PolicyDevelopmentStudySeries

U.S.MONETIZATIONPOLICY: RECOMMENDATIONSFORIMPROVEMENT

StudypreparedundertheauspicesoftheGlobalAgriculturalDevelopmentInitiative Cochairs CatherineBertiniandDanGlickman

Authors ChrisBarrett,StephenB.&JaniceG.AshleyProfessorofAppliedEconomicsand ManagementandInternationalProfessorofAgriculture,DepartmentofApplied EconomicsandManagement,CornellUniversityandErinLentz,ResearchSupport Specialist,CornellUniversity December2009

SPONSOREDBY

ABOUTPOLICYDEVELOPMENTSTUDIES Policy Development Studies gather data and provide guidance and technical assistance to policymakers on how aspects of U.S. agricultural development and food security policy might be mosteffectivelyshapedandrealized.Studiesbackgroundandconclusionsaredevelopedthrough consultationswithappropriatesubjectmatterexpertsfromtheacademic,NGO,government,think tank,andbusinesssectors. The Policy Development StudiesseriesisaproductofTheChicagoCouncilonGlobalAffairsGlobal AgriculturalDevelopmentInitiative.Launchedin2009,theInitiativeprovidesresourcesandpolicy analysis on international agriculture and food issues to the U.S. administration, Congress, and interested companies, experts, and organizations. The Initiative is led by cochairs Catherine Bertini, former executive director of the UN World Food Program, and Dan Glickman, former secretary, U.S. Department of Agriculture. For more information, please visit the Initiatives website:www.thechicagocouncil.org/globalagdevelopment. ABOUTTHECHICAGOCOUNCILONGLOBALAFFAIRS Founded in 1922, The Chicago Council on Global Affairs is a leading independent, nonpartisan organization committed to influencing the discourse on global issues through contributions to opinion and policy formation, leadership dialogue, and public learning. The Chicago Council providesmembers,specializedgroups,andthegeneralpublicwithaforumfortheconsiderationof significantinternationalissuesandtheirbearingonAmericanforeignpolicy. The Chicago Council takes no institutional positions on matters of public policy and other issues addressed in the reports and publications it sponsors. All statements of fact and expressions of opinioncontainedinthisstudyaredrawnfromafullandfair expositionoffacts,andarethesole responsibility of its authors and may not reflect the views of the respective organizations, the projectfunders,orTheChicagoCouncilsboardandstaff. Copyright2009byTheChicagoCouncilonGlobalAffairs

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 TABLEOFCONTENTS Section ExecutiveSummary Introduction WhatisMonetization? TheImpactofMonetization MonetizationStakeholders Recommendations Conclusion Appendices AppendixAU.S.FoodAssistancePrograms AppendixBLegislativeTimelineoftheUse ofMonetizationinU.S.FoodAidPolicy AbouttheCochairsandAuthors Endnotes References PageNumber 4 6 6 7 9 11 13 14 15 16 17 19

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EXECUTIVESUMMARY Withmorethanonebillionhungrypeopleintheworld,U.S.foodaidprogramsareacriticaltoolfor feedingthoseinneedandworkingtoimprovefoodsecurityonaglobalscale.Formorethanfifty years, the United States food aid programs have helped save or improve the lives of hundreds of millionsofpeople.Yettoday,astheglobalneedcontinuestogrowandtheresourcestoaddressit become ever scarcer, the United States must take a hard look at how its food aid programs are delivered. The practice of monetization, or the selling of donated food into overseas markets by private voluntary organizations (PVOs), has become widespread, absorbing approximately 60 percent of nonemergency food aid each year. While monetization provides needed funds for these organizations to operate their programs, it wastes millions in U.S. taxpayer dollarswith typical returnsofonly50to70centsonthedollarthatmightotherwisehelpsavemany morelives.In additiontobeinghighlyinefficient,monetizationhasalsobeenprovenharmfultoregionalmarkets and poor farmers in recipient countries and sometimes to U.S. producers. The practice has been eliminatedbymostotherdonorcountriesandtheWorldFoodProgram,andevensomePVOshave turneddownfundsgeneratedthroughmonetization. While most experts agree that monetization is generally ineffective, the trend toward monetizing evergreateramountsofU.S.foodaidhasbeendifficulttostop.Keystakeholdersincludingsome U.S.producersandprocessors,whocountontheprocurementoffoodforfoodaidprograms;some PVOs,whocountontherevenues generatedthroughmonetization;andmanyintheU.S.shipping industry,whocountonsustainedvolumesoffoodaidforshippingallstandinstrongopposition toachangeinthestatusquo. Nevertheless, as the U.S. government crafts a food security strategy to end the global scourge of hunger and extreme poverty, it must adapt U.S. food aid policies to current realities and use its scarce resources wisely. Following are two recommendations, meant to be implemented in combination, for scaling back the practice of monetization while addressing the needs of stakeholders. Neither of the recommendations requires changes to existing legislation on food assistancedelivery. Recommendation#1 Reduce the practice of monetization, thereby increasing the efficiency and impact of food aid throughthedirectdistributionoffoodtothemorethanonebillionhungrypeopleworldwide.This shouldbedoneinthefollowingthreeways: Limitmonetizationtothecongressionallymandatedminimumof15percentforPublicLaw 480TitleIInonemergencyfoodaid. Withinthat15percent,limitmonetizationtocircumstancesinwhichthe processoffoodaid sales,notmerelytheproceeds,advancefoodsecuritygoals. End monetization for Food for Progress and McGovernDole International Food for EducationandChildNutritionprograms.
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Recommendation#2 In addition to Recommendation #1, replace lost revenues from monetization incurred by private voluntary organizations (approximately $280 million per year) by providing direct support their forcriticalworkinfoodaiddistributionanddevelopmentprogramming.Thiscanbedoneinoneof twoways: OptionA ReducethebudgetusedtopurchaseU.S.foodaidthatismonetizedby$280million. Transfer or reappropriate this $280 million to the International Affairs 150 account for developmentassistance. Distribute this money to PVOs to support food security programs and complementary developmentactivities. OptionB Keep the budget used to purchase U.S. food aid at its current levels for a net increase in directdistributiontohelpmeettherisingdemandforassistancetothosewhoarehungryor inemergencysituations. Provide $280 million in new monies to the International Affairs 150 account for developmentassistance. Distribute this money to PVOs to support food security programs and complementary developmentactivities. OptionAiscostneutral,yetmayencounterresistancefromsomeU.S.producersandU.S.shippers whostandtoloserevenuefromthereductioninfoodaidvolumes.OptionBrequires$280million inextramonies,butismorepoliticallyfeasible,asitdoesnotdecreasethecurrentvolumeoffood aid.Italsohelpsdemonstratetheadministrationscommitmenttoglobalfoodsecurityandfulfillits July2009LAquilapledgetoincreasefoodsecurityfunding.

