Monetization of U.S. in-kind food aid

Use of Monetization by Program Authority: Percentage of funds used for monetization and direct distribution

Monetization of food aid is almost solely a practice of the United States and U.S.-based NGOs. The World Food Programme and European donors have discontinued most programs that provide food for monetization, while the United States government requires monetization by law.[7] The Food Security Act of 1985 introduced this requirement by allowing “cooperating sponsors” to cover administrative costs through the sale of United States in-kind food donations. In 1988, Title II PL 480 expanded to cover development projects as well, and non-emergency funding through monetization had a minimum level of 10%, which increased to 15% with the 1996 Farm Bill.[1] Additionally, it allowed for third-party monetization, which means food aid can be sold in one county to generate money to finance emergency or development programs in another country.[8] The Food for Progress Program and the McGovern-Dole International Food for Education and Child Nutrition Program also allow for monetization.[1]

According to the Food for Peace Monetization Field Manual Title II food aid has two objectives,

First, Title II food aid monetization is programmed to enhance food security. Second, Title II food aid is used by a CS [cooperating sponsor] to generate foreign currency to support development activities.

Monetization offers the potential to improve the marketing of food to permit greater access to those who are food insecure. Indeed, there is an important direct link between food security and how food aid is monetized. The process of monetizing can be used to promote low-cost, competitive food markets by encouraging investment in transportation, infrastructure and human capital (traders, entrepreneurs). In essence, food aid monetization can enhance long-term food security by encouraging the development of competitive food marketing systems that have built-in incentives to provide the poor with affordable staple foods.[8]

The United States reinforced its dedication to food aid and monetization for nonemergency development through the 2008 Farm Bill. This bill enacted hard earmarks for the first time, setting annual minimum commitments for nonemergency Title II programs: $375 million in FY2009, $400 million in FY2010, $425 million in FY2011, $450 million in FY2012(Sect. 3021).

However, a provision in the same bill (Sect. 3008) raised the cap on funding under Section 202(e), which allows cash resources to be “made available to Cooperating Sponsors for establishing new programs and meeting the specific administrative, management, and personnel costs of programs”(7 USC 1722(e)). Previously, the law restricted this funding to "not less than 5 percent nor more than 10 percent." The 2008 Farm Bill raised those values to 7.5 and 13 respectively and expanded the list of uses for those funds, giving the Office of Food for Peace greater flexibility to provide cash to cooperating sponsors when monetization would not be appropriate.

Since the introduction and subsequent changes of Title II, non-emergency food aid and the number of cooperating sponsors, most of which are US-based NGOs, have increased.[9] Monetization of food aid was originally intended to help agencies cover the cost of distribution of food and implementation of food-based development programs. However, monetization has since become much more prevalent as more organizations enter the field and existing cooperating sponsors expand their programs. Programs have also become inclusive of other activities such as maternal and child health.[4] According to a 2007 report from the United States Government Accountability Office, while the minimum level of nonemergency funding through monetization is 15%, it reached almost 70% in 2001. It declined to around 50% in 2005, likely due to the Office of Management and Budget's (OMB) recommendation to decrease monetization and due to the increasing demand for emergency food aid.[6] In a report prepared by Mendez England and Associates for the U.S. Office of Food for Peace, monetization of Title II food aid increased from 1987 with $21 million and five cooperating sponsors in 19 countries to 1994 with $80 million and 43 projects in 24 countries.[10] Between FY1999 and 2005, the overall contribution of monetized food aid could conservatively be as large as $900 million in support of projects with the assumption of a 60% recovery rate from the delivered commodities. This could be as high as $1.2 billion with an 80% recovery rate from US monetized Title II food aid.[1]

Positive

• Increases the quality and quantity of food available in the recipient country
• Generates income for development projects and food distribution
• Develops markets and stabilize local food prices[1]

Negative

• Displaces imports
• Disrupts local markets
• Leads to dependency on aid in recipient countries[1]
• Creates inefficiency in monetary provision of aid[7]

