**MONETIZATION FIELD MANUAL**

P.L. 480 Title II Programs

**Office of Food for Peace**

**October 1998**

TABLE OF CONTENTS

[**[Acronyms and
Glossary]{.underline}**](http://www.usaid.gov/our_work/humanitarian_assistance/ffp/monetiz.htm#gloss)

[**[Introduction]{.underline}**](http://www.usaid.gov/our_work/humanitarian_assistance/ffp/monetiz.htm#intro)\
Purpose\
Authority\
Related Documents

[**[Policy
Framework]{.underline}**](http://www.usaid.gov/our_work/humanitarian_assistance/ffp/monetiz.htm#pf)\
Background\
Programming Proceeds to Achieve Food Security Objectives\
Monetization and Food Security Objectives\
Avoiding Disincentive Effects of Monetized Food Aid\
Need for Market Analysis\
Open and Competitive Sales\
Cost Recovery in Context\
Review and Evaluation Criteria\
Monetization in Emergency Situations\
Third-Country Monetization

[**[Implementation
Guidelines]{.underline}**](http://www.usaid.gov/our_work/humanitarian_assistance/ffp/monetiz.htm#impguid)\
Measurement Costs\
US Commodity Procurement\
Price Indications\
Price Quotes\
Invoiced Prices\
Ocean Freight and Inland Transport for Landlocked Countries\
Cost Recovery Benchmark\
Development of a Monetization Request\
Justification for Monetization\
End-Use Justification\
Cost Recovery Justification\
Supply Justification\
Market Development Justification\
Preliminary Proposed Mechanics of the Monetization\
Monetization Sales Budget\
Sales Proceeds Management\
Mission Roles and Responsibilities During the Development of a
Monetization Request\
Ongoing Technical Support\
Bellmon Determination\
Certification of Cooperating Sponsor Financial Management Systems\
Concurrence of Sales Price Analysis\
Third Country Monetization\
Review and Approval of Monetization Requests\
Review and Approval Process\
Review and Evaluation Criteria\
Procedures for Call Forward and Price Quote Requests\
Information Required for Approval of a Monetization Call Forward\
Waiver Requests\
The Sale\
Transfer of Title to Cooperating Sponsor\
Performance Bonds\
Payment of Duties and Taxes\
Markings\
Sales Agreement\
Reporting Requirements\
Sales Price and Revenue Analysis\
Financial Reporting\
Management and Accountability\
Maintenance of Proceeds\
Funding Shortfalls and Surpluses Due to Difference Between Revenues\
Generated and Approved Monetization Budget Requirements\
Surpluses\
Losses\
Maintenance of Currency Pipeline\
Roles and Responsibilities of USAID Missions During Activity
Implementation\
Roles and Responsibilities of Cooperating Sponsors During Activity\
Implementation\
Roles and Responsibilities of BHR/FFP During Activity Implementation\
Umbrella Monetization\
Role of Umbrella Sales Agent\
Joint Monetization Agreement\
Monetization Committee\
Coordination with Other Donor and Donor Subsidiary Programs\
Third-Country Monetization\
Title II Activity Close-out

[**[Appendix A - Market Analysis
Overview]{.underline}**](http://www.usaid.gov/our_work/humanitarian_assistance/ffp/monetiz.htm#appa)

[**[Appendix B - Market Analysis
Procedures]{.underline}**](http://www.usaid.gov/our_work/humanitarian_assistance/ffp/monetiz.htm#appb)

[**[Appendix C - Monetization
Profile]{.underline}**](http://www.usaid.gov/our_work/humanitarian_assistance/ffp/monetiz.htm#appc)