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INTRODUCTION The United States is the worlds largest donor of food to help the hungry. Since U.S. food aid programs began more the fifty years ago, hundreds of millions of lives have been either saved or dramaticallyimproved.WhileU.S.foodaidpolicyhasdoneenormousgood,certainpracticesinthe wayfoodaidisprocuredanddeliveredhaveledtowaste,inefficiencies,andinsomecasesevenan underminingoftheverygoalsfoodaidpoliciesseektoachieve,namelygettingaidquicklytothose whoneeditmostinemergenciesandenhancingoverallfoodsecurityamongtheworldsbillionsof poorandhungrypeople. Inatimeofscarceresourcesathomeandgrowingneedabroad,Americacannotaffordtotolerate ineffective policies and practices in its food aid program. One of the most controversial of these practices is monetization, or the sale of U.S. food aidpurchased by U.S. taxpayersin recipient countries to cover the costs of food aid distribution and fund aid work. This practice has been showntobeinherentlyinefficient,riskyforprivatevoluntaryorganizations(PVOs)thatdistribute theaid,andpotentiallyharmfultoregionalmarketsandpoorfarmersaswellasU.S.producers.The practicehasbeeneliminatedbymostotherdonorcountries,theWorldFoodProgram,andevenby someofthePVOsthathavebeeninvolvedindistributingU.S.foodaid. In strictly financial terms, the United States Government Accountability Office and other experts havefoundthatmonetizedU.S.foodaidtypicallygeneratesonlyfiftytoseventycentsofrevenueon eachtaxpayerdollarspent.Ofthemorethantwobilliondollarsinfoodaidspentorappropriatedin 2006,roughly$400millionofthe$698millionallocatedfornonemergencyfoodaidwasmonetized, generatingfundslikelyworthonlybetween$200and$280million.Thisisanunnecessarylossto taxpayers of $120 to $200 million. With life and livelihoodsaving emergency assistance often costingonlyfivetotendollarsperperson,thehumancostof thiswasteismillionsofliveslostor irreversiblydamaged. America mustuseitsscarceresourcesasefficientlyandeffectivelyaspossible.Inmostcases,the value of food aid is highestin both financial and humanitarian termswhen it is distributed directlytothosewhoneeditratherthanwhenitissoldatadiscountintherecipientcountryslocal markets. Yet simply eliminating the practice of monetization is not an immediately practical solution. The interests and concerns of various stakeholders must be addressed in order for changes to be politically viable. And, indeed, carefully targeted monetization of food aid can, in somecases,beeffectiveinfurtheringfoodsecuritygoals. This brief provides the background needed to understand the practice of monetization, the costs andbenefitsassociatedwithit,andtheinterestsofthestakeholdersinvolvedinit.Italsoprovides tworecommendationsforsharplyreducingitsusewhileaddressingtheconcernsofstakeholders. Neitheroftherecommendationsrequiresanychangestoexistinglegislationonfoodaiddelivery. WHATISMONETIZATION? Monetization is the process whereby donated food is sold into overseas markets. The practice, whichgeneratesrevenuesinlocalcurrencies,wasoriginallyintroducedintheFoodSecurityActof 1985 as a way to help PVOs cover administrative, transportation, distribution, and storage costs associatedwithfoodaiddistribution.Overtime,theacceptableusesofmonetizationproceedswere
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expanded legislatively beyond administrative costs to include the funding of broad development initiatives. TodayU.S.foodaidlegislationmandatesthataminimumof15percentofTitleIIofFoodforPeace Act,formallytheAgricultureTradeDevelopment andAssistance Actof 1954,nonemergencyfood aid be monetized to support PVOs. In practice, however, the use of monetization has increased dramaticallyandnowabsorbsapproximately60percentofnonemergencyfoodaid.Thepracticeis wellentrenched,withsomeU.S.producersandprocessorscountingongovernmentprocurementof thelargevolumesofcommoditiesrequiredtofulfillinkindfoodaidmandates,someU.S.shipping companiescountingongovernmentpaymentsforthetransportoftheselargevolumesoffoodaid, and many PVOs counting on the revenues generated through monetization of the food aid to supportfoodaiddistributionanddevelopmentactivities. The 2008 Farm Bill is likely to encourage even more monetization through a hard earmark provision mandating that in fiscal year 2009 at least $375 million of food aid be used for nonemergency programming. This will progressively increase to $450 million in fiscal year 2012. The earmark was intended to ensure that food aid would be reliably available to support PVO developmentprogramming.1 THEIMPACTOFMONETIZATION Monetizationisgenerallyconductedintwoways:(1)thesellingoflargevolumesoffoodonopen markets in the recipient countryusually in urban areasfor the sole purpose of generating revenueor(2)thewelltimedsaleofsmallerlotstoparticularmarketparticipants(suchassmall traders or processors) in order to support local market development, reduce market price volatility, or improve access to food aid in areas of need. This latter approach is called targeted monetization. In targeted monetization, the process of selling food aid is intrinsically important becauseofitsroleinfurtheringfoodsecuritygoals. OpenMarketMonetization ThevastmajorityofmonetizationbyPVOsisthefirsttypeopenmarketsalesoflargelotsoffood aid. This type of monetization is the most problematic. It has negative consequences both for the recipientcountryandfortheUnitedStatesasadonor.Thesearesummarizedbelow. Problemsforrecipientcountry: Distorts local markets, discouraging food production by local farmers, thus undermining agriculturaldevelopmentandfoodsecuritygoals Contributestopricevolatilityinlocalmarketssincelargequantitiesareoftendumpedall atonce Diverts food away from the poor because of open market sales that do not reach food insecurepopulations Canbesubjecttoprofiteeringandblackmarketschemes Problemsfordonorcountry: Isinherentlyinefficient,generatingonlya50to70centsofrevenueoneachdollardonated EntailslegalandfinancialrisksforthePVOsdistributingaid
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CanimpedeU.S.commercialexports,displacingcommercialsalesbyAmericanagribusiness Iscontroversialinternationally,causingconflictswithkeypartnersandpossibleviolationof internationaltradeagreements

