This column was originally published in Illinois AgriNews during the month indicated and is reprinted here by permission.

Illinois AgriNews - June 2006

Whither Food Aid?

Robert L. Thompson
Department of Agricultural and Consumer Economics
University of Illinois at Urbana-Champaign

One of the most important breakthroughs in the current WTO trade negotiations has been getting the European Union's commitment to eliminate all agricultural export subsidies. Export subsidies have been banned since the 1960s in everything except agricultural products. The EU is the main place that still subsidizes ag exports. After it buys agricultural commodities to support market prices, the EU uses subsidies to move the inventories out into the world market, often depressing world market prices in the process. If the EU can't subsidize exports, it will have to reduce its support prices enough to bring their production down into line with their market demand. This would be a good thing.

The EU has agreed to a ban on agricultural export subsidies -- but only if other countries that indirectly subsidize ag exports also stop. For many decades the U.S. has given to poor countries commodities accumulated by the Commodity Credit Corporation under our price support programs. Little fuss was raised by other countries as long as this food aid went to starving people in poor countries for purely humanitarian reasons, as in times of famine or natural disasters. The recipients of this food aid didn't have the money to buy the food even if it had been available on the local market. Over time the U.S. has diversified its food aid well beyond this original motivation in ways that other countries, including the E.U., see as an indirect export subsidy. They insist that we stop using such forms of food aid.

Of greatest concern to them is “monetization” of food aid. USDA gives commodities to charitable organizations like CARE and Save the Children to sell in countries overseas where they are working in exchange for local currency, which they then use to finance their projects. This is where the EU's complaint arises. Because the commodities are sold , the local buyers obviously had the purchasing power to buy those commodities. These sales then must have displaced potential commercial sales – either by local farmers or other suppliers.

When “monetization” of food aid displaces sales of local farmers, it drives down the local market price. This may actually increase poverty in the recipient countries since 70 percent of the people who live on less that one dollar per day in low income countries are farmers. U.S. farmers would scream unfair if the CCC gave commodities to charitable organizations to sell into the U.S. market to generate funds to support their Hurricane Katrina recovery projects. That's exactly how farmers in developing countries see monetized food aid.

American farm organizations like food aid because they see it moving more commodities overseas. Many charitable organizations rely heavily on monetized food aid to support their projects overseas. The issue is not the value of the projects the organizations carry out, many of which do a lot of good, but rather the mode of financing those projects.