it reduces the demand for commercial imports.
The key issue is the extent of these market distortion affects. Some aid has minimal market distortion affects. Emergency relief for an unexpected, severe disruption to food supplies is a good example.
Short term assistance to prevent the loss of human life is a reasonable response by donor countries. But there are legitimate concerns about the market distortion affects caused by non-emergency food aid.
This includes aid classified as emergency relief but ends up as a substitute for commercial purchases.
Who is the report targeted
at?
The Doha Round of WTO trade
negotiations are expected to introduce further constraints on the use of
export subsidies. It could even reach agreement on the elimination of this
form of assistance. If an agreement is reached the use of alternative export
assistance measures such as food aid could affect the prospects for an
improvement in global trading conditions.
Discussions on the negotiation modalities have included an exchange of views on the need to impose disciplines on the use of food aid. This report highlights several issues which have been raised about the provision of food aid. It was prepared as a contribution to government representations on the development of international disciplines on food aid.
Background
There are three types of
food aid:
Both of the latter two
types of food aid can have market distorting effects especially when it’s
sold so the proceeds can be used for other purposes.
In the past the global supply of food aid has fluctuated because some donors have used it as a surplus disposal mechanism. For some commodities the fluctuations have not been a reaction to the needs of recipient countries. It has reflected developments in the domestic markets of some donor countries and the use of food aid as an export assistance measure.
The use of food aid in this way has not changed with the implementation of the UR Agreement on Agriculture. In 1999 there was a substantial increase in the global supply of food aid. Total food aid deliveries rose by almost 80% to 15.1 million tonnes. This was the biggest annual change in food aid for some time. Emergency food aid increased by 60% to 4.8 million tonnes but most of the growth was in program food aid – it increased by 175% to 7.8 million tonnes.
Since 1999 there has been a substantial decline in the provision of non-emergency food aid. Most of the reduction has been in program food aid. By 2005 it had declined to 0.9 million tonnes. Emergency relief has become the dominant form of food aid and it currently accounts for more than 60% of global aid deliveries.
Cereal products account for more than 80% of the world’s food aid. About half the cereal aid is wheat and the remainder is rice and coarse grains. In 1999 wheat aid increased by 5.3 million tonnes. It remained at relatively high levels in the following two years but has subsequently declined.
The supply of rice aid has followed a similar pattern. There was a large increase in 1998 when aid volumes almost doubled to 1.4 million tonnes. It remained at relatively high levels in subsequent years with a further period of growth evident in 2002 and 2003.
The fluctuations in wheat and rice aid were largely driven by the effects of industry support policies in some donor countries. For example, the high levels of wheat aid in the 1999-2001 period coincided with global trading conditions of low prices and high government stocks. In recent years the reduced levels of aid have coincided with low stocks and high prices.
Dairy products are another commodity where the changes in aid flows have been driven by the effects of industry support policies in some major donor countries. During the 1999-2000 period there was a substantial increase in dairy product food aid. It remained at relatively high levels for several years before declining in 2005.
Food aid supplied as dairy products is mostly composed of skim milk powder (SMP). The increased aid flows in the 1999-2000 period coincided with global trading conditions of low prices and rising public stocks in the US and EU. High public stocks of SMP from price support activities were a continuing feature of both markets in subsequent years:
The US is the world’s
largest supplier of food aid. In 2005 the US accounted for almost half
of the global supply of food aid and the EU contributed around 18%. Japan
and Canada were smaller though significant providers of food aid. The dramatic
rise in food aid in 1999 was largely driven by increased cereal aid from
the US and the EU:
The expansion in US cereal
aid was not a one-off event. In the four years from 1999 to 2002 US cereal
aid was double the amount provided over the preceding four years. The increase
is apparent when compared with the 15% reduction in EU aid flows in the
same period. It reflects US efforts to promote extra external outflows
of wheat at a time when domestic market conditions were under pressure.
To some extent Japan also contributed to the growth in cereal aid. In 1998 Japan’s cereal aid increased by 0.8 million tonnes and in 2001 it increased by 0.5 million tonnes. It reflected Japanese efforts to promote external outflows of rice to relieve the domestic market pressures of surplus production.
The higher levels of non-cereal aid in the 1999-2002 period were mostly supplied by the US. US noncereal aid was 80% higher in the 1999-2002 period in comparison to the previous four year period.
Dairy products contributed to the increase as the US promoted extra outflows of SMP to support domestic returns. US SMP aid increased substantially in the late 1990’s and remained at relatively high levels for several years.