**ACRONYMS AND GLOSSARY**

+------------+---------------------------------------------------------+
| **AER**    | Annual Estimate of Requirements. A table submitted with |
|            | a DAP or PAA which is signed by the cooperating sponsor |
|            | and estimates the quantities of commodities that will   |
|            | be required for the coming year.                        |
+------------+---------------------------------------------------------+
| **BHR      | Bureau for Humanitarian Response/Office of Food for     |
| /FFP/POD** | Peace/ Program Operations Division at the U.S. Agency   |
|            | for International Development.                          |
+------------+---------------------------------------------------------+
| **Bank     | A document issued by a bank by which the bank agrees,   |
| G          | on behalf of the buyer, to ensure that all obligations  |
| uarantee** | set forth under a contract, including payment in full,  |
|            | will be met by the buyer, provided the seller           |
|            | demonstrates full discharge of his obligations through  |
|            | presentation of specified documents within a            |
|            | predetermined time frame.                               |
+------------+---------------------------------------------------------+
| **Bellmon  | An analysis in the proposal submitted to the Mission    |
| Amendment/ | Director by the Cooperating Sponsor, pursuant to        |
| Deter      | section 403(a) of P.L. 480, showing that a commodity is |
| mination** | suitable for monetization (or distribution) in that     |
|            | country, adequate storage is available in the recipient |
|            | country, and import of the commodity will not result in |
|            | a substantial disincentive to or interfere with         |
|            | domestic production or commercial marketing of the      |
|            | commodity in that country. The Mission makes the        |
|            | determination on the adequacy of the analysis, subject  |
|            | to final approval of all aspects of the proposal by     |
|            | FFP.                                                    |
+------------+---------------------------------------------------------+
| **C&F**    | Commodity and Freight. A price quotation that includes  |
|            | the cost of merchandise and freight charges to a        |
|            | specific destination.                                   |
+------------+---------------------------------------------------------+
| **CCC**    | Commodity Credit Corporation. A corporate agency and    |
|            | instrumentality of the United States within the U.S.    |
|            | Department of Agriculture.                              |
+------------+---------------------------------------------------------+
| **CS**     | Cooperating Sponsor. An entity, within or without the   |
|            | United States, governmental or not, such as the foreign |
|            | government, the American Red Cross, the                 |
|            | intergovernmental organization, or the private          |
|            | voluntary organization or cooperative, which enters     |
|            | into an agreement with the U.S. Government for the use  |
|            | of agricultural commodities or funds.                   |
+------------+---------------------------------------------------------+
| **Call     | A request initiated by the field office of a CS for the |
| Forward**  | delivery of a quantity of food commodities to a         |
|            | particular country program for use over a specified     |
|            | period of time.                                         |
+------------+---------------------------------------------------------+
| **Commod   | Food or feed transferred or available for transfer to   |
| ity(ies)** | cooperating sponsors.                                   |
+------------+---------------------------------------------------------+
| *          | The required attributes of the commodity being          |
| *Commodity | requested.                                              |
| Specif     |                                                         |
| ications** |                                                         |
+------------+---------------------------------------------------------+
| **Cost     | The concept that the expenses incurred by the U.S.      |
| Recovery** | Government in procuring and transporting a P.L. 480     |
|            | Title II commodity are offset by the revenue realized   |
|            | when the commodity is monetized.                        |
+------------+---------------------------------------------------------+
| **DAP/PAA  | A document, updated periodically by BHR/FFP, that       |
| Gu         | provides guidance to Cooperating Sponsors on the        |
| idelines** | preparation of Development Activity Proposals and       |
|            | Previously Approved Activity reports, two new           |
|            | designations for \"Operational Plan\" as defined in     |
|            | Regulation 11.                                          |
+------------+---------------------------------------------------------+
| *          | A report that is prepared at the time a commodity is    |
| *Discharge | discharged from the vessel of transport at the          |
| Survey**   | destination port and documents the condition of the     |
|            | cargo.                                                  |
+------------+---------------------------------------------------------+
| **FAS**    | Free Alongside Ship. Includes all costs of              |
|            | transportation and delivery of the goods to the dock.   |
+------------+---------------------------------------------------------+
| **FEWS**   | Famine Early Warning System, funded by USAID. Tracks    |
|            | vulnerability to famine in food insecure countries.     |
+------------+---------------------------------------------------------+
| **FFP/D**  | The Director of the Office of Food for Peace.           |
+------------+---------------------------------------------------------+
| **Food for | The general term applied to the food donation program   |
| Peace**    | authorized by the Agricultural Trade Development and    |
|            | Assistance Act of 1954 (P.L. 480), as amended.          |
+------------+---------------------------------------------------------+
| **GIEWS**  | Global Information and Early Warning System, created    |
|            | under the Food and Agricultural Organization in Rome.   |
|            | Estimates food production and food needs in             |
|            | famine-prone countries.                                 |
+------------+---------------------------------------------------------+
| **Hard     | A currency widely used as a means of exchange in        |
| Currency** | international transactions.                             |
+------------+---------------------------------------------------------+
| **In       | Measurements used in determining the degree of progress |
| dicators** | that has been made toward achieving an objective.       |
+------------+---------------------------------------------------------+
| **Letter   | A commercial instrument issued by the importer\'s bank  |
| of         | to the exporter that establishes a documentary basis    |
| Credit**   | for the exporter getting paid, provided the exporter    |
|            | complies with the exact terms of the credit.            |
| **LIFDC**  |                                                         |
|            | Low Income, Food-Deficit Countries include all          |
|            | food-deficit (ie. net importing basic foodstuffs)       |
|            | countries with per capita GNP not exceeding the level   |
|            | used by the World Bank to determine eligibility for     |
|            | International Development Association (IDA) (soft loan) |
|            | assistance.                                             |
+------------+---------------------------------------------------------+
| *          | For purposes of this document, the representative       |
| *Mission** | office of USAID in a country outside the United States. |
+------------+---------------------------------------------------------+
| **MT**     | Metric Tonnage.                                         |
|            |                                                         |
| **Mone     | The selling of agricultural commodities to obtain       |
| tization** | foreign currency for use in U.S. assistance programs.   |
+------------+---------------------------------------------------------+
| **O        | A market dominated by only a few parties.               |
| ligopoly** |                                                         |
+------------+---------------------------------------------------------+
| **PAA**    | Previously Approved Activity. The report submitted      |
|            | annually by a CS that requests a fiscal year allocation |
|            | of commodities and dollars for an ongoing Title II      |
|            | activity.                                               |
+------------+---------------------------------------------------------+
| **P.L. 480 | An \"Emergency and Private Assistance\" program to      |
| Title II** | provide agricultural commodities to foreign countries   |
|            | on behalf of the people of the United States to:        |
|            | address famine or other urgent or extraordinary relief  |
|            | requirements; combat malnutrition, especially in        |
|            | children and mothers; carry out activities that attempt |
|            | to alleviate the causes of hunger, mortality or         |
|            | morbidity; promote economic and community development;  |
|            | promote sound environmental practices; and carry out    |
|            | feeding programs.                                       |
+------------+---------------------------------------------------------+
| **Pa       | A business with some degree of autonomy that is         |
| rastatal** | otherwise owned and controlled by a government.         |
+------------+---------------------------------------------------------+
| **         | Commodities or funds unused during a financial year or  |
| Pipeline** | reporting period that are transferred to the budget or  |
|            | planning levels for the following financial or          |
| **Results  | reporting year. Also sometimes referred to as           |
| Report     | \"carryover.\" A \"pipeline analysis\" is a report of   |
| (R2)**     | the \"carried forward\" commodities or funds.           |
|            |                                                         |
|            | Cooperating Sponsor reporting document summarizing      |
|            | progress made during the year\'s activities.            |
+------------+---------------------------------------------------------+
| **Third    | A monetization where commodities are sold in one        |
| -Country** | country and the foreign currency generated is used in   |
| **Mone     | that country and/or another country in the same region. |
| tization** |                                                         |
+------------+---------------------------------------------------------+
| **Title    | A \"Food for Development\" program under which          |
| III (P.L.  | agricultural commodities are donated typically on a     |
| 480)**     | government to government basis to least developed       |
|            | countries.                                              |
+------------+---------------------------------------------------------+
| **UMR**    | Usual Marketing Requirements. Analysis required under   |
|            | P.L. 480 to ensure that P.L. 480 sales programs do not  |
| *          | disrupt world commodity prices or normal commercial     |
| *USAID/W** | trade patterns betwen the importing country and other   |
|            | friendly countries.                                     |
|            |                                                         |
|            | United States Agency for International Development in   |
|            | Washington, D.C.                                        |
+------------+---------------------------------------------------------+
| **USDA**   | United States Department of Agriculture                 |
+------------+---------------------------------------------------------+
| **Umbrella | Two or more Cooperating Sponsors operating in a         |
| Mone       | specified country or region monetize their commodities  |
| tization** | jointly for purposes of: containing costs related to    |
|            | marketing and market analysis; avoiding duplication of  |
|            | effort; increasing the volume of commodities to be      |
|            | monetized which enhances competitiveness; and achieving |
|            | greater supply impacts.                                 |
+------------+---------------------------------------------------------+
| **WFP**    | WFP means the World Food Program, which enters into an  |
|            | agreement with the U.S. Government for the use of       |
|            | agricultural commodities and which is directly          |
|            | responsible under the agreement for administration and  |
|            | implementation of programs involving the use of         |
|            | commodities made available to meet the requirements of  |
|            | eligible recipients.                                    |
+------------+---------------------------------------------------------+

**INTRODUCTION**

**I.    PURPOSE**

This Monetization Field Manual outlines policy and operational
procedures for private voluntary organizations (PVOs) and cooperatives,
acting as Title II Cooperating Sponsors, in the design, implementation,
management and evaluation of P.L. 480 Title II partial and full
monetization transactions in emergency and non-emergency contexts. The
roles and responsibilities of Title II Cooperating Sponsors, USAID
Missions, and USAID/W, including FFP/D, are also clarified.

**II.    AUTHORITY**

This manual is supplemental to the Agricultural Trade Development and
Assistance Act of 1954 (P.L. 480), as amended, and USAID Regulation 11
(22 CFR Part 211) dated May 7, 1992. This Monetization Field Manual
supersedes the manual dated August, 1988. In the event of any
inconsistency, Regulation 11 takes precedence over the manual.

**III.    RELATED DOCUMENTS**

The following references, which further articulate USAID monetization
policy and operational procedures, should be used in conjunction with
these guidelines:

-       [[USAID Regulation 11 dated May 7,
    1992;]{.underline}](http://www.info.usaid.gov/hum_response/ffp/reg11.htm)

-       Automated Directive Systems (ADS) with supplemental reference
    Handbook 9;

-       [[USAID \"Background Paper and Guide to Addressing Bellmon
    Amendment Concerns on Potential Food Aid Disincentives and
    Storage,\" dated July
    1985;]{.underline}](http://www.info.usaid.gov/hum_response/ffp/bellmon.htm)

-       [[State Cable 086836 - Bellmon Certification Requirements for
    P.L. 480 Title II Activities, dated May 14,
    1998;]{.underline}](http://www.info.usaid.gov/hum_response/ffp/bellcab.htm)

-       [[OMB Circular
    A-122;]{.underline}](http://www.dri.edu/Admin/research/122INDEX.html)

-       [[Annual USAID DAP/PAA guidance for the preparation of Title II
    development proposals and reporting
    documentation;]{.underline}](http://www.info.usaid.gov/hum_response/ffp/99glfi2.htm)

-       [[Title II Monetization Evaluation Report dated, March 29,
    1996;]{.underline}](http://www.info.usaid.gov/hum_response/ffp/finalrp2.htm)

-       [[Title II Close-out Plan Guidance, dated September,
    1996;]{.underline}](http://www.info.usaid.gov/hum_response/ffp/closout.htm)

-       PVO Guidelines for Title II Emergency Food Proposals and
    Reporting (Draft), dated January 26, 1998.

