MSU/FSG Study of the Impact of WFP Local and Regional Food Aid Procurement on Markets, Households, and Food Value Chains

September 1, 2014 - Author: MSU Study Team: David Tschirley, , and Helder Zavale

IDWP 134. David Tschirley, Robert Myers, and Helder Zavale. 2014. MSU/FSG Study of the Impact of WFP Local and Regional Food Aid Procurement on Markets, Households, and Food Value Chains

EXECUTIVE SUMMARY:

This study examines the impact of the World Food Program’s (WFP) Local and Regional
Procurement of food aid (LRP) on households and markets. It focuses on four countries and
commodities where WFP LRP has had a meaningful share of the market: maize in Uganda
and Mozambique, beans in Ethiopia, and High Energy Protein Supplements (HEPS) in
Ethiopia and Malawi. The study investigates three specific impacts of LRP: (1) its effect on
the level and variability of local market prices, (2) the impacts of resulting price and
production changes on the economic welfare of local rural and urban households, and (3) the
effect of LRP purchases and related training and inspection activities on the investment
decisions and trading practices of traders and processors in the food system, and hence on the
development of the food supply chain. To explore these questions, the study uses four
complementary methodologies: (1) a structural computational model (CM) that predicts
effects on local market prices; (2) a vector autoregression model (VAR) that empirically
estimates the impact of past LRP on market prices; (3) a household model that estimates the
effect of the resulting price increases on the economic welfare of different households; and
(4) a case study approach to investigate trader and processor responses to engagement with
WFP and their perception of the effects of WFP LRP on the food supply chain.

Maize accounted for 58% of all LRP volume in Africa between 2001 and 2011, and Uganda
and Mozambique ranked first and second, respectively, in maize LRP purchases as a share of
estimated market surplus in each country. HEPS was the next most procured item, at 12% of
all volumes, and Ethiopia and Malawi ranked first and second, respectively, in total LRP
volumes purchased. Beans accounted for 7% of all volumes and Ethiopia and Uganda were
nearly tied for the largest total volume of bean procurement. Because we chose countries and
commodities where LRP was largest, the impacts found in other countries are likely to be
lower than those found in this study.

Case studies were conducted for all commodities. The CM and VAR models were estimated
for maize in Uganda and Mozambique and beans in Ethiopia. Due to data limitations on
beans, welfare effects were estimated only for maize in Uganda and Mozambique.

Several broad findings stand out from the study. First, with the exception of Uganda, the
average price effects of LRP are modest. Second, price increases are economically
meaningful during the two years of highest procurement in Mozambique and during many
years in Uganda. Price effects are very small for beans in Ethiopia.

Third, welfare effects are small for the great majority of households, despite sometimesmeaningful
price effects. Average welfare effects are less than a 1% loss for maize in Uganda
and Mozambique, and about three-quarters of all households experience impacts between 1%
and -1%. Because beans have lower shares in consumption and production and lower
estimated price effects, its household level welfare effects will be even lower than those
estimated for maize in Uganda and Mozambique.

Fourth, there are small groups of households that do experience significant welfare effects,
both positive and negative. In Uganda, 8.9% of households are estimated to experience
welfare gains or losses greater than 3%, while in Mozambique 6.9% experience such effects.
Negative (and positive) welfare effects are distributed relatively evenly across the income
distribution in Mozambique, while in Uganda negative effects are more concentrated among
the poor. Focusing on the bottom third of the income distribution in that country, over 13%
had estimated losses of greater than 3%, and nearly 6% had losses greater than 5%. On the
positive side, 4.4% enjoyed welfare gains of more than 3% and 1.6% had gains above 5%

With price effects that are generally modest and welfare effects that are small for at least
three-quarters of households and near zero on average, the overall effect of LRP depends
primarily on the systemic effects that WFP generates by the way in which it goes about its
procurement. Case studies focused on three potential systemic effects: improved knowledge,
practices, and investments regarding quality; operational efficiencies stemming from largerscale
transactions under less uncertain prices and quantities; and effects on entry into sectors
and on companies’ and sectors’ ability to compete in the commercial sector.

Our fifth broad finding is that WFP has positively influenced the quality culture on maize in
Uganda, beans in Ethiopia, on HEPS in Ethiopia and Malawi, but not on maize in
Mozambique. In all these cases, traders and processing companies have invested in new
machinery and new practices to satisfy WFP’s market. Many companies indicated that
WFP’s quality training and ongoing interactions on quality have caused them to focus more
analytically on quality parameters; to understand and implement practices to achieve and
document these parameters; to consolidate and spread within their company the inconsistent
quality practices that they already had; and in some cases to use these improved practices to
enter the export market more strongly.

