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Recent trends and issues in agriculture and rural development or the state of IFAD’s business in the global context

of post-AquilaExecutive Board – 97th Session

14-15 September 2009Kevin Cleaver

Assistant President for Operations

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Six contemporary agriculture issues affecting developing country farmers, and the impact on IFAD

• Issue #1: Food, fuel, fertilizer price volatility and world economic crisis

• Issue # 2: Agricultural growth is inadequate to meet demand

• Issue # 3: Climate change and environmental degradation: government responses inadequate causing land degradation, water shortages, production failure

• Issue # 4: Government responses often counter-productive

• Issue # 5: Agriculture is constrained in fragile states and conflict-prone countries: hitting the poor most

• Issue #6: All of the above causing rural poverty to increase

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Issue #1: Commodity and oil index prices increasing, and increasingly volatile

Food and fuel Price Volatility

0

50

100

150

200

250

300

CRUDE P ETROLEUM,AVERAGE

FOOD

RICE THAILAND(BANGKOK)

WHEAT U.S.GULF P ORTS

MAIZE US(GULF P ORTS)

Source: IMF International Financial Statistics, J uly 09 Index: 2005= 100

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Effect of food prices: Developing world and Africa worse off due to increased food prices

Countries in red suffer biggest trade balance losses, countries in blue expected to show biggest gains

Source: IMF Survey Magazine, April 2008

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Long term trends: The long term decline in real agricultural prices has been reversed

Extended Annual FAO Food Price Index, 1998-2000= 100

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Why are food prices rising; and why greater volatility?

• Due to rapidly rising global and local demand for food, at about 2% per annum and rising

- In turn caused by income growth, population growth, dietary changes, bio-fuels

• Combined with a slowing of the rate of increase in production

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Issue # 2: Agricultural growth response to higher prices is weak due to:

• Lack of agriculture investment and consequent reduction in productivity growth

• Cereal yields increasing at 1-2% p.a. now, compared to 3-6% p.a. in the 1960s-1980s

• 18% of development assistance went to agriculture in 1979, falling to less than 3% last year

• Low investments in agricultural research: 0.42% of agricultural output in Asia, 0.65% in Africa, 1.1% in LAC (over 5% in developed countries)

• Transport, marketing and farm input price increases as oil prices increase

• Land degradation

• Substitution of bio-fuels for food (for maize)

• Government policy deficiencies, panic in food markets

• Climate change may be exacerbating the slow food production response

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Agricultural productivity: Improvements far below population growth

Least Developed Countries: Agricultural productivity and population

0

100

200

300

400

500

600

700

800

900

Population, million

Agriculture value added perworker (constant 2000 US$)

Cereal yield ( 10 kg perhectare)

Source: WDI dataset 2008

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Agricultural productivity: Growth most in high-income countries; stagnation in sub-Saharan Africa

Cereal Yield (kg per hectare)

0

1000

2000

3000

4000

5000

6000

High income

Low income

Sub-Saharan Africa

High income 3338 4180 4985

Low income 1387 1730 2080

Sub-Saharan Africa 1051 1029 1090

1980 1990 2005Source: WDI dataset 2008

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Investment in the agricultural sector: Government spending and donor aid declining

Share of total government spending on agriculture

Year Africa Asia Latin America Total (Weighted Average)

1980 6.4% 14.8% 8% 11.3%

1990 5.2% 12.2% 2% 7.9%

2002 4.5% 8.6% 2.5% 6.7%

Source: DFID/ World Bank 2007

Donor Aid to developing countries: Share of agriculture

1980 20%

1990 15%

2006 4%

Source: IFPRI, April 2009

To meet MDG-1, an additional $14 billion annually is needed in developing countries; and an additional $3.8 to 4.8 billion in SSA.

IFAD lending/grants at $500-600 million p.a. too small to have significant impact.

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Issue #3: Rural environmental issues and climate change have larger impact on small farmers than previously thought

• Deforestation, groundwater depletion, salinization of irrigation areas, destruction of rural biodiversity, soil loss (see UNEP Atlas of Africa)

• Agriculture both a cause and victim of environment problems

• Agriculture contributes 13% of green house gases

• Rural environment problems to worsen due to climate change (IPCC)

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Issue #4: Government responses to the above often counter-productive

• Supply response to higher prices strongest in industrial countries, China and Brazil

• Harmful government policy responses to higher prices in many countries

- Export bans - Farm price controls imposed to allow consumer subsidies at low

public cost- Bio-fuel subsidies and import barriers- Lack of investment in agriculture; too much focus on food aid

