Opportunity: World food production must rise by 70 per cent

  • Almost a billion people on the planet suffer from hunger

Ranking high on the G20 agenda, food security is one of today’s essential issues.

Global leaders are acting collectively, improving policy coordination and building new support for the developing world’s agriculture and emergency food relief programmes. They are working together urgently at a critical time, as rising food prices are taking a harsh toll on the poor, and the tragedy of famine has returned to the Horn of Africa.

This united government action is especially welcome after years of relative neglect, in which agriculture’s share of total aid flows fell from 19 per cent in 1980 to just three per cent in 2006. But to enhance it even further, other steps must be taken to increase the private sector’s role. The global financial markets’ impact on food security must also be strengthened.

No one solution can be sufficient at a time when almost a billion people suffer from hunger. World food production must rise by 70 per cent as population rises by two billion over the next 40 years. But there is much to be gained by making commodity-price hedging, against price volatility and other proven short-term financial products, more widely available, in conjunction with a broader package of longer-term initiatives to build the private sector’s impact on hunger.

Need for collective action

The G20 emphasises that food security is a comprehensive challenge, requiring collective action from all players involved to increase the production of food at affordable prices through sustainable agriculture practices. Since 2008, it has been building the Global Partnership for Agriculture, Food Security and Nutrition with three broad objectives:

  • governance, to ensure the coherence of policies affecting food security;
  • knowledge, to mobilise expertise and research on behalf of food security; and
  • finance, to reverse the downward trend in financing for food security.

Within the context of making more financing available, new ways must also be found to offset today’s price volatility, which hurts producers and consumers alike. In the second half of 2010 alone, the World Bank estimates, 44 million people fell below the poverty line because of high and volatile food prices. International agriculture prices then spiked in 2011 for the second time in three years. The United Nations and the Organisation for Economic Co-operation and Development estimate that food prices will continue to remain higher, and continue to show excessive swings, for the next decade.

This volatility not only limits the access of the poor to food, but also restricts producers’ access to animal feed and other inputs, as well as financing for their business activities, hampering investment and holding back output. Left unattended, it poses serious threats to progress in other areas of the global food security agenda.

IFC’s response

In response to volatility, IFC has worked in close coordination with the G20 presidency to develop the new Agriculture Price Risk Management (APRM) product. Cited at the June 2011 G20 agriculture ministers’ meeting in Paris, it is initially being rolled out with JP Morgan, enabling price hedges worth many times its $400 million facility amount on behalf of emerging-market agricultural producers and buyers. Since the exposure associated with risk-management operations is typically smaller than the principal amount of hedges made available to clients, these combined credit exposures should enable up to $4 billion in price protection to be arranged by JP Morgan for emerging-markets’ agricultural producers and buyers.

The APRM product will enable financial intermediaries to help importers of cereal grains obtain protection from sudden price increases that could take a heavy toll on the poor, who often spend up to 80 per cent of their household budgets on food. The effort with JP Morgan will have especially strong regional coverage in Latin America, creating a model that will be extended with other banking partners to sub-Saharan Africa, Asia and the Middle East and North Africa. The model is one that could then be replicated by other multilateral institutions for wider impact.

To complement these efforts, IFC is also supporting the development of new commercial insurance products that will help African farmers increase their output, protecting them for the first time against risks of drought and other forms of severe weather that can damage their crops. More than 19,000 small-scale Kenyan farmers now hold affordably priced weather insurance, provided through an IFC-backed initiative of the Syngenta Foundation for Sustainable Agriculture and two local partners, UAP Insurance and mobile telecoms operator Safaricom. Similar efforts are also under way to help other commercial players introduce weather insurance to 24,000 farmers in Rwanda. These innovative African projects are funded through IFC’s Global Index Insurance Facility – a partnership with the European Commission, the ACP Secretariat, Japan and the Netherlands – that is also expected to expand access to index insurance in other African markets, and then to be replicated in Asia and Latin America.

It is also important to remember that in many low-income regions, inadequate storage and distribution systems result in up to half of the food that is produced being destroyed before it reaches consumers. Warehouse and storage facilities can be improved with new private capital and management, but are just one part of local agricultural supply chains, all of whose components need to receive more private financing to keep up with rising demand for food.

Leading financial institutions in the developing world – such as ICICI Bank and HDFC Bank in India, Banco Galicia in Argentina, Banco Itaú in Brazil, and Standard Bank of South Africa – have all found ways to tap these markets, successfully building large local agribusiness portfolios. The challenge now will be to extend this trend more deeply into Africa, where less than one per cent of commercial lending currently goes to agriculture.

IFC currently invests more than $2 billion per year in the agricultural sector. It will be working alongside its partners to help clients attract more private financing for inventories, seeds, fertilisers and chemicals, infrastructure, distribution and other key needs for increased food production.

Our overarching goals are to enhance food security, through increased investment and enhanced productivity; enhance development and inclusiveness, by focusing on smallholders, women and risk management; and enhance environmental and social sustainability as a business driver, through resource management.

Global coordination

These initiatives complement the Global Agriculture and Food Security Program launched at the September 2009 G20 Pittsburgh Summit. Pooling new donor resources to help support country-led agricultural investment plans, this new vehicle is housed at the World Bank Group. It includes a private-sector window, managed by IFC, that focuses on launching and scaling up high-impact products for small-scale farmers. Working alongside donor partners Canada, the United States and other potential collaborators, IFC will use these funds to extend the private sector’s reach, using the grant funds to build up key areas in the food supply chain that are not yet fully commercial.

IFC welcomes new partners in this historic effort. Together, we can open up the new private-financing channels that are essential in addressing food security, reducing poverty and feeding a hungry world.[mpoverlay][/mpoverlay]


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