Theimpact ofmonetizationhasbeenwelldocumented.Despitethe marketassessmentsrequired by the U.S. government, known as Bellmon determinations, designed to minimize local market disruption from food aid in recipient countries, evidence of food aid monetization disrupting markets,destabilizingprices,anddecreasingordisplacingsupplyisstrong.2Largevolumesalesof food on commercial markets have been identified as the form of food aid most likely to cause adverse market consequences.3 A 2006 Food and Agriculture Organization (FAO) review of the availableevidenceconcludedthatmonetizationwilldepressanddestabilizepricesinplaceswhere marketsarenotwellintegratedinthelargerregionaleconomy.InMozambique,expertsfoundthat the combination of emergency food aid deliveries and monetization oversaturated the countrys markets, causing maize prices to plunge.4 Experts also found that food aid reduced prices in Ethiopia.5Otherresearchfindsthatmonetizedfoodaidnegativelyaffectsproductionandimports inrecipientcountries,whiledirectlydistributedfoodaiddoesnot.6 Theinefficienciesofmonetizationhavealsobeenwelldocumented.TheGovernmentAccountability Office and others consider monetization to be inherently inefficient. The opportunity cost of monetizingfoodaidcomparedtorunningidenticalprogramswithdirectappropriationsofcashis quitehigh.Itwillalmostalwaysbelesscostlytotaxpayerstofunddevelopmentprogramsdirectly thantofirstprocurefoodaidintheUnitedStates,shipitabroad,andthensellitoftenatadeep discounttogenerateprogrammingfunds.7PVOsroutinelyretainapproximately50to70centson thedollar.8,9 Beyond these financial losses, experts have found that annual appropriations processes in the UnitedStatescausenonemergencyaiddeliveriestobebunchedintothefinalquartersofafiscal year, leading to uneven aid deliveries.10 As a result, PVOs may not be able to break up food sales intosmalllotsorsellfoodduringappropriateperiodssuchasseasonalshortfalls. Inaddition,successfullymonetizingincommercialmarketsisdifficultandrisky.Inits2001report to Congress on food aid monetization, the U.S. Department of Agriculture (USDA) stated that the increasing involvement of PVOs in implementing food aid programs has required these organizationstoseekexpertiseinallfacetsofcommoditysalesandcopewithprice,exchangerate, andotheruncertainties.Maintainingtheskillsandresourcesrequiredtomonetizefoodaiddiverts somePVOsfromtheircoremissions.CARE,aPVO,decidedtodiscontinueopenmarketfoodsalesin 2009 partly because monetization requires intensive management and is fraught with risks. Procurement, shipping, commodity management, and commercial transactions are management intensiveandcostly.Experiencehasshownthatthesetransactionsarealsofraughtwithlegaland financialrisks.11 Indeed, in 2002 the Office of Management and Budget (OMB) recommended decreases in monetization. OMB pointed out that monetization can impede U.S. commercial exports, lower marketprices,induceblackmarketactivity,andthwartmarketdevelopmentforU.Sfarmproducts. OMBalsoraisedquestionsabouttheeconomicefficiencyofthe practice,articulatingthatthebest useoffoodaidisdirectdistributiontofoodinsecureindividuals.12
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Monetizationisalsocontroversialinternationally.Inparticular,thegrowthinfoodaidmonetization has come under international scrutiny during the Doha Development Round of the World Trade Organization(WTO)talks.ThedeclarationissuedattheconclusionoftheWTOMinisterialMeeting held in Hong Kong in December 2005 defined inkind food aid for nonemergency purposes and, specifically,foodaidmonetization,asanexportsubsidyfrom thesupplyingcountry.13Explicituse of food aid as an export subsidy was forbidden in the 1986 Food Aid Convention. While the declaration reconfirmed the international communitys commitment to the use of food aid for emergency situations, the declaration also states, we will ensure elimination of commercial displacement.Tothisend,wewillagreeeffectivedisciplinesoninkindfoodaid,monetization,and reexportssothattherecanbenoloopholeforcontinuingexportsubsidization.14 However, the July 2008 collapse of the Doha talks may have contributed to the recent surge in monetization, as that collapse removed immediate threats of international disciplines being imposed on the practice.15 The United States has engaged in vigorous debate on these proposals, withtradeofficialsreaffirmingtheU.S.commitmenttoprovidinginkindfoodaidandemphasizing thepositivedevelopmentimpactsthathavebeenachievedthroughprogramsfinancedbyfoodaid monetization.16 TargetedMonetization Whileopenmarketmonetizationisfraughtwithproblems,targetedmonetizationcanyieldpositive results.Thoughitsuseisrelativelyrare,afewcasesofcarefullytargetedmonetizationhavebeen showntobeeffectiveatagribusinessdevelopment.ThePVOgroupAllianceforGlobalFoodSecurity findsthatwelltimedsmalllotsalescancurtailthepricevolatilityassociatedwithmonetizationand can provide smaller traders an opportunity to participate in purchasing food aid.17 Similarly, expertshavefoundthatfoodaidsoldtosmallprocessorsandtraderswhothenreselltheaidcan improve competition.18 In urban areas with wellintegrated markets, careful monetizing during foodinsecuritycrisescanimprovefoodsecurityand,theoretically,stabilizeprices.Forexample,the objective of the USAID Market Assistance Program (MAP) is to increase access to food for food insecure households via monetization. In MAP, the process of monetization (rather than the cash generated) is a key feature of the program.19 In 2003 in Zimbabwe, the program funded targeted salesoffoodaidtohouseholdslivinginlowincomeurbanneighborhoods. MONETIZATIONSTAKEHOLDERS Thelegislativedevelopmentofmonetizationhasbeendrivenby theinterestsofkeystakeholders, including some U.S. producers and processors, PVOs, and those involved in the U.S. shipping industry. Each group has had strong incentives to support the sale of food aid. Collectively, these threegroupshavebeenreferredtoastheirontriangleofU.S.foodaid.20 ProducersandProcessors Almost all U.S. food aid today is purchased directly from U.S. producers through a procurement process carried out by USDA on behalf of USAID. A relatively small number of large U.S.based agribusinessfirmscompetetosellfoodcommoditiesforthispurpose.21Agribusinessesbenefitfrom foodaidprocurementbecauseaprovisioninthe1985FarmBillrequiresthatatleast75percentof thenonemergencyminimumtonnageofU.S.governmentfoodaidbefortified,bagged,orprocessed.