**TITLE II MONETIZATION**

**POLICY FRAMEWORK**

**I. BACKGROUND**

Since the beginning of Title II monetization in 1986, the use of
monetization proceeds has grown dramatically to become a critical
resource for Cooperating Sponsors (CSs). The 1996 reauthorization of
P.L. 480 increases to 15 percent the minimum percentage of the aggregate
value of non-emergency Title II commodities to be made available
annually for monetization by PVOs and cooperatives. In addition, the use
of third-country monetizations, where commodities are sold in one
country and the foreign currency generated is used in another country in
the same region, is now permitted in both emergency and development
programs.

A 1995 U.S. Department of Agriculture (USDA) study entitled *Food Aid
Needs and Availabilities - Projections for 2005* states that \"food aid
needs will nearly double over the next decade, even with reasonably
optimistic assumptions about recipient countries\' ability to produce
their own food or have the financial capacity to import food
commercially.\" Coupled with growing needs for food aid, especially in
sub-Saharan Africa and South Asia, is the reduction in real terms of
USAID\'s development budget\--both food and non-food resources. Scarcity
of U.S. Government surplus food stocks, requiring that virtually all
food aid be purchased in commercial U.S. markets, also contributes to
the current context of rising demand and declining supply. Other
challenges involve the increased pressure on USAID and CSs to
demonstrate concrete progress toward food security goals and the
continuing debate over whether the distribution or the monetization of
commodities is the most efficient and effective use of the food aid
resource.

In February of 1995, USAID issued its *Food Aid and Food Security
Policy* paper, which promotes the integration of food aid with other
USAID assistance resources and the use of monetization proceeds to
complement activities aimed at enhancing agricultural productivity and
improving household nutrition. The policy also emphasizes the need to
strengthen performance monitoring and evaluation systems to demonstrate
more quantitatively and qualitatively the food security impact of food
aid programs. The purpose of this manual is to clearly define a new set
of policy guidelines and operational procedures to ensure that Title II
monetization directly contributes to the food security objectives
defined in the Agency\'s *Food Aid and Food Security Policy* paper and
to improve the management of monetization activities and resources.

**II.    PROGRAMMING PROCEEDS TO ACHIEVE FOOD SECURITY OBJECTIVES**

USAID\'s *Food Aid and Food Security Policy* paper is the foundation of
any review of Title II activities, including those supported by Title II
foreign currency. Priority will be given to proposals in which the use
of the foreign currency generated has the greatest potential for
achieving food security results for vulnerable people. Specifically, it
is USAID\'s policy that foreign currency generated from monetization
must be programmed to support the objectives of increased agricultural
productivity and improved household nutrition.

If a USAID Mission wishes to exercise program direction or management
control, or both, over a given activity, then the appropriate
implementation mechanism is a contract and not a grant and donation.
(See USAID\'s Automated Directives System Section 304.5.) P.L. 480 is a
grant and donation program, and if the Mission wishes to directly
program monetized food aid or to use monetized food aid in support of
host government-sponsored programs, then the appropriate implementation
mechanism is Title III, not monetized Title II. As with all other
grants, both food and non-food, provided by USAID, Title II grants and
donations are provided to support the program activity identified,
designed and managed by the grantee or a Title II CS.

**III.    MONETIZATION AND FOOD SECURITY OBJECTIVES**

Title II food aid monetization is typically built around two objectives.
First, Title II food aid monetization is programmed to enhance food
security. Second, Title II food aid is used by a CS to generate foreign
currency to support development activities.

Monetization offers the potential to improve the marketing of food to
permit greater access to those who are food insecure. Indeed, there is
an important direct link between food security and how food aid is
monetized. The process of monetizing can be used to promote low-cost,
competitive food markets by encouraging investment in transportation,
infrastructure and human capital (traders, entrepreneurs). In essence,
food aid monetization can enhance long-term food security by encouraging
the development of competitive food marketing systems that have built-in
incentives to provide the poor with affordable staple foods.

Thus, Title II monetization must address three objectives:

1\.    to generate the maximum feasible amount of foreign currency funds
for Title II food security activities;

2\.    to enhance household access to food, at least in the short run;
and

3\.    to encourage, where appropriate, the development of competitive
food marketing systems.

These objectives rest upon the underlying precept that, above all, food
aid monetization efforts must strive to \"do no harm\" to producers\'
incentives, fragile local food markets, and low-income consumers. They
also stem from the belief that food aid is a unique resource that does
have enormous potential to contribute to long-term sustainable
development. Above and beyond the generation of funds for food security
activities, monetization is one more tool among the set of programming
options available to enhance the food security of vulnerable households
through the use of U.S. food commodities.

**IV.    AVOIDING DISINCENTIVE EFFECTS OF MONETIZED FOOD AID**

Food aid practitioners have long recognized the potential for food aid,
whether through direct distribution or monetization, to create
disincentives for domestic food production. This recognition, however,
does not always translate into food aid programming that \"does
noharm.\" Legislation and regulations require that, before P.L. 480 food
aid can be provided for direct distribution or monetization, a CS must
prepare a Bellmon Amendment determination in accordance with Section
403(a) of P.L. 480, to establish that: a) adequate storage facilities
are available in the recipient country, and b) \"the distribution of the
commodities in the recipient country will not result in a substantial
disincentive to or interference with domestic production or marketing in
that country.\" Too often Bellmon analyses and determinations reflect
serious shortcomings in demonstrating a clear understanding of the
market in which a monetization is to take place. They also frequently do
not cover the requirement of Section 403(b) of P.L 480, that the
Administrator \"shall ensure that the importation of United States
agricultural commodities and the use of foreign currency for development
purposes will not have a disruptive impact on the farmers or the local
economy of the recipient country.\" Current policy requires that if a
Mission is present in the country where commodities are being monetized,
the Mission must make a determination from the CS\'s Bellmon analysis
that the statutory requirements are met.

When food is appropriately targeted and distributed to those without
adequate cash income to purchase in the market, disincentive effects are
often, although not always, minimized. For example, feeding programs
often target poor consumers that have calorie deficits due to an
inability to secure food either through production or through the
market. In such cases, direct distribution of food aid can be a net
addition to total food availability with minimal effect on agricultural
production incentives and domestic food prices.

Monetized food aid, however, does not have these advantages because in
most cases it is eventually purchased by consumers through normal
marketing channels. As a result, it can have serious negative and
positive impacts on food prices, marketing, and production incentives.
In addition, since any food system is composed of numerous participants
(farmers, traders, processors, retailers and consumers), the impact upon
different participants can vary greatly. More affordable retail food
prices can benefit urban consumers but translate to lower produce prices
for farmers. Similarly, sales of food aid in the \"hungry season\" right
before harvest may stabilize prices and benefit consumers. However, such
sales may also destroy incentives for food traders to engage in
intra-seasonal storage and to create local capacity to deal with
seasonal food insecurity. The timing of a monetization, not just the
volume of commodity, must be considered in the overall context of food
flows.

The effects of monetizing must be carefully scrutinized. The key issue
is not so much whether monetization will have an effect on the market
but rather the magnitude of the effect. Is it tolerable or desirable? Is
it \"substantial?\" More attention must be devoted by the CS and USAID
Mission to understanding and minimizing potential disincentives while
maximizing the potentially positive effects of monetized food aid. In
response to increased attention to preparing thorough Bellmon analyses,
the key elements that must be considered during the preparation of a
Bellmon determination are outlined in Appendix A.

**V.    NEED FOR MARKET ANALYSIS**

Because the rationale for monetizing, or the decision not to monetize,
flows primarily from market factors, the analysis of food market
structure, conduct, and performance must be a central component of all
food aid monetization efforts. For this reason, the Title II CS andUSAID
Mission must increasingly demonstrate throughout proposal submissions,
activity implementation, and results reporting a clear understanding of
the markets in which they operate. Approval of proposals utilizing
funding from monetizations will be contingent upon demonstration of an
understanding of the likely effects of the monetization on the local
market.