• Subsidies maintained for high greenhouse gas emission agricultural practices in both industrial and developing countries

• The poorest people often most neglected by governments (women farmers, indigenous people, the poorest regions)

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Issue #5: Agriculture is particularly constrained in fragile states and conflict-prone countries

• Fragile states had 30% of world’s poor, 50% more malnutrition

• Inadequate local governance and weak institutions in fragile states, reflected in poorly performing investment programs

• Accompanying investment climate, infrastructure poorly developed in fragile states

• Civil strife more common in fragile states (by definition)

• Poor governance and civil strife scares away donors, private sector, exacerbating the problem

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Issue #6: Rural poverty and hunger is increasing as a consequence of the above five issues

• 2 billion live on less than $2 per day

• Over 1 billion hungry people in the world (June 2009), 100 million more than last year

• 642 million in Asia and the Pacific

• One third of the population affected in sub- Saharan Africa

• Food emergencies in 31 countries

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Poverty: Very little progress in sub-Saharan Africa, greatest numbers in South Asia

Source: World Bank 2009

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Malnutrition: The same trends followed and deepened

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The L’Aquila statement, in brief:

“The combined effect of longstanding underinvestment in agriculture and food security, price trends and the economic crisis have led to increased hunger and poverty in developing countries, plunging more than a further 100 million people into extreme poverty and jeopardising the progress achieved so far in meeting the Millennium Development Goals. … Food security, nutrition and sustainable agriculture must remain a priority issue on the political agenda, to be addressed through a cross-cutting and inclusive approach, involving all relevant stakeholders, at global, regional and national level. …”

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… Building on the experience of FAO, IFAD, and other agencies, special focus must be devoted to smallholder and women farmers and their access to land, financial services, including microfinance and markets. Sustained efforts and investments are necessary for enhancing agricultural productivity and for livestock and fisheries development. Priority actions should include improving access to better seeds and fertilizers, promoting sustainable management of water, forests and natural resources, strengthening capacities to provide extension services and risk management instruments, and enhancing the efficiency of food value chains. …

- Endorsed by 27 countries

The L’Aquila statement, in brief:

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The L’Aquila declaration states that more resources will be made available to fragile states and to Africa (up to $20 billion in next 3 years)

• How should the resources be used, and what is the potential role for IFAD?

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IFAD’s 8th Replenishment period corresponds to the L’Aquila statement (2010-2012)

IFAD will lend and grant $3 billion during this period. IFAD will focus on:

• Smallholder production and productivity improvement, particularly amongst the poorest rural population and women

• Rural employment generation through farming, agro-industry, marketing, input supply

• Development of farmers’ organizations, to help plan village-level development and manage services in:

- Rural finance- Marketing and input supply- Water and irrigation- Land and grazing- Forests

• The above to address the production and rural poverty issues at the same time

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IFAD supports micro-credit project through Women’s Groups in Uganda

•Microfinance plays a crucial role in consumption smoothening.

•Microfinance is one of the few asset classes with a positive return during 2008. While emerging market funds have experienced a 20 percent sell-off, assets of the top 10 MFI funds grew by 32 % in 2008 (CGAP, May 2009)

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Agriculture Services in Haiti

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Women’s training in the Gaza strip

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Reforestation in Bolivia

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Irrigation and Land Rehabilitation Project in Bhutan

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IFAD projects will incorporate adaptation to climate change and environmental concerns

• Adaptation- Drought resistant cultivars- Crop diversification- Alternative tillage and erosion control- Payment for environmental services- Weather insurance- Drought contingency and early warning systems- Water management, including flood response

• Mitigation of climate change through agriculture. IFAD will argue to:- Reduce subsidies for high greenhouse gas-emitting agriculture practices

• Reduce expansion of new irrigation schemes, farm machinery, chemical fertilizer, land and forest clearing, livestock development, fuel use

- Subsidize low greenhouse gas emission processes • water management, conservation agriculture, reforestation

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IFAD agrees that the market and the private sector are increasingly driving agriculture. Governments and donors need to adapt this evolving reality to the benefit of small farmers, but work mostly through governments

VALUE CHAIN APPROACH:

Research

Extension service

Input industry

Producers Food process industry

Food retail

industry

Consumers

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IFAD will make its projects more effective and larger scale to have larger impact

• Support projects and programs in partnership with other sources of expertise and funds (IFIs, bilaterals, private sector, governments) – to scale up

• Focus more on institution building in fragile states

• Introduce longer term approach, with 10-15 year partnerships reflected in 2 to 3 consecutive projects

• In fragile states with poor governance, work through civil society, NGOs, private sector

• Encourage more South-South cooperation with Middle Income Countries

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What more can IFAD do in the context of L’Aquila?

