What is Monetization? U.S. International Food Aid Programs

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1 What is Monetization? Food aid may be distributed directly to target populations or may be sold and the proceeds used to support program-related costs and developmental activities, such as training, technology transfer and incentives for behavior change. The sale and use of proceeds for these purposes is called monetization. The use of monetization is approved on a case-bycase basis by the administrative agency, either USAID or USDA, as part of the program application and approval process. While only a small part of the food aid portfolio is monetized (14% in fiscal year 2010), the sale of a commodity that is in short supply in a developing country can provide economic and development benefits that are not possible with direct program funding. For example, monetization can address credit, hard currency, and other constraints to buying on the international market, thereby creating business opportunities and increasing the availability of the commodity in the recipient country. In this way, monetization offers multiple benefits providing a needed commodity through marketing systems and generating proceeds that are used to implement specific food security and economic development objectives. U.S. International Food Aid Programs Under U.S. law, several food aid programs are authorized, but not all of them are currently being used. Below is a summary of U.S. international food aid programs that are authorized by law. It describes the purpose each type of food aid program and how the programs are reviewed and approved by administrative agencies. Figure 1 shows the tonnage levels for food aid programs from fiscal year 2006 to Section 416(b) of the Agricultural Act of 1949 authorizes the Secretary of Agriculture to provide commodities held by the Commodity Credit Corporation for international food assistance. It is only used when the Secretary declares that surpluses are available and in practice, apportionments for section 416 must be approved by the White House Office of Management and Budget. When available, section 416 has primarily been used to provide commodities for emergency needs. It has also been used during economic crises in developing countries and for supporting developmental programs in developing countries. CCC no longer holds substantial inventories of commodities that are useful for food aid and section 416 has not been used in several years. Both monetization and distribution programs are permitted under section 416. The Food for Peace Act or PL480, (prior to 2008 known as the Agricultural Trade Development and Assistance Act of 1954 ) provides food aid and funds accrued from commodity sales to improve food security in developing countries. It is funded through 1 For programs subject to appropriations, expenditures for a fiscal year may not be the same as appropriations because of Maritime Administration reimbursements for some of the previous year s ocean freight costs and funds carried in from the previous year. 2 A DAP was previously called a Multiyear Assistance Program or MYAP and both designations will be

2 congressional appropriations. Three food assistance programs are authorized under PL 480: Title I (concessional loans to foreign governments for the procurement of U.S. commodities); Title II (donations of commodities primarily through NGOs or the UN WFP to meet emergency needs and address the underlying causes of hunger); and Title III (donations of commodities to foreign governments to promote development). PL 480 Titles I and III accounted for the largest portion of PL 480 from the 1980s to With few exceptions, the commodities were sold in recipient countries. Depending on the terms of the agreement, the proceeds were used for general budget support for the recipient country government or for specific projects. Title III grants were phased out in Title I loans ended in 2007, partially because developing countries did not want to incur long-term debt. However, the use of Title I funds for grants to foreign governments through the Food for Progress program continued, albeit in small amounts (e.g. $20,000,000 in FY 2010). PL 480 Title II has been the largest part of the U.S. food aid portfolio for over a decade. USAID determines which agricultural commodities including processed, blended, and fortified foods are available for Title II, and issues a commodity list with estimated procurement costs per metric ton for each product. When developing Title II proposals, applicants choose commodities from that list. After a program is approved, the USDA-Kansas City Commodity Office procures the commodities through open tenders and the implementing organization takes responsibility for the commodities when they cross ship s tackle at U.S. ports. For emergencies, food aid may be provided to governments, intergovernmental organizations, private agencies, and public agencies under terms and conditions determined by the Administrator of USAID. Most agreements are for one year, but half of emergency operations are in countries that receive emergency food aid for two years or longer. Nonemergency programs are typically implemented by private voluntary organizations (PVOs) and cooperatives over several years to reduce food insecurity of vulnerable populations. The USAID website describes those programs as tackling chronic undernutrition and helping the most vulnerable break the cycle of poverty and hunger through agriculture and livelihoods support. USAID determines eligible countries for nonemergency programs (such as blended and fortified cereals, fortified nut butters or pastes, wheat, corn, soybeans, vegetable oil, and rice) and issues a Request for Applications, soliciting Development Assistance Program (DAP) proposals. 2 DAPs typically have both monetization and distribution components. For example, supplemental foods may be distributed to lactating and pregnant women, young children, or people affected by HIV/AIDS, 2 A DAP was previously called a Multiyear Assistance Program or MYAP and both designations will be seen in this report. Link to the USAID FY 2012 PL 480 Title II DAP RFA:

3 while the sales proceeds support training and materials for maternal-child nutrition, health, and sanitation, and for improving agricultural production and marketing. The needs assessment, objectives, activities, and beneficiaries of each activity, as well as a plan for measuring and reporting on results (such as decreased levels of child malnutrition, increased household food supplies, greater diet diversity, increased agricultural productivity, greater access to and management of water, and increased incomes), are part of the program proposal. The proposal also identifies the types and levels of each commodity that will be used and provides a market analysis explaining why those commodities were chosen and explains how they will be distributed or monetized. If a proposal is approved, a baseline study is conducted to set the starting point for measuring progress. If monetization is part of the program plan, an organization provides information in its proposal demonstrating that the monetization of the chosen commodity in the amounts requested and through the method proposed is unlikely to interfere with local production or marketing or commercial imports of the same or substitute commodities. USAID issues monetization guidelines for applicants to follow when analyzing the market to develop the monetization plan. USAID also decides whether the information provided in an application is correct, including by contracting with an independent firm (Fintrac, Inc.) to conduct a Bellmon Estimation Study (BEST) that identifies which commodities and how much of each commodity may be monetized without resulting in substantial disincentive or interference with domestic production or marketing. USDA provides the calculation of Usual Marketing Requirements (UMRs), which is used to determine the amount of a particular commodity that can be monetized with minimal potential to interfere with commercial agricultural trade. 3 Once a DAP is approved, the awardee conducts market analyses to estimate prevailing prices and market conditions closer to the time when the commodity will be sold. For all programs, the awardee provides progress reports to USAID, including on the use of commodities for distribution and monetization, the use of funds to date, and progress toward achievement of results. Food for Progress, established in 1985 and restructured in 1990, following the dissolution of the Soviet Union, provides commodities to developing countries and emerging democracies committed to introducing and expanding free enterprise in their agricultural sectors. Food for Progress programs target particular industry segments or barriers to private sector agriculture growth within a country. Outcomes include improved agricultural incomes, growth of agricultural businesses and financial services, and higher levels of production. Most programs are implemented by non-governmental organizations (NGOs), such as PVOs, cooperatives, nonprofit associations, and 3 The UMRs are reported by the U.S. Government to the FAO Consultative Subcommittee on Surplus Disposal, which allows other governments to comment on the levels that will be provided and whether they may or may not interfere with commercial trade.

4 universities, and in some cases, by governments or intergovernmental organizations. Funding for Food for Progress through CCC funds averaged $155 million a year from 2006 to 2010, providing an average of 240,016 MT of commodities per year. 4 The guidelines, regulations, results framework, and other information for submitting a Food for Progress proposal are provided on the USDA/FAS website. In each fiscal year USDA may use a total of $40 million for ocean transportation costs to ship the commodities to overseas destinations, which limits the amount of commodities that can be provided. In each fiscal year USDA may also provide a total of $15 million to implementing agencies to support program implementation. Monetization is commonly used in the first year of the program to fund activities over a three-year period. Applications include information explaining how the commodities were selected and demonstrating that the amount requested can be imported and monetized without disrupting local production and marketing patterns of the same or similar products. USDA determines whether that information is correct and also determines the UMRs for commodities requested. The sales process, estimated proceeds, and detailed budget for using the funds are included in the application. Once a program is approved, the awardee submits reports on monetization, expenditures, and activities every six months. The McGovern-Dole International Food for Education and Child Nutrition Program provides school meals or take home food rations, improves the educational environment, and results in increased attendance, improved learning and greater local support for school feeding programs in developing countries. Programs are conducted in countries that have made a demonstrable commitment to education. Funding averaged $125 million from FY 2006 to 2010 (average of 104,729 MT) and, except for $84 million provided by CCC, was provided through the congressional appropriations process. Programs are implemented by NGOs, the UN World Food Program and, occasionally, by governments. Following guidelines posted on USDA s website, proposals are submitted for a program in eligible countries (typically three years in duration). If approved, commodities are provided for school meals or take-home food supplies to reward families that send their children to school. Funds are provided to cover management, operational and activity costs. Monetization is used infrequently. However, the flexibility to monetize has provided opportunity to add value to the commodities in recipient countries and to support school feeding programs when USDA funding cannot be provided for internal transportations, storage and handling. Guidelines for choosing commodities and for describing the monetization process are similar to those for Food for Progress. 4 PL 480 Title I funds can also be used for Food for Progress programs and levels provided from FY were: $73,000,000 (212,350 MT) in FY 2006; $17,000,000 (23,210 MT) in FY 2007; none in FY 2008; $22,000,000 (14,300 MT) in 2009; and $20,000,000 (40,680 MT) in FY 2010.

5 1000 Metric Tons The Bill Emerson Humanitarian Trust can hold up to 4 million metric tons of commodities, or cash equivalent, which are available for urgent humanitarian needs overseas, when there are insufficient PL 480 Title II emergency funds. It currently holds approximately $315 million in cash and is administered by the Commodity Credit Corporation at USDA. Figure 1: U.S. International Food Assistance Tonnages, FY Bill Emerson Humanitarian Trust McGovern-Dole Food for Education Food for Progress Food for Peace (PL 480) 3,500 3,000 2,500 2,000 1,500 1, Source: USAID U.S. International Food Assistance Reports,