There are several well-developed frameworks that can be used to analyze
food markets. One of the most common, developed by economists and
refined by business school practitioners, involves recognizing the links
between the structure of a market (the number of buyers and sellers, the
nature of the commodity, etc.), the conduct of participants (how prices
are set, what rules are followed, etc.) and the eventual performance of
the market. Performance is simply judged by the degree to which the
market meets a diverse set of goals; some of the goals of a food
marketing system might be technical efficiency or affordable retail food
prices.

Although market analysis is often thought of as a highly quantitative
exercise, much can be gained from a descriptive analysis of the
structure, conduct and performance of a food market. Such analysis can
be well suited to low-cost rapid appraisal techniques. At its most
basic, food market analysis boils down to viewing the food system as a
step-by-step series of inter-linked transactions and transformations. An
understanding of \"how the system works\" can be gained by an initial
inventory of all participants, followed by open-ended conversations and
interviews with participants. In response to this increased emphasis on
understanding markets, suggested procedures for conducting a market
analysis are provided in Appendix B.

USAID recognizes that this increased attention to market analysis
requires that USAID increase its own technical capacity or refocus
existing technical capacity so that a determination can be made as to
whether a CS submitting a proposal has demonstrated an understanding of
the local market and how its monetization will affect that market.
Moreover, USAID recognizes that, although it is the CS\'s responsibility
to conduct a Bellmon analysis (unless one already exists for the current
fiscal year and the relevant commodity and Metric Tonnage (MT) level),
the CS should not carry the burden of expanded market analysis alone.
USAID, primarily through its field Missions but also through its
technical offices, is committed to providing technical assistance to the
CS to enhance its capacity to analyze markets and, ultimately, to design
and execute market-friendly monetizations. This is an integral part of
the statutory requirement that the appropriate United States field
mission concur in the CS proposal before it is submitted to USAID/W. At
the same time, USAID strongly encourages the CS executing a monetization
to continue its efforts in developing marketing expertise. Similarly, it
is the Mission Director or principal officer in-country who must make
the Bellmon Determination, as under Delegation of Authority 902, no
Title II activity may take place in a country without clearance of the
principal USAID officer, who then will be responsible for monitoring all
food aid activities in the country. The CS is encouraged to tap existing
Section 202(e), Institutional Support Assistance (ISA), foreign currency
or other resources for the purpose of increasing technical capacity to
carry out successful monetizations that, at a minimum, \"do no harm.\"
Potential collaboration with national and international institutions
with the technical expertise to conduct market analyses should also be
considered.

**VI.    OPEN AND COMPETITIVE SALES**

A decade ago, many developing countries had tightly controlled marketing
systems, and negotiated pricing arrangements may have been the only
option for the CS choosing to monetize. Today, however, most developing
countries have made substantial food policy reforms and now permit a
wide range of private sector marketing activities. Nonetheless, too
often the CS monetizes food aid by selling directly to monopolistic
parastatals and oligopolistic traders and processing firms even when
small-scale private buyers exist. The reason for this is relatively easy
to understand: negotiated sales to one buyer or several large buyers
eliminates the complexity and higher costs associated with conducting
auctions or making sales in small lots to numerous buyers.

By neglecting small-scale buyers and overlooking the potential for
alternative marketing channels to meet consumer food needs, sales to
parastatals and oligopolies adversely affect the very people food aid is
meant to help. The net effect is often to exclude statutorily favored
small-scale buyers, traders, processors and retailers that usually have
much lower operating costs than large-scale enterprises. Evidence shows
that monopolistic parastatals and oligopolistic milling firms often have
inflated pricing structures that ultimately raise the cost of food to
consumers. In contrast, due to low entry costs and more appropriate,
lower-cost technology, small-scale traders and processors often operate
in highly competitive niche markets and have the ability to supply
consumers with staple foods at affordable prices.

As the longer-term positive and negative effects of food aid sales are
more fully considered, USAID and its partners must focus on how food is
monetized and to whom the food is sold. Where appropriate, USAID must
support open and competitive sales as opposed to non-competitive sales.
Auctions and tender sales have several advantages over negotiated sales
and administered prices:

    Auctions/tender sales eliminate the inherent difficulties in
determining a \"market price\" for monetized food aid;

    Auctions/tender sales offer a degree of transparency that, except in
the case of extremely immature markets, can facilitate access to food
supplies by small-scale buyers

    Auctions/tender sales offer scope for realizing higher sales prices,
thereby generating greater amounts of foreign currency proceeds for CS
activities.

It is acknowledged that markets vary and thus auctions and tender sales
may not always be feasible. However, efforts must always be made to
maximize the openness of the sale, and the CS is required to submit a
justification to BHR/FFP as part of its DAP/PAA submissions for
monetizations necessitating non-competitive sales.

USAID has considerable experience in working with host countries to
monetize Title III food aid through auctions, with lessons learned from
over a half-dozen countries. In cases where this expertise might prove
valuable, the Title II CS is encouraged to seek guidance from USAID.

**VII.    COST RECOVERY IN CONTEXT**

Cost recovery has been central to the debate surrounding monetization.
Revenues generated from Title II commodity sales that are less than the
costs incurred in purchasing, shipping, and selling the commodity have
drawn the attention of the General Accounting Office, Congress, and
others. USAID policy requires that CSs strive to achieve at least full
cost recovery (using foreign flag carrier rates) with each and every
monetization transaction they conduct. USAID recognizes that full cost
recovery is not always achievable and has established a benchmark sales
price, below which commodities may not be sold without a waiver by
FFP/D. This benchmark serves as an important accountability and
reporting tool, but is only one among several criteria for judging the
merits of a proposed monetization activity.

Sales prices for monetized commodities determine the amount of resources
that will be available for activities aimed at achieving food security
impacts. Accordingly, the difference between the costs associated with
the purchase and transport of the Title II commodity and the amount of
proceeds generated represents the amount of resources not available for
programming. In this respect, cost recovery benchmarks act as a measure
of accountability, ensuring that monetization resources are used
efficiently in terms of U.S. dollars made available by Congress for food
security versus U.S. dollars actually spent on food security
interventions.

Cost recovery benchmarks are also used to prevent sales that are carried
out with little regard for obtaining the \"fair market price.\" To the
extent that sales prices are below \"fair market\" prices for similar
transactions in the market, a windfall gain is created. In specific
monetizations this may be desirable. In most cases, however, sales below
local market prices result in a windfall gain for a particular trader at
the expense of programming funds for activities targeted to the food
insecure. In addition to the short-term consequences, windfalls for
particular traders can lead to an adverse change in the long-term
competitive balance in the market and excessive profit for a few
individuals. For this reason, the degree to which a sales price is
different from (less than) the \"fair market\" value in the markets
where the product is sold must be considered.

Various benchmarks, such as the fair market, C&F, and
Free-Alongside-Ship (FAS) values of the commodity to be monetized, have
been used for determining sales prices. For example, the fair market
value may be very different from either the C&F price or the FAS price.
Moreover, the fair market price can only be determined by the
interaction of supply and demand forces in open and competitive markets,
while Title II commodities are sometimes sold to monopolistic
parastatals and oligopolistic traders and processing firms. Clearly,
simple observation of \"prevailing market prices\" may not be realistic
since the observation may be based upon a very thin market. Only if
demand is perfectly elastic will an additionalsupply, i.e., the quantity
of food aid to be monetized, not translate into a decline in market
prices, except in cases where the supply of commodity will be
substituting for commercial imports. In these cases, however, the CS
should be concerned about creating significant disruptions in vulnerable
markets as well as safeguarding usual U.S. marketings under Section
403(h) of P.L. 480. CS are encouraged to work with other donors,
traders, partners, U.S. Trade Representatives and embassy Agricultural
Trade Attaches where appropriate.

