High food and fuel prices, climate change and natural disasters, weak local and regional markets, and mismatches between supply and demand - these factors have challenged the world's ability to end hunger. Procuring and distributing food aid efficiently and quickly is critical to food security, but organizations that provide humanitarian food assistance - including international relief agencies, national governments and non-governmental organizations (NGOs) - often face significant obstacles to obtaining food at the best price and delivering it quickly to those in need.
In response to these challenges, the Milken Institute, with support from the Bill & Melinda Gates Foundation, hosted a Financial Innovations Lab on fostering an efficient and responsive food access pipeline. The daylong workshop at the University of California's Washington Center brought together a diverse group of experts from around the world, including representatives from development finance institutions, humanitarian organizations, commodity exchanges, the U.S. government, foundations, financial institutions, and research organizations. Lab participants considered the current obstacles to delivering food aid and brainstormed possible solutions.
Betsy Zeidman, director of the Center for Emerging Domestic Markets and a research fellow at the Milken Institute, outlined the scope of the problem. She described the challenges that humanitarian agencies face as falling into two categories:
Lab participants examined two potential solutions to risk management: physical grain reserves and alternative commodity procurement tools. They also explored models from other sectors that could address the unpredictability of funding.
Improving Risk Management
Grain reserves can mitigate supply risk by serving as an access point for humanitarian agencies in emergency situations. Brian Wright, a professor in the Department of Agricultural and Resource Economics at the University of California, Berkeley, gave an overview of how humanitarian agencies might incorporate grain reserves into their food access pipeline to improve their response time. These reserves also help smooth spikes in commodity prices, he said.
Kshama Fernandes, vice president of IFMR Capital, discussed the benefits of warehouse receipts programs, storage facilities that allow farmers to use their stored commodities as collateral to gain access to financing. Lab participants saw various challenges with grain reserves, including where they would be located, the potential for fraud, and the need for strong management and clear rules for stock release and replenishment. Brian Wright noted that call options might serve as an even better alternative to physical reserves.
Julie Dana, senior financial specialist at the World Bank, described forward purchases and alternative procurement tools that humanitarian agencies might use to manage price risk. She reviewed traditional procurement tools, such as reserves, in-kind commodity donations and spot purchases, and described the advantages of alternative tools, including pre-positioned stocks, forward purchases, call contracts, futures and options.
As one example, the government of Malawi used a call option to assure supply and cap the price of maize during the lean season, Dana said. In addition, the United Nations World Food Programme (WFP) has had success with its forward purchase pilot, according to Robert Opp, special advisor to the executive director at the WFP.
Some Lab participants expressed doubt that the boards of humanitarian agencies would fund call options premiums. But Panos Varangis, principal banking specialist at the International Finance Corporation, likened options to a form of insurance and stressed that they are worthwhile even if they are not always exercised because they can be huge cost-saving mechanisms in the event of a crisis.
Stabilizing funding streams
A humanitarian agency's funding will be inefficient by definition, as the clients are not the customers, said Michael Klein, an advisor to the WFP. Because outcomes do not affect donors directly, inefficiencies will naturally occur, he said.
Although a number of sophisticated financial instruments have long been used in the private sector, they have not been used as widely by food aid agencies, Klein noted. Updating the tools humanitarian agencies use and improving their efficiency is critical, he said.
Glenn Yago, director of Capital Studies at the Milken Institute, presented various financial models that have been used in other sectors to stabilize funding, including advance market commitments, the World Bank's Green Bond, the Caribbean Catastrophe Risk Insurance Facility and the International Finance Facility for Immunisation.
Whatever the model, Lab participants stressed that the costs of funding day-to-day operations be separated from the costs of funding emergencies because the two needs differ substantially.
Click here for a full report detailing the Lab's findings.