According to the USAID Food for Peace Manual, “Above and beyond the generation of funds for food security activities, monetization is one more tool among the set of programming options available to enhance the food security of vulnerable households through the use of U.S. food commodities."[8] Monetization also creates opportunities for American businesses to produce, process, and ship in-kind food aid.[1]

The production and shipment of in-kind food aid is often more costly than other methods of providing food assistance, and persistent provision of food aid can create a dependency of the recipient country on food aid.[1] Monetization is controversial in the international community; according to critics, “in addition to being highly inefficient, monetization has also proven harmful to regional markets and poor farmers in recipient countries and sometimes to U.S. producers."[3] The GAO has stated, “the current practice of using food aid to generate cash for development projects—monetization—is an inherently inefficient use of resources.”[6]

While many private voluntary organizations support monetization of food aid because it funds their programs, some have begun to fall on the other side. CARE ended its open-market monetization in 2009. TechnoServe announced in 2003 that it would not enter into new Food for Peace contracts because it was an unreliable source of funding. Catholic Relief Services, Save the Children, CARE, and other aid groups signed a 2006 declaration stating monetization is inefficient and diverts food from the poor.[3] Catholic Relief Services states it, “sells commodities only when it has determined that there are no alternative methods of funding and that the sale of the commodities will have no negative impacts on local markets and local production. CRS will seek to replace monetization with cash funding to cover program costs.”[12]

In 2007, CARE announced it would phase out all monetized food aid by 2009, choosing to forgo the $46 million in food aid it received from the United States government. CARE made the declaration in the International Herald Tribute.[13] CARE’s 2006 White Paper on food Policy’’ finds three problems with monetization of food aid:

1. Experience has shown that monetization requires intensive management and is fraught with risks. Procurement, shipping, commodity management, and commercial transactions are management intensive and costly. Experience has shown that these transactions are also fraught with legal and financial risks.

2. Monetization is economically inefficient. Purchasing food in the US, shipping it overseas, and then selling it to generate funds for food security programs is far less cost-effective than the logical alternative – simply providing cash to fund food security programs.

3. When monetization involves open-market sale of commodities to generate cash, which is almost always the case, it inevitably causes commercial displacement. It can therefore be harmful to traders and local farmers, and can undermine the development of local markets, which is detrimental to longer-term food security objectives.[14]

Many NGOs indicate monetization is an inconvenience at best and can take resources and focus away from their development goals, as they have to hire personnel with expertise in “commodity marketing, commercial contracting, finance, and logistics” to handle monetization. When NGOs fail to handle food aid with expertise, local traders have complained, “about the adverse effects on the commercial marketing channel of inept competition.” Although NGO practices have improved over the years, they have often sold commodities below market prices, which undersells local traders and adversely affects the market.[7]

Moreover, funds generated from monetization are often unpredictable as they depend on market prices, and this fluctuation in funding can affect NGOs’ programming. Also, monetization often recovers a fraction of the worth of the food commodities, leading to complaints about efficiency.[7]

However, not all NGOs agree. The Alliance for Global Food Security represents 13 NGOs, including World Vision, which support the monetization of food aid. The organization states in its Positions on the 2007 Farm Bill that monetization, "keeps precious hard currency in the [recipient] country" and "allows food distributors and processors who do not have the credit status or liquidity to buy on the world market to bid on commodities." Additionally, they say, "it has the additional benefits of using the proceeds for programs that improve food security and help the needy."[15] World Vision's website addresses concerns about effects of monetization, stating, "Monetization affects local markets, as does every other form of aid. Well-targeted and managed monetization can improve market diversity, performance, transparency and competition; it can overcome local oligopoly control; it can set precedents for publicly visible fair bidding procedures; it can make retail prices more affordable for people living in poverty to buy food. In many circumstances, monetization can comprise an extremely efficient way to address a food deficit."[16]