- The combined effects of the pandemic and Russia’s invasion of Ukraine have exposed the fragility of supply chains, including those essential for food security.
- National impulses to restrict trade or onshore production of essential goods will only worsen the situation.
- Real solutions call for greater, not less, global cooperation and for more open markets and resilient supply chains.
For decades at Citi, we have helped our clients finance the most efficient supply chains possible to bring goods and services to markets around the world. Speed and cost were the two most important considerations in determining those routes.
For good reason, security and resiliency are now dominating the dialogue I have with global political and business leaders. But as we look for ways to increase both, we should continue to look past insular ideas in search of global solutions.
Food security as a case study
The two years of unprecedented pandemic-produced shocks that stressed supply chains and saw the FAO Food Price Index for staples like vegetable oils and cereals increase by 182% and 68%, respectively, have been immediately followed by Russia’s invasion of Ukraine, exacerbating an already dire food security scenario.
When farmers suddenly become soldiers in the world’s breadbasket – where the two countries, combined, produce more than a quarter of the world’s barley and wheat – it naturally sprouts concerns about the risks of having our food supply concentrated in a handful of countries. Many are asking… If a war in Ukraine is causing food insecurity in Egypt and Nigeria, is this really a system we want?
Some have suggested that a major shift to “on-shore” food production is the logical solution. We have even seen some countries impose export bans on certain essential goods. But these solutions ignore the critical role that open markets play in preventing food shortages. Indeed, protectionism will only increase commodity prices across the board and contribute to a global economic downturn.
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Globalization’s success in reducing hunger
The era of trade liberalization not only produced better economic outcomes, but also reduced hunger and famine, and enhanced food security – all during a period of rapid population increase.
In fact, from 2001 to 2017, the number of undernourished people around the world plummeted by 170 million. At the same time, the death rate from famine dropped dramatically. And as barriers to trade fall and incomes rise, people spend less proportionally on food, enabling them to allocate more money toward goods and services that improve their lives.
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Building resiliency with fewer barriers to access
However, the current crisis has demonstrated that we may have over-optimized for efficiency in some cases by relying on concentrated centers of food production.
To strengthen resilience, we need to diversify our supply chains, especially for critical goods such as food. This will require us to improve access to services across borders that are essential to the production and transportation of agricultural products.
For example, greater access to financial services that are essential for all types and sizes of businesses would better position farmers, particularly in emerging markets, to prepare for and respond to disruptions, thereby moderating the traditional commodity cycle of booms and busts. Similarly, financing the logistical infrastructure to bring products to markets could help manage the predictability of demand.
High barriers to trade, especially in services, prevent farmers in many parts of the world from contributing more to the global food supply. We can help our farmers increase production and eliminate food insecurity by increasing their productivity through the distribution of key agricultural inputs and best practices, including:
- Finance: In East Africa, fewer than half of small- and medium-sized enterprises (SMEs) have access to formal bank finance, despite employing 50%–80% of the region’s workers. However, when a solution such as cash loans is applied, the outcomes are drastically better. When food and cash loans were studied by Innovations for Poverty Action in Zambia during the "lean season," agricultural output, local wages and consumption all increased, while off-farm labor decreased. The loans enabled farmers to smooth their incomes, allowing them to retain workers and make capital improvements.
- Insurance: Crop insurance can help ensure that farmers in developing countries remain solvent and support food supply chain resiliency. In the Indian state of Gujarat, a public-private partnership provided subsidized insurance to small and midsize farmers to serve as collateral for credit. The partnership led to an increase in the flow of credit to farmers, and its success eventually inspired India to establish a national program.
- Market Access: Farmers in developing nations are constrained by a variety of factors including remote locations, limited business knowledge, higher transportation costs and agricultural tariffs. Peru’s participation in various trade agreements has lowered tariff barriers, leading to significant increases in its agricultural exports. Peruvian agricultural exports to the U.S. have grown 175% since the bilateral free trade agreement between the two countries went into force in 2009. In turn, these exports have contributed to strong employment and wage growth in agri-businesses and a steady decline in the number of Peruvians living in poverty.
- Training, Technology and Farm Products: Throughout the developing world, training, technology and farm products such as seeds and fertilizer often lag far behind other countries. Expanding access to these resources globally allows small-scale farmers to unlock new approaches that greatly increase their productivity. One Acre Fund, a non-profit Citi client that specializes in funding for products for small farmers in Sub-Sahara Africa, found that farmers participating in their programs earned on average nearly 40% more than comparable farms that did not participate.
Solving food insecurity and building more resilient supply chains across sectors for the long haul will require greater global engagement, not less. By removing barriers to services, goods and ideas, we can help markets produce more stable prices, increase food availability and improve health, especially in developing countries. As a global community, we need to move toward a system that offers farmers in Africa, Asia, and South America access to the same tools as farmers have in Iowa, East Anglia or Rotterdam.