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Duetothehighcostofthesevalueaddedactivities,fewfarmersareabletobecomeeligibletowin USDAFarmServiceAgencycontracts.ThevastmajorityofU.S.farmers,includinggrowersofmajor foodaidcommoditiessuchasmaize,wheat,soy,andricedonotsignificantlybenefitfromfoodaid purchases. PrivateVoluntaryOrganizations With some exceptions, PVOs have a strong financial incentive to perpetuate existing food aid programs, whether they believe that monetization is appropriate or not.22 PVOs became the primary recipients of food aid for distribution and sale by the latter part of the 1990s when emergency and project food aid, or food in support of local interventions run by PVOs or the World Food Program, became the predominant form of food aid over program food aid, or governmenttogovernmentfoodtransfers.Asmentioned,becauseofU.S.mandatesthatfoodaidbe inkinddonations,PVOshaveusedmonetizationtogeneratecashforfoodsecurityprogramming. Intheabsenceofothersourcesofdirectfunding,bythelate1990smonetizationproceedsbeganto fundmoreandmoredevelopmentactivities(e.g.,health,marketing,farmereducation,agriculture development),leadingtoadramaticincreaseinboththenumberofPVOsmonetizingfoodaidand the volume of monetization. According to the OECD, the number of PVOs participating in Title II programswentfromfivein1988tonineteenin1999,remainingstableatnineteenthrough2005.23 Todaythenumberstandsatfifteen.Proceedsfrommonetizationnowcompriseasubstantialshare ofthesePVOsrevenue. While the majority of PVOs vigorously support monetization, views have begun to diverge. Technoserve, which previously monetized virtually all of the food aid it received under the governmentsprimaryfoodaidprogram,FoodforPeace(P.L.480TitleII),announcedinthespring of 2003 that it would enter into no new Food for Peace contracts because they were unreliable sources for multiyear funding.24 CARE, Catholic Relief Services, and Save the Childrenwho are among some of the largest players in monetizationwere among American, Canadian, and Europeanaidgroupsthatsignedadeclarationin2006statingthatmonetizationisinefficientand usuallydivertsfoodaidawayfromthepoor.CAREhasnowendedopenmarketmonetization(asof September 30, 2009). Catholic Relief Services and Save the Children, however, feel they have no alternativebuttocontinuethepractice,arguingthattheyaretooresourceconstrainedandthecost to their beneficiaries too high to forgo selling food aid until alternate funding sources become available. Nevertheless,theAllianceforGlobalFoodSecurity(formerlytheAllianceforFoodAid),acoalition offifteenPVOsthatstronglysupportsmonetization,assertsmonetizationandbartercontributeto food security.25 Without the resources that monetization provides, these PVOs argue, it will be impossible to carry out the kinds of important development activities that are now funded with monetizationproceeds. U.S.ShippingIndustry TheconstituencywithperhapsthemosttolosefromchangesinAmericanfoodaidpolicyarethose involvedintheU.S.shippingindustry.26Cargopreferenceregulationstipulatingthat75percentof food aid must be shipped on U.S.flagged vessels has generated enormous profit margins for the
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smallnumberofshippinglinesandfreightforwardersthatparticipateinU.S.foodaidshipments. Indeed,expertsfoundthatduring200002,nearly40percentoftotalfoodaidexpenditureswere paidtoshippingcompanies.27Inadditiontovesselowners,cargopreferencesbenefitmanyofthose workingintheU.Smaritimeindustry..28 POLICYRECOMMENDATIONS Foodaidisanincreasinglyscarceandlifeandlivelihoodsavingresource.AstheU.S.government crafts a food security strategy to resolve the global scourge of hunger and extreme poverty, adapting U.S. food aid policies to twentyfirst century conditions is essential. Following are two recommendations,intendedtobeconsideredtogether,forscalingbackthepracticeofmonetization in order to improve the efficiency and effectiveness of food aid programs designed to alleviate current hunger while simultaneously improving longerterm food security. Neither of these recommendationsrequireschangestoexistinglegislationonfoodassistancedelivery. Recommendation#1 Reducethepracticeofmonetization,therebyincreasingtheefficiencyandimpactoffoodaid through the direct distribution of food to the more than one billion hungry people worldwide.Thisshouldbedoneinthefollowingthreeways: Limitmonetizationtothecongressionallymandatedminimumof15percentforFood forPeaceTitleIInonemergencyfoodaid. Within that 15 percent, limit monetization to circumstances in which the process of foodaidsales,notmerelytheproceeds,advancefoodsecuritygoals. End monetization for Food for Progress and McGovernDole International Food for EducationandChildNutritionprograms. The United States is the worlds most generous donor and yet still helps only a small fraction of thosewhoneedfoodassistance.Divertingfoodaidawayfromthesevulnerablegroupstobesold forcashmisusesalimitedandlifesavingresource.Tomakethebestuseofincreasinglyscarcefood aid resources, donated commodities should be reserved for direct, targeted distributions to food insecurepopulations.Thecostsassociatedwithincreasingdirectdistributioncanbemetthrough Section 202(e) and the Internal Transportation, Storage and Handling provisions of the Food for PeaceAct.29Monetizationshouldberetainedasanoption,butrestrictedtothefewspecialcasesin which welltimed, small lot sales of food aid can be targeted to support local agribusiness development.Inrareinstances,largersalescouldevenbeusedtominimizepricespikesinpoorly integratedmarketsineffectivelyreachedbycommercialinternationaltrade.However,monetization shouldbelimitedtowhentheprocessofsellingfoodisagoal,withtheintentofmeeting,butnot exceedingtheTitleIIminimum. Toensurethatboththeremainingmonetizedfoodaidanddirectlydistributedfoodassistancedo not negatively impact markets or food prices, the U.S. should encourage governments, PVOs, and multilateralorganizationstobettercoordinatetheirdirectdistributionandmonetizationactivities withinlocalcommunities,countries,andregions.
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The U.S. could encourage stronger oversight of this process through country and regionallevel planning. NetCosttotheUSG=$0 Recommendation#2 In addition to implementing Recommendation #1, replace lost revenues from monetization incurred by private voluntary organizations (approximately $280 million per year*) by providing direct support for their critical work in food aid distribution and development programming.Thiscanbedoneinoneoftwoways: OptionA ReducethebudgetusedtopurchaseU.S.foodaidthatismonetizedby$280million. Transfer or reappropriate this $280 million to the International Affairs 150 account fordevelopmentassistance. DistributethismoneytoPVOstosupportfoodsecurityprogramsandcomplementary developmentactivities. Option Aiscostneutral,and,indeed,savesmoneysincetheUnitedStatesdoesnothavetopayto shipthe$280millionincommoditiesthathavebeenremovedfromitsfoodaidbudget.Thisoption, however,islikelytoencounterresistancefrom(1)U.S.producerswhostandtoloserevenuefrom the reduction in food aid procurement and (2) U.S. shippers who stand to lose revenue from reducedvolumesoffoodaidbeingshipped. NetCostofOptionAtotheUSG=$0 OptionB Keep the budget used to purchase food aid at its current levels for a net increase in direct distribution to help meet the rising demand for assistance to those who are hungry or in emergencysituations. Provide $280 million in new monies to the International Affairs 150 account for developmentassistance. DistributethismoneytoPVOstosupportfoodsecurityprogramsandcomplementary developmentactivities. Option B involves an increase in costs but is more politically feasible, as it does not alter the amount of food aid purchased from U.S. producers or shipped by the U.S. maritime industry. In
*Inrecentyears,monetizationhasprovidedapproximately$200$280millionannuallyincashproceeds.