The difficulties outlined above reaffirm that there are often trade-offs
involved in terms of recovering costs and achieving food security
impacts through the process of monetization. Cost recovery is therefore
one of several factors to consider when determining whether or not to
monetize. Sales below the cost recovery benchmark must be justified
through the identification of measurable food security impacts that are
unique to the supply and/or sale of food as opposed to cash. The cost
recovery benchmark, which is discussed in detail in the Implementation
Guidelines section of this document, will be:

   80% of the C&F value, using the FAS quotation provided by FFP at the
time of the call forward, the foreign flag rate, plus port clearing and
handling costs and duties, estimated transport costs to move the
commodity to the point of sale, and expenses associated with marketing
the commodity, or 100% of FAS, whichever is greater.

**VIII.    REVIEW AND EVALUATION CRITERIA**

Proposal approval containing a monetization request will be based
primarily upon the anticipated measured impacts on food security. The
following criteria will provide the basis for review and evaluation of
monetization requests in addition to the criteria in the DAP/PAA and
Emergency Guidelines:

1\.    Assurance that the monetization proceeds will be used to support
activities that are expected to achieve demonstrable impacts on food
security, as defined by USAID\'s *Food Aid and Food Security Policy*
paper and measured using approved indicators;

2\.    Assurance that the monetization meets all of the requirements of
a Bellmon Determination;

3 .    Certification that the amount of currency generated in the
monetization transaction(s) will meet or exceed the cost recovery
benchmark.

**IX.    MONETIZATION IN EMERGENCY SITUATIONS**

Monetization of food aid in emergency situations is normally supportive
of (a) enhancing access to food by vulnerable groups, and (b) generating
funds supportive of emergency food activities. Monetization of emergency
food aid must be guided by the criteria set forth in Section VIII of
this manual. If the criteria cannot be satisfied due to the nature of
theemergency, then the FFP/D must make the determination that the
benefits of the specific monetization merit a waiver of the Section VIII
criteria.

In emergency situations, the monetization of food aid should demonstrate
that monetization offers the best option for satisfying the nutritional
needs of targeted vulnerable groups. Situations where monetization may
be appropriate include small-scale sales in drought-affected villages
where surrounding farm families cannot grow enough to support the
non-farm community. Other situations may occur wherein small-scale
monetization can facilitate the re-establishment of a distribution
channel closed by war or natural disaster. Finally, the sale of food aid
to cover costs of moving commodities to targeted vulnerable groups may
have a more effective and developmental effect than the direct
expenditure of foreign currency.

**X.    THIRD-COUNTRY MONETIZATION**

BHR/FFP is still in an exploratory period regarding third country
monetization. These types of transactions will be reviewed in the next
year to see where they have succeeded and

what lessons can be learned and best practices developed.

Third-country monetization requests have become more frequent as
monetization in smaller markets are not always feasible. CSs are
encouraged however to make every effort to monetize within the country
in which they are working. Monetizations in third countries require
additional input from many sectors and are often more difficult to piece
together. Most of the third country monetizations to date have been
successful, but the amount of work necessary to succeed can be more
intensive than monetization in an activity country.

CS\'s should note that third country monetizations are subject to the
same review and evaluation criteria as identified in Section VIII above.
Prior to developing a proposal involving third-country monetization, the
CS should confirm with FFP those LIFDC countries within the region that
would be eligible recipients of the monetized commodities. CSs should
consult the Monetization Field Manual\'s Implementation Guidelines,
Section XI, Third- Country Monetization for additional information.

**TITLE II MONETIZATION**

**IMPLEMENTATION GUIDELINES**

**I. MEASUREMENTS COSTS**

USAID requires that CSs strive to achieve full cost recovery with each
and every monetization transaction they conduct. The following costs
must be included when determining the cost recovery of a Title II
monetization: the cost of purchasing the commodities in the U.S.;
commercial ocean freight for foreign flag vessels; inland transport for
landlocked countries; port clearing and duty; inland transportation to
the point of sale; and marketing. Guidelines for measuring these costs
are provided below.

**A.    U.S. Commodity Procurement**

   Two features of U.S. commodity markets have implications on the
procurement costs of Title II commodities. First, in general, the
specific commodities procured for Title II food assistance do not have
one defined price in port position for a specific delivery period unless
a transaction is completed. However, public information is available
that provides an indication of where these markets would trade if orders
were placed. Second, markets for specific commodities vary over time and
will depend on the month that the commodity is to be delivered. In this
context, there are three distinct types of price information that CSs
are required to obtain at different stages of a monetization process.

   1.    Price Indications

       Price indications are approximate prices of commodities in U.S.
port position. They may be provided without reference to commodity
specification and grade and must be used as the name implies\--as
indications. These numbers are useful in determining how local prices
compare in a general sense with U.S. prices and in tracking changes in
these relative prices.

       Price indications must be obtained periodically during the
preparation of a market analysis and monetization budget proposal.
Indications are therefore important during the early stages of the
monetization design to determine if a monetization is possible. They
must not be used to determine whether or not to proceed with a
monetization call forward request.

       The Internet is a recommended resource for obtaining price
indications. Some useful web sites include:

       
[[ftp://ftp.fsa.usda.gov/public/export/default.htm]{.underline}](ftp://ftp.fsa.usda.gov/public/export/default.htm)

       
[[ftp://ftp.fsa.usda.gov/public/grain/default.htm]{.underline}](ftp://ftp.fsa.usda.gov/public/grain/default.htm)

       
[[http://www.fas.usda.gov]{.underline}](http://www.fas.usda.gov/) (and
links to related sites)

       Hard Red Winter Wheat (HRW) prices from Kansas City Board of
Trade:

           
[[http://www.kcbt.com/dgpsum.htm]{.underline}](http://www.kcbt.com/dgpsum.htm)

          
[[http://www.ams.usda.gov/mncs/mn_reports/sj_gr710.txt]{.underline}](http://www.ams.usda.gov/mncs/mn_reports/sj_gr710.txt)

       Hard Red Spring Wheat (HRS) and Soft White Wheat (SWW) from the
Minneapolis Grain Exchange:

           
[[http://quotewatch.com/exchanges/mgex.html]{.underline}](http://quotewatch.com/exchanges/mgex.html)

           
[[http://www.mgex.com/wheat/shtfut.htm]{.underline}](http://www.mgex.com/wheat/shtfut.htm)

           
[[http://www.ams.usda.gov/mncs/mn_reports/ws_gr710.txt]{.underline}](http://www.ams.usda.gov/mncs/mn_reports/ws_gr710.txt)

       Soft Red Winter Wheat (SRW) from the Chicago Board of Trade:

           
[[http://quotewatch.com/exchanges/cbot.html]{.underline}](http://quotewatch.com/exchanges/cbot.html)

           
[[http://www.ams.usda.gov/mncs/mn_reports/ws_gr710.txt]{.underline}](http://www.ams.usda.gov/mncs/mn_reports/ws_gr710.txt)

       Soybean, Soybean oil, Soybean Meal from the Chicago Board of
Trade:

           
[[http://quotewatch.com/exchanges/cbot.html]{.underline}](http://quotewatch.com/exchanges/cbot.html)

           
[[http://www.ams.usda.gov/mncs/mn_reports/ws_gr711.txt]{.underline}](http://www.ams.usda.gov/mncs/mn_reports/ws_gr711.txt)

       Corn/Maize (Yellow) from the Chicago Board of Trade

           
[[http://quotewatch.com/exchanges/cbot.html]{.underline}](http://quotewatch.com/exchanges/cbot.html)

           
[[http://www.ams.usda.gov/mncs/mn_reports/ws_gr711.txt]{.underline}](http://www.ams.usda.gov/mncs/mn_reports/ws_gr711.txt)

       Sunflower Oil from USDA Market News

           
[[gopher://shelley.ca.uky.edu//00.agwx/usr/markets/usda/MSGR851]{.underline}](gopher://shelley.ca.uky.edu/00.agwx/usr/markets/usda/MSGR851)

       Corn, Soybeans, SRW, HRW, DNS, SWW:

            USDA Market News (for FAS export U.S. port prices):

            
[[gopher://shelley.ca.uky.edu:70/00/.agwx/usr/markets/usda/jogr850]{.underline}](gopher://shelley.ca.uky.edu:70/00/.agwx/usr/markets/usda/jogr850)

           USDA Market News (Missouri Department of Agriculture News)
for spot and              short-term futures prices:

            
[[gopher://shelley.ca.uky.edu:70/00/.agwx/usr/markets/usda/sjgr850]{.underline}](gopher://shelley.ca.uky.edu:70/00/.agwx/usr/markets/usda/sjgr850)

On U.S. commodity exhanges, grains are traded in bushels (Bu.),
vegetable oil is traded in pounds (L.b.) and some commodities are traded
in hundredweight (Cwt.) The measurements below are from the USDA,
Economics Statistics, and Cooperative Service Statistical Bulletin
titled \"Conversion Factors and Weights and Measures,\" and can be used
to compute the MT value for the information provided by the above
Internet sites:

       Bushel (Bu.) Weights:    1 Bushel (Wheat/Soybeans) = 60 Lbs.

