THE DARK SIDE OF FOOD SECURITYGOSA SIMPOSIUM

19 MARCH 2013Presented by Pieter Esterhuysen

Poverty and hunger50% of world population live with less than $2.5/day

Asia most poor people – then Africa ($1.25/day)

7 out of 10 most food vulnerable countries are in Africa

GDP of 41 most indebted countries (600 m p) ˂ income of 7 most wealthy people

Global food stocks under pressure – consume same and more than production

Food reserves 110 days consumption 10 years ago now about 80 days

Land sold to other countries and speculators = enough to produce food for a billion people – there are about a billion malnourished people globally

Nearly 60% of global land deals in the last decade = grow crops suitable for bio fuel

Record commodity prices last 2 years

Commodity market volatility increased from +- 10% in 90’s to 30% + now

WFP

2011 World population = 7 billion

2050 Up 30% to 9.3 billion

78 million more to feed every year

214 000 additional mouths to feed a day

39 of the 58 countries contributing are in Africa

24% will live in Africa vs. 15% currently

2100 10 out of 20 most populous countries in Africa

Nigeria 4 th most populous country

Hunger Demography

Poverty and hunger

1996 World Food Summit = target – to halve undernourished by 2015.2010 the number was 925 vs. 824 mil in 1996

We are not making progress – situation is deteriorating

‘Earth to run out of food by 2050?’ Time magazine’s December 2010 headline

“Our time is running out” – Oxfam

UN warns of looming worldwide food crisis in 2013Global grain reserves hit critically low levelsExtreme weather means climate 'is no longer reliable'Rising food prices threaten disaster and unrest

‘Hunger is dehumanizing. It gets to a level where you do not know how you will survive and you will do anything for a simple kernel of corn’

‘It is a traumatizing situation as a young child to be without food. Your stomach is so empty that even when you are thirsty and you take water it makes you dizzy. You get so nauseated your body wants to vomit, but you haven’t eaten.’ Peter Kimeu – small scale farmer in Nachakos, Kenya.

Food scarcity: the time bomb setting nation against nation – OXFAM

Food security

Food security exists when all people, at alltimes have physical and economic access

to sufficient , safe and nutritious food to meettheir dietary needs and food preferences

for an active and healthy life (FAO)

Poverty/Hunger statistics/realities = Food security strategy/policy

______________________

Food security strategies and policies

Actions and projectsRegulationsAidExternal/international relationsProtectionism Etc

This presentation focuses on the negative impact or dark side of selected actions/ projects driven by food security policies

and strategies of governments and donors

Discussion

International aidGovernment interventionReputationExpatriate contributionStupidity

Photograph: Jerome Delay/AP

International Aid

Total aid to Africa per annum = $50 billion

Last 50 years = $2 to $3 trillion

Number of Africans who live on $1/day has doubled in last +-20 years

Total annual food aid = 4 to 5 million mt

Food aid less than 1% of food production – insignificant impact on food markets - but can have an impact on recipient markets

IITA

International Aid

The determinates of Food Aid Provisions to Africa and the Developing WorldNun (Harvard) en Qian (Yale) - 2011

Normally food aid increase when recipient production decrease

US food aid correlates with US surpluses – not recipient conditions

Aid flows to former colonial tied countries are less responsive to recipient production – especially Africa – effectivity low

Bi-lateral aid + poorly targeted and less effective vs. multilateral aid which has a counter-cyclical and stabilising impact on local food prices

International Aid: Inefficiency MALARIA infects 300 million to 500 million people paAt least a million people die pa. A child dies every 30 seconds of malaria More than 80 percent occur in the poor countries of Africa.

William Easterly - ‘The white man’s burden’

Mosquito nets handouts = markets/fishing/bridal veils and killing local industry

Malawi Aid project = local production of nets – selling in cities @ $5 and in rural markets @ 50c (Population Services International)

Malawi under 5 net utilisation increased from 8 % to 55%

Zambia follow up after handouts = 70% never used the nets

Easterly said: "is the tragedy in which the West spent $2.3 trillion on foreign aid over the last five decades and still had not managed to get $4 bed nets to poor families. The West is not stingy. It is ineffective.”