Section412ofthe2008USFarmBillguaranteesaminimumdollarlevelofnonemergencyTitleIIfoodaid.In fiscalyear2010,thisminimumis$400million.RoughlyhalfofTitleIIfoodaidisgenerallymonetized.In additiontothis,virtuallyallFoodforProgressfoodaidismonetized.Combined,itisestimatedthesethat totalnonemergencyfoodassistancewillprovide$400millionworthoffoodaidtobesold.PVOsrecoup50to 70percentofthevalueoffoodaidduringsales.$280millionwouldcoverwhatPVOswouldrecoupthrough monetizationpractice. GlobalAgriculturalDevelopmentInitiative PolicyDevelopmentStudySeries December2009 Page12of20

addition, current food aid volumes are badly needed in school feeding, maternal and child health andemergencyfeedingoperations.Bykeepingfoodaidvolumesatcurrentlevelsandsellingfood only when the process of the sale generates intrinsic benefits, more food becomes available for direct distribution to food insecure households requiring inkind assistance. This, combined with the appropriation of new cash for essential programs would demonstrate the administrations commitmenttoglobalfoodsecurityandhelpfulfilltheUnitedStatesJuly2009LAquilapledgeto increasefoodsecurityfunding. NetCostofOptionBtotheUSG=$280million Providing $280 million support food assistance direct distribution and development activities would fully replace food aid monetization proceeds, effectively eliminating PVOs need to rely on riskyfoodaidsaleswhilelesseningtheinherentinefficiencyandriskofadversemarketeffects. CONCLUSION Selling food aid misuses American taxpayer dollars in times of domestic and global economic hardship, causes unnecessary discord with allies within the WTO and other global bodies, and weakensAmericaseffortstoaddressglobalfoodinsecurity.Theunveilingoftheadministrations Global Hunger and Food Security Initiative, following on the LAquila Accords, presents a unique opportunitytorevitalizeandreformeffortstoaddresstheunderlyingcausesoffoodinsecurityand tomoreeffectivelymeethumanitarianassistanceneeds.Sharplylimitingmonetization,protecting food aid for distribution, providing PVOs with needed cash for complementary food security programming, and improving interagency cooperation would better support this strategy and demonstrate the U.S. governments commitment to ending global hunger and to effectively using scarceresources.