                       1 Bushel (Corn/Sorghum) = 56 Lbs.

       Bushel to Metric Tons:    36.743 Bushels (Wheat/Soybeans) = 1
Metric Ton (MT)

                       39.368 Bushels (Corn/Sorghum) = 1 Metric Ton (MT)

       Hundredweight (Cwt.)    1 Cwt. = 100 Lbs.

                       1 MT = 22.0462 Cwt.

   2.    Price Quotes

       Price quotes are approximate values for a specific commodity for
delivery in a specific time frame. As such, they require more time to be
developed and must be developed for each individual monetization. A
price quote must be obtained at the time of the call forward from
BHR/FFP/POD.

       BHR/FFP/POD will provide a written price quote within three
working days after receipt from a CS of a request for such a price
quote. The CS\'s request must be in writing and include the commodity
specifications and delivery time frame. This FAS price quote must
replace the price indications obtained during the market analysis and
proposal development stages and must be used in determining cost
recovery.

   3.    Invoiced Prices

       Invoiced prices are the actual prices identified on shipping
documents of commodities at the time that the purchase was made in the
U.S. Except in unusual circumstances, this price will be different from
price quotes received at the time of the call forward. CS must still use
the FAS price quotation in determining cost recovery.

**B.    Ocean Freight and Inland Transport for Landlocked Countries**

   The Merchant Marine Act of 1936, as amended, requires that 75 percent
of Title II food assistance be shipped on U.S. flag vessels. These U.S.
shipping costs usually exceed the costs of non-U.S.-flag shipments. In
recognition that this requirement is a deviation from standard
commercial practices and would make cost recovery more difficult to
achieve, estimated shipment costs of ocean freight on a foreign flag
carrier, as opposed to the higher U.S. flag rates, will be used for both
budgeting and reporting purposes.

   Estimated non-U.S.-flag rates must be obtained from the CS\'s freight
forwarding agent during proposal preparation and at the time of the call
forward. At the time of the call forward, the CS must provide
BHR/FFP/POD with the certification of sales price along with the freight
indication in support of the call forward.

**C.    Cost Recovery Benchmark**

   Realizing that full cost recovery may not be attainable in all
situations, FFP has, for the time being, established a more
accommodative cost recovery benchmark. The benchmark is set at 80
percent of the C&F value, using the FAS quotation provided by FFP at the
time of the call forward, the foreign flag rate, plus port clearing and
handling costs and duties, estimated transport costs to move the
commodity to the point of sale, and expenses associated with marketing
the commodity, or 100 percent of FAS, whichever is greater.

   

**II.    DEVELOPMENT OF A MONETIZATION REQUEST**

Full and partial monetization requests are considered integral parts of
Title II emergency and non-emergency activities. Accordingly, when
monetization is requested, the requests must always be included as part
of the submission. In addition to this field manual, the CS must refer
to Regulation 11 as well as the guidelines for the preparation of Title
II development or emergency proposals, which are published annually by
BHR/FFP, for instructions regardingthe submission of monetization
requests.

Monetization requires an ongoing understanding of the local market. The
following are the key elements, in addition to the market analysis
section of the Bellmon Determination, which must be included in the
monetization component of a Title II proposal.

**A.**     **Justification for Monetization**

   Justify the appropriateness of monetization by examining, as
appropriate, the anticipated impacts of the end-use of the funds, the
amount of funds to be generated, the supply of food or sale itself, and
the potential for development of local markets.

   1.    End-Use Justification

       Explain in detail the specific uses of the foreign currency
resources by Title II intervention. State which interventions supported
by foreign currency proceeds involve direct distribution of Title II
commodities and which do not. Provide a percentage breakdown of the
amount of foreign currency proceeds that support each activity
intervention.

       Note: Title II monetization must be included as a funding source
in the comprehensive budget. The specific foreign currency uses
described above must be clearly linked to specific monetization budget
line items. The total amount of foreign currency budgeted must be used
to determine the amount of tonnage needed. In other words, there should
be a direct correlation between the budget requirements and the amount
specified for monetization on the AER.

   2.    Cost Recovery Justification

       Justify the monetization on the basis of the amount of funding to
be made available for programming as compared to the costs incurred in
carrying out the monetization. In the case where the monetization does
not have objectives beyond raising cash to support Title II activities,
this must be stated explicitly. If the revenues generated by the sale
are expected to be less than the cost recovery benchmark, the difference
must be justified on the basis of food security impacts. See Section
V.B.

   3.    Supply Justification

       If the monetization is justified on the basis of the proposed
food security impact ofthe sale, identify the potential supply effects
from the monetization, including the impact of the additional supply of
food in the market, as well as the effects anticipated from the sales
process. Identify all features of the monetization that have value but
are not captured in the cost recovery equation.

   4.    Market Development Justification

       Monetization can be an effective tool for contributing to the
development of local markets by broadening the participation in
commodity sales to include small- to medium-sized traders and/or those
traders who may not have traditionally had access to commercial
opportunities. Strategies for strengthening local market capacity
include reducing barriers to entry for smaller traders, developing
appropriate payment plans, and facilitating the movement of commodities
into rural areas.

       Justification on the basis of market development must include a
profile of the commercial environment and strategies to be used to
increase participation, as well as targets for measuring success.

       Using a chart or table form, identify the specific objectives of
the monetization sale and the benchmarks and indicators that will be
used to measure progress against these objectives.

**B.    Preliminary Proposed Mechanics of the Monetization**

    1.    Describe the rationale for the commodity or commodities chosen
for monetization. What is the end-use of the commodity chosen? What are
possible alternatives to the commodity chosen?

    2.    Identify and justify the proposed time frame for the sale.
Provide seasonal prices and harvest schedules where relevant and
available and identify other key price determining factors.

   3.    Identify and justify the proposed location of the monetization.
In doing so, identify regional prices for the commodity and describe the
market structure.

   4.    Describe and justify the sales methodology, particularly in
relation to the proposed objectives of the monetization and to the
existing market structure. Describe the proposed terms of payment.
Identify roles, where applicable, of agents and other participants in
the sale.

    5.    Verify that the commodities to be monetized are in demand and
not in competition with similar or substitute commodities. State the
current sources and approximate amounts of supply of the proposed
monetization commodity and its close substitutes, taking into
consideration other donor imports and subsidy programs, such as USDA\'s
Export Enhancement Program (EEP). Discuss the volume of commodities
proposed for monetization in relation to the size of the market inwhich
the monetization will take place.

   6.    Describe the storage facilities both at port and inland that
will be available in the recipient country when the commodities arrive.