• IFAD can provide project/program “vehicles” into which other donors can put money

• IFAD will provide more agricultural policy advice

• Wider and more effective knowledge sharing, including in the November World Food Summit

• Development of grassroots agricultural and farmer organizations: institutional development at the grass roots and globally

• Remittances

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Still more

• IFAD’s internal efficiency must improve dramatically- IFAD will not take on more than its capacity permits

• IFAD’s Results Measurement Framework for 2010-2012 commits to improve results qualitatively and in scale

• IFAD will work to help coordinate assistance to agriculture and rural development

- UN Secretary-General’s High Level Task Force; FAO, WFP, CGIAR, other UN agencies; regional institutions; IFIs; bilaterals; the Copenhagen Climate Change Summit

• IFAD will explore new instruments and conditions to deliver more effective products to its clients

- Private sector, new grant policy, gender policy, environment policy, MICs policy, fragile states policy

• What can you, as Board members, do?

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Annex - Effect of agriculture price increases on developing countries

• High international agricultural prices stimulated production in industrial countries and a few large MICs

- 2009 production forecast is marginally lower than 2008 record cereal output of 2.28 million tonnes

• There has been a recent decrease in international prices- But cereal prices still 66% higher in March than in 2005- Domestic prices higher than a year earlier in about 78% of

developing countries - Rice prices higher in all sub-Saharan countries (April 2009)

• Developing countries cereal import bill rose 56% in 2008

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Annex - The effect of increased food prices on food insecurity in rural households

• The rural poor can benefit from higher agricultural prices if: (i) they are a net producer; not a net consumer; (ii) if they can sell at the higher prices; or if (iii) they can get higher paying rural jobs

• Studies show that food purchasing power of the poor decreased by 20% in 2008, because the poor spend 60% or more on food (more net consumers than net producers)

• Surveys have found greatly increased malnutrition (stunting and wasting) in countries experiencing high food inflation (2007-08).

• Net Result: poverty and hunger increasing

• Hungry poor increased from 923 million in end-2007 to 963 million in end-2008 to 1020 million in June 2009

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Annex – Monthly volatility in food prices

Food prices increasing and increasingly volatile

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1/19

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2/19

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Food P rice Index

Meat P rice Index

Dairy P rice Index

Cereals P rice Index

Oils P rice Index

Sugar P rice Index

Monthly food prices from 1991 to August 2009: FAO Food Price Index September 2009 (2002-2004= 100)

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Annex - What next? Projections suggest that prices will fall, but stay higher than long-term trend levels

Source: OECD-FAO Agricultural Outlook 2009-2018

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Annex - Climate change and agricultural productivity: The long-term projection

Source: IMF 2008

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Annex - The role and effects of value chains

• Supply side: Increasing # of market players; Centralized management of purchases; Decreasing ability of governments to regulate;

• Demand side: Urbanisation + Income growth creates demand for new products: consumer driven value chains springing up

• Size: Supermarkets have about 50% share of food retail in Central America, Mexico, East Asia, S. Africa; 20% in China, India.

• Effect of value chain phenomena on rural poor: depends on:- Structure of agro-economy: Increased power of consumers and

purchasers could exclude smallholders; but if smallholders are contracted by purchasers, could have increased opportunities

- Employment potential: If large farms increase employment, could benefit rural poor; but large farms could capture most of the benefit of contracting with value chains.

- Role for IFAD: IFAD will help organise small farmers into cooperatives and associations to negotiate with rest of value chain, and strengthen technical/quality control of production.

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Annex - Agricultural growth: Productivity varying across countries

Average annual growth (1990- 2005) in agricultural GDP

India 2.5

China 3.7

Brazil 4.1

Ghana 3.8

Average annual growth (1990- 2005)

Bangladesh 3.2

Ethiopia 2.4

Burundi - 1.7

Source: WDR 2008

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Annex - Agricultural growth mirrors malnutrition in most countries

1990-02 1995-97 2003-05

India 24 21 21

China 15 12 9

Brazil 10 10 6

Ghana 34 16 9

Undernourishment in total population (%)

1990-02 1995-97 2003-05

Bangladesh 36 40 27

Ethiopia 71 63 46

Burundi 44 57 63

Source: FAO Statistics, 2009