Aims/Objectives
The objective of this report
is to examine the concerns about the use of food aid as a form of export
assistance. It is a worthwhile exercise in light of moves to incorporate
some controls on the use of food aid in the Doha trade negotiations. The
aim is to review global developments in food aid since the UR Agreement
on Agriculture was implemented in 1995:
Methods used
This study will focus on
claims that food aid is equivalent to targeted export subsidies. In particular
it will examine the use of food aid in the context of WTO agricultural
trade reforms. The uncontrolled use of food aid has the potential to weaken
the benefits of trade related liberalisation measures that may be achieved
in other areas of the Doha WTO negotiations.
The scope of the analysis will be constrained by the availability of information on the quantity and distribution of food aid for individual products. It focuses on wheat, rice and SMP as examples of the way food aid is distributed in global commodity markets. The major developed economies supply most of the global food aid and in some cases these products gain significant levels of assistance from government support policies.
The report provides an overview of global food aid in terms of products, the major donors and the distribution of aid. The main source of information is the World Food Program (WFP) supplemented by reports prepared by the WTO and the Food and Agricultural Organisation (FAO). The US is the world’s largest supplier of food aid and has several aid programs. The study briefly examines the procurement and distribution conditions of the US programs to highlight the different ways food aid is dispersed in recipient countries.
Results/Key findings
One of the trade related
concerns about the use of food aid is the objectives of donor countries.
A needs based approach to the provision of aid would see a targeted flow
of commodities that matched up with the consumption preferences of the
final recipients. But the evidence suggests fluctuations in food aid have
often involved surplus disposals by the donor countries.
Most of the aid involves cereal products such as wheat, rice and coarse grains. During periods of low grain prices and/or high stocks the level of food aid has increased. When prices are high and/or stocks are limited the volume of aid has declined. This approach to the use of food aid has not altered since the UR Agreement on Agriculture was implemented.
For some donors the provision of food aid has more to do with promoting extra external outflows of products when the need arises. It is apparent that some donors use food aid as a form of indirect price support at times of high supplies on the domestic market. For some commodities fluctuations in food aid are directly linked to production surpluses created by industry support policies in donor countries.
Examples of the use of food aid by particular donors were examined for three commodities – wheat and SMP from the US and rice from Japan. In each case the increased food aid was not driven by some pressing needs in the recipient countries. It was based on a need to:
For example, surplus
output at a time of highly competitive export conditions was a catalyst
for increased US wheat aid in the late 1990s. It helped to relieve some
of the pressure on market returns created by direct assistance to the wheat
industry.
Japanese rice aid shows a clear link to the supply situation in the domestic market. In selected years food aid was increased to help reduce public stocks of rice. The supply pressures were created by market access opportunities from the UR Agreement on Agriculture, a lack of alternative export assistance measures and high levels of support for the domestic industry.
US SMP aid is also clearly linked to market support activities. It was used with subsidised exports to dispose of surplus output created by the domestic price support scheme. Food aid has been a form of export assistance for SMP for many years. It was used to relieve the supply pressures that developed when WTO restrictions on subsidised exports were fully utilised in the late 1990s.
In each case the donors took advantage of the lack of WTO restrictions on the use of food aid. The aim of the Doha trade negotiations is to reduce trade distortions caused by subsidised exports, domestic support and market access restrictions. If food aid continues to be used in this way it will reduce the pressure for supply adjustments in supported industries that will flow from WTO trade reforms:
In recent times aid provided
for emergency relief has expanded. It increased substantially in 1999 and
has remained at relatively high levels ever since. There are concerns about
the legitimacy of some of this aid and how donors classify their aid transactions.
The definition of what constitutes emergency relief is a relatively loose
concept. There is no internationally accepted definition of emergency situations
and aid donors are free to interpret the concept as they wish.
The emphasis on emergency aid looks unusual because previously it has fluctuated around lower levels. It appears to be driven by the high levels of US food aid since 1999 – food aid from the EU, Canada and Australia declined over this period. Non-emergency food aid was an issue in the preliminary discussions on export assistance policies for the Doha trade talks. This may have encouraged some donors to classify more of their aid as emergency relief:
Recent trends in US wheat
aid provide a useful example. Disaggregating US wheat aid into emergency
and non-emergency assistance was not possible. But about 75% of the wheat
aid is channelled through a program called PL480 Title 2. This program
is used for emergency relief efforts and aid shipments have been increasing
in recent years. It suggests there may have been a conscious decision to
favour this program at the expense of others.