Reuters

International Aid: Inefficiency

A US Government Accountability Office study indicated that only +-35% of aid money spent is spent on food

Analysis (Nov 2012) of $5 million US aid to Cambodia in 2010 indicated that $3.5 million (70%) was spent on freight and logistics

Another US food aid project to Cambodia in the same year implied local Cambodian procurement – logistics and freight cost amounted to only 19% of the total cost.

Bloomberg

International Aid: Motive

International aid is not always what it seems to be

China case:Grants/Zero interest loans/concessional loansBy 2009 47% of all Chinese aid went to Africa2010 – 2012 - $10 billion loans for AfricaChina Eximbank and China Development bank – 1994 – develop China

Support China equity in AfricaAid excluded African countries with ties with Taiwan – aid follows diplomatic tiesGhana Bui dam – financed guaranteed by cocoa beans (40 000 mt paX20)DRC reconstruction – Chinese credit line $3 billion - equity control copper and cobalt mine – payment via resources receipts

Definition of aid?? Economic cooperation??

Aid .... Sometimes for donating country’s own food security – China

Thinkstock/Imagebank

Food Aid: Political instrumentFood aid = valuable instrument to optimise political power

Ethiopian case:

Ethiopia = low income/food deficit/limited infrastructure and purchase power

Largest aid recipient in Africa (second globally) – $2.39 billion pa average

Relative good state and planning institutional capacity

Constant substantial food aidGovernment distribution is focusing on supporters – withhold aid from Communities not supporting - support 99.6% 2010 electionCommon practice – farmers not getting access to seed/ferts/assistance for not supporting government

‘Ask your own party for help’

‘You are suffering so much problems, why don’t you write a letter of regret and join the ruling party?’

Effect of aid on production

Food aid normally has a short term focus – sometimes resulting in long term damage

Haiti case:

US rice aid to Haiti over past few decades as example

March 2010 – Pres Clinton apologised for US dumping cheap rice in Haiti – to the detriment of local producers

Haiti produced 47% of the country’s rice in 1988 – 2008 = 15%

US rice are still part of bilateral aid to Haiti

Reuters

Negative impact of Aid on recipient country

James Bovard (Wall Street Journal and Chicago Tribune)‘The continuing failure of foreign aid’

Allow governments to postpone essential ag reformsFails to provide sufficient support to ag investmentsMaintain a pricing system which give farmers an inadequate incentive to increase production-----------------------------------------------------------Small scale farmers – 50% of Russia’s food production on 25% of landUkraine – 55% of output on 16% of land

External food aid deliveries can disturb this structure easily

IITA

Tied aid – Political/economic leverage through Aid

US aid

Provide own produce – indirect support of own agricultural sector – provides more than 50% of WFP aid

Support own companies – Monsanto – drive for GM commodity aid

At least 75% of all food donations must be supplied/processed/transportedby US companies

65% of all food aid by the US is consumed by logistics (up to 35% more expensive than local purchases) and takes 2 to 3 months longer

Without aid shipments the US cargo fleet will loose 15% capacity and 16 000 to 30 000 jobs

Effect of Food aid on social and military conflict Correlation between food shortages and conflict. 2007/08 food crisis – record Prices - Riots/protests in 48 countries

2011 food price index of FAO – new records – wave of protests acrossNorth Africa and the middle East – Toppled both the Egyptian and Tunisianpresidents

Research showed a correlation between aid and conflict

Food aid = crowding out effect/local production decrease/mis-use = conflict

Malawi government + University of Texas + AidData – created an interactivemapping tool overlaying data on aid projects/climate change and conflict

US food aid 1 000 mt increase risk of civil conflict by 0.38% - the same shipment will reduce probability of existing civil war ending in single year with 0.55% points(Nunn & Qain)

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umber of Food Price Riots

Food Riots

FAO Cereals Price Index

UNCTAD Rice Price Index

FAO Food Price Index

Food Prices and Rioting, 2007-2008

WFP and FAO

Food Aid: CorruptionJeffrey Winters – Northwestern University in the US – World Bank loans +- $100 billion lost to corruption – loan funds for development

Some years ago the African Union estimated that corruption of roughly $150 billionpa – cost for the continent

DRC’s president Mobuto Sese Seko - stolen billions of aid dollars (Transparency International)