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 APPENDIXAU.S.FOODASSISTANCEPROGRAMS TheU.S.operatessevenfoodassistanceprogram30. Title I Food for Peace Act EstablishedbytheAgriculturalTradeDevelopmentAssistanceActof 1954,orP.L.480,andrenamedastheFoodforPeaceActinthe2008FarmBill,TitleIoftheFood forPeaceActisadministeredbyUSDAsForeignAgriculturalServiceandoffersconcessionalcredit salesofagriculturalcommoditiesbytheU.S.governmenttodevelopingcountries.TitleIsaleshave traditionallybeentogovernments,althoughthe1996FarmBillallowedsalestobemadetoprivate entitiesinrecipientcountries.SinceFY2006,newfundingforthisprogramhasnotbeenrequested becausedemandforfoodassistanceusingcreditfinancinghasfallenorgrantprogramshavebeena moreappropriatetool. TitleIIFoodforPeaceActEstablishedbytheAgriculturalTradeDevelopmentAssistanceActof 1954, or P.L. 480, and renamed as the Food for Peace Act in the 2008 Farm Bill, Title II of the FoodforPeaceActisadministeredbyUSAIDandprovidesdonationsoffoodtomeethumanitarian anddevelopmentneedsabroad.TitleIIaidischanneledthroughrecipientgovernments,NGOs,or international organizations such as the World Food Program. P.L. 480 Title II is now the United Stateslargestfoodaidprogram. Title III Food for Peace ActEstablishedbytheAgriculturalTradeDevelopmentAssistanceAct of1954,orP.L.480,andrenamedastheFoodforPeaceActinthe2008FarmBill,TitleIIIofthe Food for Peace Act is administered by USAID and donates commodities to developing country governments that then generally sell the food to generate funds, ostensibly to support longterm economicdevelopmentprograms.ThisprogramhasnotbeenfundedsinceFY1999. Food for ProgressEstablished by the Food for Progress Act of 1985, this food program is administeredbyUSDAanddonatesagriculturalcommoditiestodevelopingcountriesandemerging democraciesinexchangeforcommitmentsfromrecipientcountriestopromotefreeenterpriseand competitionintheagriculturaleconomies.Itfocusesonprivatesectordevelopmentofagricultural infrastructure. Section 416(b)Established by the Agriculture Act of 1949, this food program authorizes the donation of surplus U.S. food commodities for international food assistance. It was originally enacted to prevent surplus U.S. food supplies from going to waste. In recent years, this food programhasbeencurtailed. McGovernDole International Food for Education and Child NutritionEstablished by the 2002 Farm Bill, this food program is administered by USDAs Foreign Agricultural Service and donates food commodities for school feeding and maternal and child nutrition projects. The legislationalsoincludesauthorizationofcashfortheseactivities. Bill Emerson Humanitarian TrustEstablished by the Agricultural Trade Act of 1980, this authorityisadministeredbyUSDAandisareserveusedtorespondtoemergencyfoodaidneedsin developing countries when appropriated resources are not available. The trust is authorized to holduptofourmillionmetrictonsofU.S.agriculturalcommoditiesorthecashequivalant.USDAis authorized to release 500,000 metric tons annually and up to an additional 500,000 metric tons thatwerenotreleasedinyearspriortomeetemergencyfoodassistanceneeds.
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APPENDIXB:LEGISLATIVETIMELINEOFTHEUSEOFMONETIZATIONINU.S.FOODAIDPOLICY 1985 1988 1996 2008

TheauthoritytomonetizeTitle IIprojectfoodaidwasfirst introducedintheFoodSecurity Actof1985.Thisactpermitted implementingsponsorstosell U.S.donatedinkindfoodaidin therecipientcountryasaway tohelpcoveradministrative costsassociatedwithfoodaid distribution.Italsomandated thataminimum5percentof nonemergencyTitleIIand Section416(b)commodity valuebemonetizedforthis purpose.Italsorequiredthat75 percentoftheminimum tonnageofnonemergencyfood aidbeprocessed,fortified,or bagged. TheCargoPreferenceActof 1954wasamendedtorequire thatthepercentageofcertain agriculturalcargoestobe carriedonU.S.flagvesselsbe increasedfrom50to75 percent.

In1988 theacceptable usesofTitleII monetizationproceeds wereexpandedto includedevelopment objectives.The minimummonetization levelfornonemergency TitleIIwasincreasedto 10percent.

The1996FarmBill increased theminimummonetization levelfornonemergencyTitleII foodaidto15percent. TheMaritimeSecurityActof 1996,Section17,permitsGreat Lakesportstoparticipatein thehandlingofP.L.480TitleII humanitarianfoodaid packagedcommodities awardedonalowestlanded costbasiswithoutreferenceto vesselflag.

The2008FarmBill strengthenedtheU.S. commitmenttousingfoodaidand monetizationfornonemergency (developmental)purposesbysetting minimumdollarlevelsfornonemergency programmingofTitleIIfoodaidunder Section412.Theminimumlevelsare: FY2009,$375million;FY2010,$400 million;FY2011,$425million;and FY2012,$450million.Thishardearmark forthefirsttimehasdedicatedafunding streamtosupportcooperatingsponsors monetizationefforts. Section202(e)providescooperating sponsorstheauthoritytousenotless than7percentandnomorethan13 percentofTitleIIfundsascashtosupport newprogramsorfundspecific administrativemanagement,personnel, andinternaltransportationand distributioncosts.Suchfundsmaynotbe usedforsuchexpensesastechnical assistance,training,orprojectrelated materials.