**C.    Monetization Sales Budget**

   For proposals that have a monetization component, the CS shall
provide a separate monetization sales budget for the purpose of
analyzing estimated sales costs versus revenues. Refer to the section of
this manual on measuring costs for relevant definitions. For each
commodity to be monetized, the budget must include:

   1.    U.S. Commodity Price Indication (\$/MT x amount requested);

   2.    Estimated Ocean Freight and Inland Transport for Landlocked
Countries (\$/MT x amount requested);

   3.    Estimated Internal Transport to the Point of Sale, Duty,
Handling, Port Clearing, and Marketing Costs. Break out these costs by
line item;

   4.    Base Costs (sum of 1-3, above);

   5.    Estimated Sales Revenue plus Projected Interest to be Earned
(\$/MT x amount requested) + interest;

       Use the estimated sales price (\$/MT) of the commodity or a
similar commodity in the sales position considered for the monetization.
The total amount should correspond to the amount of Title II foreign
currency budgeted for in the comprehensive budget; and

   6.    Preliminary Cost Recovery Estimate - Express item 5 as a
percentage of item 4.

**D.    Sales Proceeds Management**

   1 .     Identify the means for mitigating the effects that inflation
and currency devaluation might have on the monetization proceeds. Two
possible methods include depositing the funds in an interest-bearing
account and converting the proceeds to a hard currency.

   2.    Identify the financial institution in which the sales proceeds
are to be deposited and verify that the proceeds will be deposited in a
separate interest-bearing account.

   3    Describe the monitoring or accounting system that exists to
track the receipt, disbursement and expenditure of the foreign currency
proceeds. Describe the monitoring role of the Mission in terms of
reporting requirements, frequency of reporting, etc.

   4.    In the case of umbrella monetizations, describe the legal
relationship between the lead agent and each participating CS. Attach as
an appendix the inter-agency monetization agreement. The agreement
should describe the organizational and management framework, including
the allocation and disbursement processes and the fee payment schedule,
if appropriate.

**III.    MISSION ROLES AND RESPONSIBILITIES DURING THE DEVELOPMENT OF A
MONETIZATION REQUEST**

**A.    Ongoing Technical Support**

   To the extent possible, Mission technical staff, e.g., agricultural
economists, must provide CSs with technical assistance during all stages
of the market analysis, fine-tuning, and sales preparations.

**B.    Bellmon Determination**

   For the commodities to be monetized, the Mission must provide
explicit determination regarding the CS\'s Bellmon analysis. The USAID
Mission must describe its role in analyzing the market in which the
monetization will occur. If the CS\'s Bellmon analysis is rejected, the
Mission should explain why. It is not necessary for the CS to provide a
disincentive analysis if the Mission or USDA has completed such an
analysis for another program that is relevant to the program proposed by
the CS.

**C.    Certification of Cooperating Sponsor Financial and Management
Systems**

   Missions must certify the adequacy of the CS\'s financial and
management systems for carrying out the monetization activity. If there
are shortcomings in the CS\'s financial and management systems,
determine whether corrective action can be taken or whether the
deficiencies are significant enough to warrant rejection of the
activity.

**D.    Concurrence of Sales Price Analysis**

   Missions must provide explicit concurrence (or rejection) of the
sales price analysis undertaken by the CS. If the analysis is rejected,
the Mission must provide reasons for the rejection.

**E.    Third Country Monetizations**

   Benefiting Missions are responsible for assisting CSs in their third
country monetization requests. This may include, but not be limited to:
1). Providing technical assistance in carrying out a Bellmon review in
the third country; 2). Assisting the CS with third country clearance
(ie. Bellmon Determination andproceed expatriation); 3). Assisting CSs
in UMR process; 4). FFP encourages CSs and benefiting Missions to
communicate with the monetization country Mission or Embassy to alert
them of pending third country monetization requests. In instances where
the benefiting mission is unable to perform these functions they may
requestFFP/W to assist. FFP assistance will be based on management
capacity and funding availability to provide the necessary technical
assistance.

**IV.    REVIEW AND APPROVAL OF MONETIZATION REQUESTS**

**A.    Review and Approval Process**

   In general, review and approval of monetization requests will be
subject to the guidance provided by BHR/FFP for the review and approval
of all Title II proposal submissions.

   In the case of multi-year approvals for development activities, as
long as the objectives unique to the monetization, the commodity choice,
and the mechanics of the monetization remain the same, annual approval
of commodities for monetization is subject to submission of the
following:

        monetization sales budget, as described in Section II.C. above;

        Bellmon Update, as described in Section II.B.5.-6. above; and

        comprehensive budget, with foreign currency pipeline analysis,
as described in annual Title II guidelines and referenced in Section
II.A.1. above.

       If the objectives unique to the monetization, commodity choice,
or the mechanics of the monetization have changed, a comprehensive
monetization request, as outlined in Section II., must be submitted for
Mission (if applicable) and BHR/FFP review and approval.

       Approval of monetization requests equates to recognition that the
monetization is conceptually possible. Between the time of the approval
and the time of the call forward request for monetization, actions must
be taken by the CS to refine the proposed mechanics of the monetization
and verify whether the anticipated sales price will meet the cost
recovery benchmark.

**B.    Review and Evaluation Criteria**

   As noted in the Policy Framework section of this document, the merits
of all monetization requests will be judged against the following
criteria, in addition to those stated in the DAP/PAA or emergency
proposal guidance:

   1.    Assurance that the monetization proceeds will be used to
support activities that are expected to achieve demonstrable effects on
food security, as defined by USAID\'s *Food Aid and Food Security
Policy* paper and measured using generic or otherwiseapproved
indicators.

   2.    Assurance that the monetization will not create disincentives
to local production or marketing of the commodity to be monetized or its
substitutes..

   3.    Certification that the amount of currency to be generated in
the monetization transaction(s) will meet or exceed the cost recovery
benchmark.

**V.    PROCEDURES FOR CALL FORWARD AND PRICE QUOTE REQUESTS**

Approval of calls forward for monetization will be contingent upon the
provision of updated market information and confirmation that the sales
price is expected to be at or above the required benchmark. Monetization
calls forward for sales anticipated to be below the cost recovery
benchmark will not be processed unless a waiver is signed by FFP/D.

**A.    Information Required for Approval of a Monetization Call
Forward**

   At the time of the call forward request, the following information
must be submitted to BHR/FFP/POD:

        clear commodity specifications;

        for negotiated sales:

       \--    written verification that a signed contract is in place
and confirmation of the negotiated sales price, or

       \--    CS certification of the expected sales price, which must
meet or exceed the cost recovery benchmark;

        for tender sales/auctions:    

       \--    adequate evidence that the market is competitive or can be
made so;

       \--    CS certification of the estimated sales price, which must
meet or exceed the cost recovery benchmark;

        Mission concurrence on the call forward request.

**B.    Waiver Requests**

   Where a CS does not expect a monetization to meet or exceed the cost
recovery benchmark, but rather proposes to conduct the monetization
because of its anticipated food security impact, the CS must submit a
written waiver request to the FFP/D for approval of the monetization
call forward for a sale price below the cost recovery benchmark. CS
headquarters and USAID Missions will be notified of decisions on waivers
within 15 days after receipt of the written request.

**VI.    THE SALE**

**A.    Transfer of Title to Cooperating Sponsor (Per Reg.
211.4(b)(i))**

   Title to commodities for monetization passes to the CS at the time
and place of delivery FAS at U.S. ports. The CS is responsible for all
arrangements in connection with the receipt, storage and maintenance of
the commodities for monetization from the time of delivery at the U.S.
port to the time of delivery to the purchaser. This includes
transportation of the commodities overland to landlocked countries.
Unless the CS has requested USDA to perform the discharge surveys, the
CS must arrange to have an independent surveyor attend the discharge of
the commodities and may, at its option, engage an independent surveyor
to supervise clearance and delivery of the cargo from customs or port
areas to the purchaser and to issue appropriate delivery survey reports.
The CS\'s commodity monitoring responsibilities cease once the full
amount of the agreed purchase price has been deposited into the CS\'s
account and title to the commodities has passed to the purchasers or
other third parties.