Former Malawi president Bakili Muluze was charged with embezzling aid money worth $ 12 million

Former Zambian president Frederic Chiluba are still in court case regarding millions of dollars personal enrichment

New York Times – 11/3/10 - 50% of Somalia’s aid money – militants/officials/business menand UN personnel – project fed 2.5 mil people/$.5 billion - Somali authorities collaborated with pirates – hijacked ships. Auctioned of EU visas – pirates as officials to EU

Food Aid

Real motivesEfficiency of spendingImpact on production in receiving countryPolitical leverage (donor and recipient)CorruptionPolitical and social conflict

Government intervention

Food security policy/strategy

Floor Prices

CeilingPrices

ImportControl

Export Control

FoodReserves

InputSupport

UN Global Compact Project Team

Era of increased government involvementGrain storage capacity seen as collective/strategic

Government interventionMarkets are sensitive – need confidence to develop – market can solve problemsif developed – careful how you intervene

Malawi case:

2012 crop – government buys at $180 and instruct private sector to do the sameLocal/smaller companies bought at lower prices/foreign companies did notTheoretical price – not enough finance for Gov agencies

Close borders for exports – end up with artificial low prices – local farmer under pressure - will plant less next season

Withdraw export permits after private sector contracted

No market carry for stocks – private sector got out of positions

Currency MK164 = $1 to MK300 = $1 in 1 year$ are not available for repatriation Focus on other crops

Impact of Government intervention on markets

Zambian Government involvement

Input supply program/Food reserve program/ subsidised maize supplies

2012/13 plating season – 182 000 mt fertiliser and 9 000 mt maize seed = $150 milBought 1mil mt of maize @ $265/mt = total $415 mil (19% over priced)FRA selling at $225/mt (-$40/mt = total of $40 million – losses)Volatility down 35%

Government also apply export bans - food security (700 000 mt + surplus)

Previous season – election year - more aggressive – volume and price

Market: No space for private sector/no market development No price discovery system development/no hedging mechanism, No natural integrated market development/consumer pay price/ Commercial production focuses on other crops

Government Intervention: Price transmission

Sensitivity of one market for another market = price transmission

Maize prices in eastern and southern Africa (FAO)

Malawian markets are integrated but with a lagBangula is an exception (border)4 month lag – government intervention/logistical limitations

Government Intervention: Price transmission

FAO

Price adjustment in maize markets in Malawi

Price adjustment in maize markets in Zambia

Integrated with international marketsTime lag = 6 months – RSA - government / infrastructure Ndola = exception – border town

Government Intervention: Price transmission

FAO

Government intervention

Government intervention in markets – motivated by Food Security is probably the darkest side of food security

Destruct or contaminate marketsShort to medium term focus with long term destructionMany times politically drivenResource distribution distortedEconomic value and long term prosperity destructed

Role of expatriates in AfricaIn light of a dwindling professional sector, African institutions are increasinglydependent on foreign expertise. To fill the human resource gap created by brain drain, Africa employs up to 150,000 expatriate professionals at a cost of US$4 billion a year. 35% of total ODA to Africa is spent on expatriate professionals.

Food Security and your reputation

23 August 2012

We'll make a killing out of food crisis, Glencore trading bossChris Mahoney boasts Drought is good for business, says world's largest commodities trading company

Aid Agencies, the UK and the UN attacked the company; Vatican called for a G20 emergency global food summit; Germany’s Commerzbank, Deutche Bank en Austria’s Volksbanken removed agricultural products from some of their investment funds - sensitive to accusations that speculation is pushing up prices

Stupidity

Madonna – financed school for girls in MalawiProject $15 mil – spend $3,8 mil = failed

New York Times March 24, 2011

National education budget of Malawi - $150 mil‘Madonna was slow to heed the advice of the consulting group she hired’

So what?Understand government’s food security policy and philosophy

Develop warning signals to trigger protective actions

Develop alternative hedges ($ based commodities vs. exchange rate risk)

Business agility is important – change business model quickly

Understand aid programmes and tap into programmes to unlock value

Be visible especially through social involvement

Honour the regulatory environment

Unfortunately local influence/network is important

Food aid focuses on poor and hungry people – not ‘capitalists’ – no mercy!

Remember - Food security and national interest justifies anything!