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 ABOUTTHECOCHAIRS CatherineAnnBertiniisaprofessorofpublicadministrationattheMaxwellSchoolofCitizenship andPublicAffairsatSyracuseUniversity.ShepreviouslyservedasUNundersecretarygeneralfor management(200305)andasexecutivedirectoroftheUNWorldFoodProgram,theworld's largestinternationalhumanitarianaidagency(19922002).Shewascreditedwithassisting hundredsofmillionsofvictimsofwarsandnaturaldisastersthroughoutAfrica,Asia,LatinAmerica, theMiddleEast,andpartsofEasternEuropeandtheformerSovietUnion.BeforeservingintheUN, Ms.BertiniwasUSDAassistantsecretaryforfoodandconsumerserviceswheresheranthenation's $33billiondomesticfoodassistanceprograms. DanGlickmanisthechairmanandCEOoftheMotionPictureAssociationofAmerica,Inc.(MPAA). PriortojoiningtheMPAAinSeptember2004,hewasthedirectoroftheInstituteofPoliticslocated atHarvardUniversity'sJohnF.KennedySchoolofGovernment(August2002August2004).Mr. GlickmanservedastheU.S.secretaryofagriculturefromMarch1995untilJanuary2001.Beforehis appointmentassecretaryofagriculture,Mr.Glickmanservedfor18yearsintheU.S.Houseof Representatives,representingKansas'4thCongressionalDistrict.Duringthattime,heservedasa memberoftheHouseAgricultureCommittee. ABOUTTHEAUTHORS ChrisBarrettistheStephenB.andJaniceG.AshleyProfessorofAppliedEconomicsand ManagementandInternationalProfessorofAgricultureatCornellUniversitywherehealsoserves astheCornellCenterforaSustainableFuturesAssociateDirectorforEconomicDevelopment ProgramsandtheDirectoroftheCornellInstituteforInternationalFood,Agricultureand DevelopmentsinitiativeonStimulatingAgriculturalandRuralTransformation.Heholdsdegrees fromPrinceton(A.B.1984),Oxford(M.S.1985)andtheUniversityofWisconsinMadison(dual Ph.D.1994).ProfessorBarretthaspublishedextensivelyoninternationaldevelopment,food securityandfoodassistanceissues.HeservedaseditoroftheAmericanJournalofAgricultural Economicsfrom20032008. ErinLentzis a research support specialist at Cornell University and pursuing a PhD from Cornells Department of Sociology. She holds a BA in Economics and an MS in Applied Economics and Management, both from Cornell. Her Masters thesis on food aid targeting was awarded Outstanding Masters Thesis by Northeastern Agricultural and Resource Economics Association. Erin received a Fulbright fellowship to Bangladesh to research the secondary effects of food aid in communities facing recurring disasters.

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ENDNOTES
1ForanoverviewoftheU.S.foodaidprogram,includingagenciesinvolvedandlegislative

