Improving risk management to cope with food price volatility and promote agricultural development

1. Improving risk management to cope with food price volatility and promote agricultural development Pierre Jacquet G20 mission on addressing the effects of price volatility Interim recommendations – May 12, 2011

2. Two broad issues • Price shocks carry huge costs for poor developing countries and vulnerable populations • Access to food (notably in urban areas) • Increase in poverty (in cities, in producing areas) • Social and political unrest • Balance-of-payment problems (foreign exchange shortage, export bills) • Farm price volatility creates income uncertainty • Penalizes investment and production • Small producers are the most vulnerable within the food and agricultural value chain P.Jacquet - interim G20 recommendations

3. Some lessons from the crisis • Lack of preparedness • Uncoordinated, short term reactions • Lack of immediate access to compensatory resources • Major uncertainty on the evolution of the supply/demand balance • Crucial importance of supporting production and productivity gains in agriculture • Agricultural development implies a capacity to manage a whole range of risks, new and old, short-term and long-term. • Macroeconomy, exchange rates, “normal” price fluctuations, climate change, weather events and catastrophes, pests, damage to environment, geopolitical risks… • Mainstream risk management in agricultural development programes • As a contribution to crisis prevention and preparedness • As a way to address price and income uncertainty P.Jacquet - interim G20 recommendations

4. Six (interactive) recommendations P.Jacquet - interim G20 recommendations

5. 1. Integrated approach to agricultural development • Country agricultural development programs to include risk assessment and management strategies • Donors and other international organizations to support and commit to such strategies. • Proposed pilot (to be discussed): NEPAD might identify (in partnership with donors) countries or regions to build on and strengthen the CAADP programs to include risk assessment and management strategies that would be formally monitored as part of the CAADP. P.Jacquet - interim G20 recommendations

6. 2. Provide agricultural risk advisory services for developing countries • Invite multilateral, regional and bilateral development banks to collectively structure the provision of risk management advisory and intermediation services to developing country clients • Create a small multidonor office dedicated to that task. • Interested multilateral, bilateral and regional donors, might be invited to launch a joint initiative setting up such a risk management advisory office around a few pilot cases, elaborated on the basis of expressed interests by developing country clients. P.Jacquet - interim G20 recommendations

7. 3. Public-private partnership for food security • Launch a formal multi-stakeholder dialogue and partnership on risk management for food security and agricultural development (building on, and interacting with other multilateral initiatives s.t. the Committee on World Food Security, the principles for responsible investment…). • A multi-stakeholder workshop will be held in Paris on June 6, 2011 to discuss the contribution of the private sector to agricultural development and risk management, the potential for value-creating public-private partnerships, and the interest for the formal pursuit of such a dialogue and the adoption of principles and commitments. P.Jacquet - interim G20 recommendations

8. 4. Enhance the financial effectiveness of WFP • Expand the WFP forward facility pilot to include risk hedging at the WFP. • Ask the WFP to prepare a hedging strategy paper presenting the broad principles of a hedging strategy (including forward purchases and the choice of instruments), detailing its organizational and operational costs, and proposing a detailed two-year pilot. P.Jacquet - interim G20 recommendations

9. 5. Promote innovative finance • Recommend the use of “countercyclical” development loans that would build on the innovation introduced by the AFD in including deferred repayment options in case of external shocks, including food price surges or collapses. • AFD has already developed a few pilots (5 countries, €200 million). Support for such countercyclical instruments was received by the CFA Zone Finance ministers at their April 2011 annual meeting in N’djamena. Support of the G20 would help encouraging other donors to develop new pilots • Invite a reflection on a longer term reform of development finance, including innovations that introduce risk sharing in development finance to better take into account the vulnerability of developing countries to commodity price volatility. P.Jacquet - interim G20 recommendations

10. 6. Promoting contract farming • Explore the possibility of developing instruments (e.g. guarantees) and approaches (capacity-building) specifically designed to facilitate contract farming (locally and internationally). • A study exploring the interest and feasibility of such a “de-risking” facility could be commissioned and serve as a basis for developing potential pilots. P.Jacquet - interim G20 recommendations

11. Country food and agriculture development program to includerisk assessment and management strategy Recommendation 1 Conception and implementation Risk management advisory, intermediation, and training services (development banks) Recommendation 2 Multi-stakeholder dialogue to include private sector Recommendation 3 • Objective 2 • Managing price risk… • To increase security and predictability of agricultural income (hence investment, productivity gains, quality and sustainability, scaling-up) • To develop a toolbox of instruments covering major production risks (e.g. pull mechanisms/research for inputs, weather insurance, commodity/input price) (subset of Recommendation 2) • To negotiate a Global Agricultural Compact (subset of Recommendation 3) • To facilitate contract farming and promote private price stabilization mechanisms within value chains • Recommendation 6 • Objective 1 • Managing price risk… • To prevent or mitigate exogenous price shocks and food crises • To develop a toolbox of macro-economic risk coverage and price stabilization instruments (subset of Recommendation 2) • To develop a macroeconomic shock facility through an extension of countercyclical debt instruments and to promote risk-sharing development finance. • Recommendation 5 • To improve WFP effectiveness through hedging • Recommendation 4 P.Jacquet - interim G20 recommendations