The quality story is positive but inconclusive on maize in Uganda. We document
WFP/Uganda’s move from Fair Average Quality to East African Community quality
standards. Though a difficult transition, it resulted in substantial investment in cleaning and
drying capacity by traders in Kampala, and testimony by traders as to the value of the training
and the new procedures they had implemented. Yet poor quality grain re-emerged as a major
problem late in 2012. Preliminary interviews suggested that, in addition to known structural
factors, the problem was related to (a) high rainfall during harvest, and (b) aggressive buying
by some traders of wet maize in the expectation of high prices.

WFP has had relatively little impact on quality practices in Mozambique, for multiple
reasons: the highly dispersed marketing system that raises the cost of coordination for quality
improvement, the dominant position of the two early trading firms who had no meaningful
competition in supplying WFP, and the lack of any organized WFP quality training program.

Our sixth finding is that traders are able to generate greater operational efficiencies selling to
WFP, due to the relatively large size of tenders and a price that is known once a tender is
won. If firms are able to use their WFP experience to increase their scale of operation more
generally, then these efficiency gains will be long lasting and generate high returns to the
farmers and consumers operating in the local food system.

Finally, on the question of market entry, we found that WFP operations have spurred market
entry in the Malawian and Ethiopian HEPS sectors, have facilitated greater commercial
competitiveness of the Malawian HEPS and Ethiopian bean sectors, but have had limited
effect on market entry in Mozambique’s maize sector. By spurring entry into the Ethiopian
HEPS sector, WFP has potentially facilitated a robust response by that sector to growing
commercial markets, but that response has to date been limited, and WFP has not facilitated
any entry by these firms into regional operations. As WFP moves now to include Ethiopian
HEPS firms in regional tenders – as have done successfully for several years in Malawi –
these companies may begin to be able to take broader advantage of the quality training they
have received. In Mozambique, WFP has brought Maviga into its tendering process as a new,
large seller. Maviga has not, however, expanded its commercial business into maize,
remaining focused instead on its core trade in pulses. Interviews with Maviga did not reveal
any intention to expand commercially into maize in the immediate future.

Looking ahead, we suggest that WFP must have a market presence of meaningful size and
perceived medium- or long time frame to leverage change, and we ask how the agency can
achieve this while not imposing excessive welfare costs on poor consumers. This question is
particularly germane in light of the agency’s goal of moving to 30% cash and vouchers by
2015, which will put continued downward pressure on LRP. Case studies and a review of
procurement patterns suggest that WFP could maximize its systemic impact on African food
systems through the following approaches:
• Continue to emphasize local procurement of value-added products. Such an emphasis
is especially timely now in Africa, as their food systems are just beginning to
transform and demand for value-added products is set to grow rapidly but is not yet as
high as in Asia. As a result, WFP could, through its quality standards and training
and, if possible, more forward planning in purchases through use of the agency’s
Forward Purchase Facility (FPF), help drive investment and good quality practices at
an early stage, with long-lasting payoffs for the food systems. Moreover, doing this in
value-added products would allow WFP to largely avoid imposing negative welfare
effects on some poor households when it procures large amounts of basic staples such
as maize.
• Assist local companies to produce Super Cereal Plus and other more nutrient-dense
foods by providing them with an assurance of purchase subject to meeting quality and
safety standards and without exposing the agency to unduly high prices. If WFP can
do this, then growth potential for these products is tremendous based on substitution
for European imports. The key decision for WFP, assuming firms can meet quality
and safety standards, will be how flexible to be on pricing, delivery terms, or other
contractual aspects that will facilitate or hinder the firms’ ability to sell to the agency.
• Continue to expand the use of FPF and use it to engage in larger purchases over
longer planning horizons. If staple food LRP in Africa declines over time, as
suggested by recent trends and by the agency’s emphasis on cash and vouchers, FPF
will likely drive more positive systemic change if it is focused on a limited number of
countries that can provide relatively large quantities, rather than being spread over
numerous countries, each supplying smaller quantities.
• As WFP does this, however, it must be mindful of the finding of this study, that
purchases at the levels seen in Uganda during the years of highest LRP can impose
meaningful welfare losses on poor households that rely on maize purchases for part of
their consumption.
• Take steps to further enhance the already high transparency of its tendering process.
First, country offices could be more consistent in sending regret emails to losing
bidders. Second, WFP could standardize and ensure implementation of the existing
(but inconsistently applied) practice of announcing winning prices on tenders. Finally,
in countries where relatively few companies are invited to tender, WFP could
consider developing an SMS message and delivery list – additional to and separate
from the tender invitation that goes only to qualified traders – that announces a tender
without inviting bids

Tags: agrifood system transformation, cross-country, idwp


Related Topic Areas

Cross-country


Authors

David L. Tschirley

David L. Tschirley
517-355-0134
tschirle@msu.edu

Robert Myers

Robert Myers
517-432-3649
myersr@msu.edu


For more information visit:

Food Security Group

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