The World Bank is encouraging farmers and food producers in poorer countries to use some of the same financial tools that are criticized in the hands of speculators to protect themselves against swings in prices and boost global food production.
The organization and J.P. Morgan are setting aside $200 million each to help finance what World Bank President Robert B. Zoellick described as “plain vanilla hedges,” allowing agriculture-related businesses in developing nations to lock in prices well in advance of a harvest or commodity purchase.
The lack of such financial tools in poorer nations — and even in better-developed economies such as Brazil — means that farmers, agricultural cooperatives, food processors and similar businesses can’t plan well or get bank loans. That limits investment and, ultimately, production, Zoellick said.
Because of the way such financial products work, the money put up by the World Bank and J.P. Morgan will provide as much as $4 billion in financing to farmers and food companies, Zoellick said.
Safeguards have been put in place to prevent the program from being used for speculation and to ensure that participants do not “bet” on their own failure, according to a World Bank official.
The program will initially be focused in Latin America and Southeast Asia, where J.P. Morgan’s presence is strongest, but the bank is in discussions with other lenders to expand the program to Africa and the Middle East. J.P. Morgan and other private banks that get involved in the program would earn standard fees and profits. If a grower or producer defaults, losses would be shared with the World Bank.
Rising and volatile food prices have become a chief concern of development agencies in recent years, forcing tens of millions of additional people into poverty, according to World Bank and U.N. studies.
Increasing production, particularly in developing and poorer countries, is considered an important way to insulate local residents from the types of price swings or supply disruptions that can occur if weather or other problems reduce crop yields in major producers such as the United States or Australia.
Agriculture ministers from the world’s major economies are meeting in Paris this week to discuss other ways to address food price volatility, including limits on speculation, better world access to national crop and food reserve statistics, and an agreement to prohibit the export bans some countries have imposed to ensure adequate domestic supply.