mandates,seeAppendixA. 2FoodandAgricultureOrganizationoftheUnitedNations, TheStateofFoodandAgriculture:Food AidforFoodSecurity?(Rome:FoodandAgricultureOrganizationoftheUnitedNations,2006). 3ChristopherBarrettandDanielMaxwell, FoodAidafterFiftyYears:RecastingItsRole(London: Routledge,2005);FAO2006. 4DavidTschirley,CynthiaDonovan,andMichaelT.Weber,Foodaidandfoodmarkets:lessons fromMozambique,FoodPolicy2(1996):189209. 5GetawTadesseandGeraldShively,FoodAid,FoodPrices,andProducerDisincentivesin Ethiopia,AmericanJournalofAgriculturalEconomics4(2009):942955. 6SarahLowder,APostSchultzianViewofFoodAid,TradeandDevelopingCountryCereal Production:ResultsofaVectorAutoregressiononPanelDatausingFixedEffects(paperprepared presentedattheAmericanAgriculturalEconomicsAssociationAnnualMeeting,Denver,Colorado, July14,2004). 7U.S.GovernmentAccountabilityOffice,ForeignAssistance:VariousChallengesImpedethe EfficiencyandEffectivenessofU.S.FoodAid,ReportGAO07560(2007);BarrettandMaxwell 2005. 8BarrettandMaxwell2005;EmmySimmons,MonetizationofFoodAid:ReconsideringU.S.Policy andPractice(WashingtonD.C.:PartnershiptoCutHungerandPovertyinAfrica,2009). 9Disagreementsabouthowtomeasureefficiencyofmonetizationcloudthedebate(Simmons 2009).Somearguethatmonetizationisatleastpartiallyadditionaltootherresources,meaning thatwerefoodaidmonetizationprogramstoend,eachdollarofmonetizedfoodaidfundingwould bereplacedwithlessthanadollarofcash,ornocashatall(DavidTschirleyandJulieHoward,Title IIFoodAidandAgriculturalDevelopmentinSubSaharanAfrica:TowardsaPrincipledArgument forWhen,andWhenNot,toMonetize,MSUInternationalDevelopmentWorkingPaperNo.81, 2003).Thisviewcomparesoutcomesofprogramsfundedwithmonetizedproceedstothe outcomesofdoingnothingordoingless.Usingthispointofcomparison,someinstancesof monetizationarearguablyefficient.Anotherdifficultyinmeasuringperformanceisthatmany evaluationsfocuseitheronthestraightfinancialreturnsofmonetizationorontheoutcomesof programsfundedthroughmonetizationproceeds.Simmonsfindsthatnostudiesrigorously calculatebothwhenmeasuringperformance(Simmons2009).Further,whenassessingtheimpact ondevelopingcountryfoodmarkets,someevaluationsexamineshorttermpriceeffectsonlywhile othersconsiderlongertermoutcomesorregionalandlocaltradeeffects. 10Simmons2009. 11CAREUSA,WhitePaperonFoodAidPolicy(2006), http://www.care.org/newsroom/publications/whitepapers/food_aid_whitepaper.pdf 12OfficeofManagementandBudget,ThePresidentsManagementAgenda,FiscalYear2002. 13TheUruguayRoundAgreementonAgriculture(URAA)strengthenedlanguageonthis prohibition.PhilipAbbott,Overviewofthe2007USDAFarmBill:FoodAid&TheFarmBill, PurdueExtension,EC750W(2008). http://www.ces.purdue.edu/extmedia/EC/EC_750_W_Food_Aid.pdf. 14WorldTradeOrganization.DohaWorkProgramme,MinisterialDeclaration,AdoptedDec18 2005,MinisterialConference,SixthSession,HongKong,December1318,2005. 15Simmons2009. 16(Forexample,seeU.S.MissiontotheUnitedNationsinGeneva,UpdateonWTOAgriculture Negotiations,BackgroundBriefing,WorldTradeOrganization,Geneva,Switzerland,April21,2006, www.usmission.ch/Press2006/0421AgNegs.html).Furthermore,theU.S.hasstronglyrejectedthe
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propositionthatfoodaidbereplacedbycashdonations,reflectingstrongpoliticalsupportfor existingprogramsbyacoalitionofinterests,includingfarmgroups,PVOs,agribusiness,and maritimeshippers.FormerU.S.TradeRepresentativeRobertZoellickandUSDAofficialsasserted thatifWTOdisciplinesrequiredeliminationofU.S.foodaidprograms,anequivalentamountof foreignassistanceascashwouldlikelynotbeforthcoming(Abbott2008). 17AllianceforGlobalFoodSecurity,MonetizationandBarterContributetoFoodSecurity(2007). http://www.globalfoodsecurity.info/ 18A.Abdulai,C.B.Barrett,andP.Hazell,FoodAidforMarketDevelopmentinSub SaharanAfrica,InternationalFoodPolicyResearchInstituteworkingpaper(2004). 19Riskin2008. 20BarrettandMaxwell2005. 21RogerThurowandScottKilman,AsU.S.FoodAidPolicyEnrichesFarmers,PoorNationsCry Foul,TheWallStreetJournal,September11,2003. 22BarrettandMaxwell2005. 23OECD,TheDevelopmentEffectivenessofFoodAidandtheEffectsofIts TyingStatus(Paris:OECD,2005). 24BarrettandMaxwell2005. 25AllianceforGlobalFoodSecurity2007. 26SophiaMurphyandKathyMcAfee,U.S.FoodAid:TimetoGetItRight(Minneapolis:Institutefor AgricultureandTradePolicy,2005). 27MurphyandMcAfee2005. 28MaritimeFoodAidCoalition,LettertoSenatorJosephR.Biden,Jr.ChairmanSenateCommittee onForeignRelations,May13,2008. 29Tosupportdirectdistributionoffoodaid,PVOscandrawonfundingprovidedthroughSection 202(e)andInternalTransportation,StorageandHandling(ITSH)oftheFoodforPeaceTitleII. Becausethesefundingstreamsarenotmeanttosupportmeasurestoenhanceprogram effectiveness,PVOsmayneedtodrawonfundsprovidedbytheU.S.government(see Recommendation#2)toaugmentcashneededfordirectdistribution.Formoreinformationon eligibleusesforSection202(e)andITSHfunding,pleaseseetheFoodforPeaceInformation Bulletin0803:www.usaid.gov/our_work/humanitarian_assistance/ffp/ffpib.08.03.doc. 30BarrettandMaxwell2005.
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 REFERENCES Abbott,Philip.2008.Overviewofthe2007USDAFarmBill:FoodAid&TheFarmBill.Purdue Extension,EC750W.http://www.ces.purdue.edu/extmedia/EC/EC_750_W_Food_Aid.pdf. Abdulai,A.,Barrett,C.B.,&Hazell,P.2004.FoodAidforMarketDevelopmentinSub SaharanAfrica.InternationalFoodPolicyResearchInstituteworkingpaper. AllianceforGlobalFoodSecurity.2007.MonetizationandBarterContributetoFoodSecurity. http://www.globalfoodsecurity.info/ Barrett,ChristopherandDanielMaxwell.2005. FoodAidafterFiftyYears:RecastingItsRole. London:Routledge. CAREUSA.2006.WhitePaperonFoodAidPolicy. http://www.care.org/newsroom/publications/whitepapers/food_aid_whitepaper.pdf. FoodandAgricultureOrganizationoftheUnitedNations.2006.TheStateofFoodandAgriculture: FoodAidforFoodSecurity?.Rome:FoodandAgricultureOrganizationoftheUnitedNations. Lowder,Sarah.2004.APostSchultzianViewofFoodAid,TradeandDevelopingCountryCereal Production:ResultsofaVectorAutoregressiononPanelDatausingFixedEffects.Paperpresented attheAmericanAgriculturalEconomicsAssociationAnnualMeeting,Denver,Colorado,July14. MaritimeFoodAidCoalition.2008.LettertoSenatorJosephR.Biden,Jr.ChairmanSenate CommitteeonForeignRelations.May13. Murphy,SophiaandKathyMcAfee.2005.U.S.FoodAid:TimetoGetItRight.Minneapolis:Institute forAgricultureandTradePolicy. OfficeofManagementandBudget.ThePresidentsManagementAgenda.FiscalYear2002. OECD.2005.TheDevelopmentEffectivenessofFoodAidandtheEffectsofIts TyingStatus.Paris:OECD. Simmons,Emmy.2009.MonetizationofFoodAid:ReconsideringU.S.PolicyandPractice. WashingtonD.C.:PartnershiptoCutHungerandPovertyinAfrica. Tadesse,GetawandGeraldShively.2009.FoodAid,FoodPrices,andProducerDisincentivesin Ethiopia.AmericanJournalofAgriculturalEconomics4:942955. Tschirley,David,CynthiaDonovan,andMichaelT.Weber.1996.Foodaidandfoodmarkets:lessons fromMozambique.FoodPolicy2:189209. Tschirley,DavidandJulieHoward.2003.TitleIIFoodAidandAgriculturalDevelopmentinSub SaharanAfrica:TowardsaPrincipledArgumentforWhen,andWhenNot,toMonetize.MSU InternationalDevelopmentWorkingPaperNo.81.
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 U.S.GovernmentAccountabilityOffice.2007.ForeignAssistance:VariousChallengesImpedethe EfficiencyandEffectivenessofU.S.FoodAid.ReportGAO07560. WorldTradeOrganization.DohaWorkProgramme,MinisterialDeclaration.AdoptedDec182005. MinisterialConference,SixthSession,HongKong,December1318,2005.

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