In recent times the US has had a policy of reducing concessional food aid sales and donations for surplus disposal purposes. Wheat provided under programs that offer these types of aid has fallen.
Favourable market conditions have limited US domestic concerns about this policy. But political pressure to use food aid for surplus disposals will re-emerge if market conditions deteriorate.
Implications for relevant
stakeholders
Circumstances can arise
where food and other form of assistance are necessary on welfare grounds.
Short term emergencies caused by natural or man-made disasters can severely disrupt normal food supplies. There may also be occasions where individuals need temporary assistance because they don’t have the cash or farming resources to meet their basic food needs.
Food aid would seem a logical response to help people with an apparent food consumption deficiency.
But a lot of food aid is provided in ways that has market distortion effects in the recipient countries.
Only short term aid for real emergencies will have minimal distortion affects that can be ignored on humanitarian grounds:
It is often claimed that
monetisation of food aid helps disadvantaged people by making food more
affordable through the increased commercial availability. But using food
aid to lower market prices is a crude, highly distortionary policy response.
Monetised food aid is not a targeted form of assistance.
All consumers, including the wealthy, gain a benefit from the lower prices – those in most need may still be unable to buy food even at lower prices.
Monetisation is also justified by the activities that are funded by the proceeds. This could be a targeted food distribution program or technical projects to improve farm performance and/or remove constraints on rural development. These are worthy objectives from a foreign aid perspective but the obvious question is why cash assistance is not used in the first place.
Monetisation is an inefficient, high cost way of providing development assistance. Direct funding with cash assistance is more efficient. It eliminates the costs of administration, procurement, shipping, handling and distribution of food aid. More funds would be available for projects that promote agricultural development in the recipient country.
Technical assistance to encourage the growth and development of rural industries is the key to sustainable reductions in malnutrition and hunger. It is also a critical factor in alleviating rural poverty along with global trade reforms and infrastructure investment. In general food aid is a distortionary form of assistance that works against the achievement of these objectives.
The price received for commercial sales plays an important role in the transition from semi-subsistence agriculture to a more commercial approach. It drives the incentive for change and farm performance improvements. Monetisation and distributed aid that reduces the demand for local output will stifle this incentive. It undermines efforts to improve food security by reducing farm returns.
Food security would be enhanced by improving the productive capacity of domestic farmers. This can be encouraged by directly funding projects aimed at productivity improvements and gains in farm performance. Selling food aid and lowering domestic prices is a disincentive to expand farm output.
If targeted food aid is necessary the best approach is to provide cash for food purchases from a convenient source of supply. It is a more flexible form of assistance and allows the aid to be matched up with the dietary preferences of recipients. It can lead to more timely distributions by avoiding logistical delays that often arise with tied food aid.
In general much of the world’s food aid will have some sort of trade distorting affect because it is directed into food deficit countries. It is an alternative source of food supplies and in most cases commercial imports are already helping to address the deficit. A review of two US food aid commodities – wheat and SMP – showed a lot of the aid was directed to countries where commercial imports were already contributing to the nation’s food supplies.
Aid distributed to people in need can have a trade displacement effect if it ‘leaks’ into the market place or it’s used as a replacement for commercial purchases. The effectiveness of the targeting conditions is a key consideration. To be non-distorting the food aid needs to be fully consumed by those who have no capacity to purchase an equivalent amount of food. Monetised aid that is sold in competition with commercially priced imports and/or domestic output has a direct distortionary affect.
Recent developments in US wheat and SMP food aid were examined to illustrate how this food is distributed in the recipient countries. In both cases the aid was mostly directed into countries where a commercial trade was established. USDA announcements for the programs they administered show most of the aid was monetised which is the most distortionary form of food aid assistance for recipient countries.
Recommendations
Donors will take advantage
of the absence of WTO disciplines on the use of food aid if there are domestic
market pressures created by surplus output. The Doha negotiations are aiming
to reduce the trade distortions caused by other trade related support policies.
WTO disciplines on the use of food aid are necessary because of the potential
to weaken the benefits of trade liberalisation in other areas.
A WTO agreement will need to ensure humanitarian relief for legitimate emergencies is still provided.
It will also need to allow for effectively targeted, short term assistance to people suffering from severe food consumption deficits. The disciplines should apply to all distributors of food aid – donor country governments, NGOs and international organisations.
To minimise the market distorting effects of food aid the following reforms are necessary:
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