Vincent H. Smith POLICY SEMINAR Effects of the United States Farm Bill on Developing Countries Co-Hosted by IFPRI and American Enterprise Institute (AEI) OCT 19, 2017 - 12:15 PM TO 01:45 PM EDT

1. Food Aid Reform
Vincent H. Smith,
Professor, Department of Economics, Montana State University

2. Food Aid Reform
• This presentation draws on recent work by Stephanie Mercier,
Christopher Barrett, Ern Lentz and Vincent Smith
• Their recent work is contained in two publications:
• AEI Study International Food Aid and Food Assistance and the Next Farm Bill
by Barrett, Lentz and Mercier, one of fifteen papers to be published in the AEI
series American Agricultural Policy in Disarray
• MSU IRAEA Working Paper 2017-02, Emergency Food Aid Cargo Preference:
An empirical analysis by Mercier and Smith

3. The Issues:
• Congressional mandate that (almost) all food aid be sourced in the United
States
• Food Aid Cargo Preference: at least 50% of all food aid must be carried on
US flagged ships (a mandate US mercantile shipping lobbies are currently
seeking to expand, regardless of the humanitarian consequences, as
compensation for the brief suspension of the Jones Act with respect to
shipments to Puerto Rico)
• Monetization: the practice of having NGOs purchase food in the US, ship
to the country of interest, sell the food there, and use the proceeds to
support NGO programs related to food security.

4. How Cargo Preference Works
• Since July, 2012, at least 50 % of all US food aid has been carried on
US flagged vessels. Prior to July 2012, the requirement was 75%
• Those vessels must be owned by a company registered in the United
States and crewed by US citizens & legal residents
• Under cargo preference, shipments managed by both USAID and
USDA programs can only be shipped on US vessels through a
mandated bidding process.
• Some competition between US carriers but the US Marine
Administration (MARAD) views freight rates for US flagged ships of up
to 270% more than commercial rates on foreign flagged ships as fair
and reasonable.

5. Cargo Preference Increases Costs of Delivering Aid
• Mercier and Smith, using data on all food aid shipments between
January 2012 and May 2015, use econometric models to estimate
that cargo preference increases shipping costs for food aid by about
$50 to $60 a ton.
• Similar estimates have been obtained from previous studies.
• GAO reports that, largely as a result of cargo preference combined
with mandatory sourcing of aid from the US causes the US to deliver
only 40 cents of food aid for every dollar spent on aid, administration
and shipments.
• For every dollar spent by Canada (which allows extensive regional and
local sourcing), 70 cents of food is delivered).

6. Cargo Preference Increases Costs of Delivering Aid
(cont.)
• The costs of food aid cargo preference coupled with the mandate for
US sourcing have been estimated to add between $300 and $400
million to the total cost of delivering food aid.
• In human terms, absent these mandates, current aid budgets could
deliver aid to an additional four or more million people annually
• Also the aid would be delivered up to 14 weeks faster to where it is
needed, with substantive and long run impacts on the nutritional
status of children at risk

8. Monetization
Monetization is the shipment of food to, and sale of that food in local
markets. The funds are then used for local projects by the NGOs.
• The practice continues as a result of a hard earmark guaranteeing
that at least $350 million a year be used from Tittle II funds
• The evidence indicates that at least 20 percent of the funds are
wasted, compared to the alternative of simply giving the NGOs cash
for their non-emergency food aid projects - the wasted resources
amount to over $70 million a year.
• In addition, some research indicates that monetization sales are more
likely to disrupt local markets than other forms of aid.

9. Societal benefits from the current system?
The National Defense Argument:
“We need food aid cargo preference to ensure mercantile marine ships
crewed by US mariners are available in time of war:
Rebuttal:
• At most, FACP provides jobs for 350-400 sailors
• Only 18 percent of food aid is carried on vessels deemed by the
Department of Defense to be of any military use
• None of those ships and, apparently, none of the sailors have been
used in time of overseas wars over the past 30 plus years (Kuwait,
Iraq, etc.)

10. Societal benefits from the current system?
The “Save the US Farm Sector” Argument:
The claim is made that food aid cargo preference is needed to ensure
markets for US agricultural commodities.
To their credit, the major farm lobbies do not now view this argument
as sound. It tend s to be made by other sources.

11. Societal benefits from the current system?
Rebuttal:
• For almost all food aid commodities, including bulk shipments of wheat,
corn, and oilseeds, US food aid shipments are a negligible proportion of
both US and world output. They have no impact on prices. At the local
country elevator.
• The one exception – pulses (peas and lentils), where cargo preference
shipments account for about 10 percent of US production but only a small
fraction of global production.
• Ironically, given that most food aid commodities are traded on global
markets at global prices, if food aid dollars were used more efficiently, if
anything using US aid dollars to buy more food on world markets would be
beneficial for US farmers.

12. Alternatives
1. Let the two government agencies use the most efficient means
of providing aid:
• Local and regional sourcing
• Cash transfers, etc.
2. End Monetization and use the funds efficiently

13. Some Subtleties
Mercier and Smith find that:
• Smaller NGOs incur higher shipping costs than larger NGOs, and USAID
procures at the lowest costs on a per ton basis
• The freight rates charged when foreign flagged vessels carry food aid
are closely linked to commercial freight rate for other agricultural
cargoes
• Freight rates charged by US flagged vessels are in no way linked to
commercial freight rates
• Over 40 percent of all cargo preference food shipments were carried by
Maersk’s US subsidiary: Maersk is a Danish based multinational
company.