Rob Bailey
Research Director, Energy, Environment and Resources

The World Food Program (WFP) has recently attracted criticism for turning to one of the world's largest commodity traders, Glencore International, in order to source supplies of wheat for its emergency food distributions. Over the last eight months, WFP has bought $78m worth of wheat from the trader, raising concerns that aid money is instead being directed to the private sector.

This misses the point. WFP's role is to get food to hungry people during emergencies. Often it is able to do this using 'in-kind' donations of cereals from developed countries. Where possible, WFP also seeks to source from local farmers, so helping to support livelihoods in the affected regions. But during times of crises, these two sources of supply may be insufficient, meaning that WFP must, quite rightly, source the food it needs from international markets.

The real problem is not that WFP has to source food from international markets, but that it must do so when food is very expensive. High food price volatility creates a double whammy for the agency. First, it increases the demands on WFP, as spiking international prices generate localised food crises to which WFP must respond simultaneously. Second, it increases WFP's costs, as prices are spiking precisely when WFP turns to the market. This is what happened during the 2008 food crisis, when WFP was hamstrung, in the words of its then director, by a 'silent tsunami' of hunger and rapidly declining purchasing power.

WFP is making efforts to address this problem. As already mentioned, it is investing in regional capacity to source food from local farmers, allowing it to diversify its supply base. It also 'pre-positions' stocks of food in strategic locations, which it can use when a nearby emergency strikes. Finally, it is also entering into forward contracts with suppliers, which allow it to lock-in a price, limiting the impact of future price rises. But these efforts are inevitably constrained by WFP's funding, which is short-term and geared towards responding to emergencies ex-post, rather than preparing for them ex-ante. More flexible funding from donors would allow more ambitious use of option contracts to insulate WFP's operations from market volatility.

Perhaps the most ambitious use of options suggested so far has come from Professor Brian Wright at Berkeley University. He has suggested that donor countries enter into option contracts with their biofuel industries. At times of crisis, these contracts would trigger the diversion of food away from energy markets to WFP for emergency distribution, in effect acting as a safety valve.

No doubt this would be difficult to implement in practice, but with global biofuel use forecast to keep rising, it is worth serious consideration. In the meantime, the more donors can do to help WFP access derivative markets at scale, the more value taxpayers can expect from their food aid donations. And that is good news for hungry people.