**B.    Performance Bonds**

   The CS should obtain a performance bond prior to submitting a call
forward to BHR/FFP/POD. The performance bond should equal at least 10
percent of the expected sales price and be denominated in the currency
in which the sale will take place. The bond should take the form of an
irrevocable letter of credit (or similar instrument, in accordance with
local practices) and guarantee payment to the CS of the amount of the
bond in the event that the buyer of the Title II commodities fails to
perform inaccordance with the sales agreement.

   Any proceeds generated from the payment of a performance bond shall
be treated as program income and must be applied to the approved budget
for Title II activities.

**C.    Payment of Duties and Taxes**

   Title II commodities for monetization may be taxed by the host
government, even though taxation is clearly prohibited for commodities
imported for direct distribution. The CS may negotiate agreements with
host governments which permit the tax-free import of commodities for
monetization. USAID only agrees to the payment of such taxes if the
monetization price is sufficiently high to recover all costs, including
commodity value and freight plus the tax itself.

   USAID Missions and CSs must carefully consider the effects of payment
or non-payment of taxes in terms of limiting the proceeds available for
programming, in the case of the former, and disrupting the local market,
in the case of the latter. Any waiver of duties or taxes should result
in a higher sales price rather than a windfall to the buyer. In
countries where tax practices are deemed problematic, the USAID Mission
and CS are encouraged to negotiate with the host country to establish an
agreement whereby taxes and duties would be charged, as in a commercial
transaction, but the Title II CS would be allowed to retain those taxes
and duties as a host countrycontribution to the program.

**D.    Markings**

   Commodities for monetization will arrive in country with the
following \"abbreviated markings\": description of contents, net weight,
and USAID contract number. The phrase \"not to be sold or exchanged\"
will not appear. The buyer may subsequently repackage or label, at its
own cost, without restriction by USAID or the Cooperating Sponsor.

   If a CS has special marking requirements, the requirements must be
specified in the proposal, if possible, as well as at the time of the
call forward.

**E.    Sales Agreement**

   The CS is responsible for ensuring that a comprehensive and legally
acceptable sales contract is in place. Although sales agreements will
vary according to country circumstances, the following essential
provisions must be included:

   1.    Full commodity specifications and tonnage;

   2.    Agreed total sales price. A discount range should be included
in the agreement in order to prevent failure of performance on the part
of the buyer in the event that the commodities do not meet the exact
specifications as stated in the call forward;

   3.    How and when payment(s) will be made, amount(s) of payment(s),
terms of payment(s) (including a description of the terms), if
applicable, exchange rate used (including whether it is a market-based
rate) and when used (e.g., at the time of payment, at the time of
signing the agreement), and a guarantee that payment will take place. In
no case should title to or possession of the commodities pass to the
buyer until payment in full has been received by the CS;

   4.    Statement of purchaser\'s capability to take delivery, properly
store and successfully market the commodities in-country;

   5.    Stipulation that the purchaser will not export commodities or
products thereof;

   6.    Agreement by purchaser, having accepted the commodities when
discharged at the port of entry, not to raise claims, thereafter, about
the \"wholesomeness\" or \"fitness\" of the commodities; and

   7.    Date of sale.

**VII.    REPORTING REQUIREMENTS**

**A.    Sales Price and Revenue Analysis**

   Within 30 days after the sale, CS field offices are required to
report in writing to the USAID Mission the actual sales price in
comparison to the cost recovery benchmark. Where there is no USAID or
REDSO presence, CS shall provide a report to BHR/FFP/POD. Appendix C
contains a standardized format for reporting this information. In the
event that CS fails to achieve cost recovery, USAID Mission shall report
back to FFP/D the circumstances regarding the loss. The CS is also
required to report actual revenues generated in comparison to approved
budget requirements, in their PAA and CS\'s Annual Results Report (R2).

   In the case of numerous sales throughout the year, reporting of sales
prices may be done on a less frequent basis, when approved by USAID.

**B.**     **Financial Reporting**

   Consistent with Regulation 11, Section 211.5(l), the CS must provide
a written report of all Title II monetization activities to USAID/W on
an annual basis. This report must include information on the receipt and
disbursement of both monetized proceeds and program income by the CS and
any sub-recipients. The report must also show the source of funds, by
country, and how the funds were used. The report must be submitted as
part of the CS\'s Annual Results Report (R2).

**VIII.    MANAGEMENT AND ACCOUNTABILITY**

**A.    Maintenance of Proceeds**

   See Section II.D. of this document.

**B.    Funding Shortfalls and Surpluses Due to Difference Between
Revenues Generated and Approved Monetization Budget Requirements**

   1.    Surpluses

       In the event a CS generates a larger amount of monetized proceeds
than expected during any activity year, the CS must include such
surpluses in the annual report submitted to USAID/W. Any surplus funds
may not be utilized without written approval of FFP/W. The CS is
encouraged to discuss the surplus in the annual report indicating how
the surplus funds could be incorporated in the overall activity plan.
Possibilities include a reduction in out-year commodity requirements,
proposed modification (expansion) of activities, or, consistent with
Regulation 11, Section 211.11(b), at expiration of the program, transfer
of surplus monetized proceeds to another approved activity. In any
event, monetized proceeds above the level approved in the DAP/PAA
budget, may not be utilizedby the CS without the written approval of
FFP/W.

   2.    Losses

       Commodity losses that occur during transport of the commodities
are governed by Section 211.9 of Regulation 11. For losses resulting
from an unexpected drop in commodity prices or from any loss due to
currency fluctuation that are expected to have a negative programmatic
impact, the CS must submit a written report detailing the circumstances
of the loss. The CS may request additional commodities to compensate for
the shortfall of monetization proceeds resulting from the loss.
Provision of commodities is not automatic and consideration will be
given only after written justification from CS is provided. Limitation
of funds and CS responsibility for the loss may be a factor in
BHR/FFP\'s consideration of any replacement.

**C.    Maintenance of Currency Pipeline**

   The guidelines for preparing new DAPs specify that up to a five month
pipeline is allowed to be carried over from one fiscal year to the next.
However, funding carry-over necessary for program implementation depends
on the activity being implemented. If five months of pipeline is
insufficient, then the CS will be required to justify additional
carry-over. A pipeline analysis will be required with the submission of
the PAA and, if deemed necessary by FFP, at the time of a call forward.

**D.    Roles and Responsibilities of USAID Missions During Activity
Implementation**

   Due to the complex nature of monetization transactions, Missions may
be required to take on responsibilities that are in addition to those
spelled out in Regulation 11.

   Missions are responsible for receiving and reviewing CS reports
regarding monetization. The following reports shall be used in reporting
on monetization: Appendix C; CS\'s Results Report (R2); and resource
requests (PAA).

   Missions must report back to FFP/D circumstances regarding CSs not
achieving at least benchmark recovery on their monetization of Title II
commodities.

**E.    Roles and Responsibilities of Cooperating Sponsors During
Activity Implementation**

        The CS is required to notify BHR/FFP of shifts of 10 percent or
more between line items in its approved budgets.

        Within 30 days of the completion of the sale, the CS is required
to report to USAID Mission or BHR/FFP/POD where there is no US
government presence, at a minimum, the information listed below. (See
Appendix C format for reporting the details of a monetization activity.)

   1 .     the actual price at which the commodity was sold;

   2 .     total sales revenue, which must be reported in U.S. dollars;
and

   3 .     the quantity sold, reported in metric tons.

       In the case of numerous sales throughout the year, arrangements
can be made to report this information on a less frequent basis.

**F.    Roles and Responsibilities of BHR/FFP During Activity
Implementation**

        For price quotation requests which are received in writing and
indicate commodity specifications and delivery time frame, provide price
quotes within three working days;

        Respond to all regulatory requirements such as non-U.S. vehicle
purchase waivers;

        Review Bellmon updates;

**IX.    UMBRELLA MONETIZATION**

CSs are strongly encouraged to monetize jointly. Umbrella monetization
can keep marketing costs and expenses related to analyzing markets
contained, avoid duplication of effort, strengthen the ability of CS to
negotiate more competitively in the market, and increase the potential
for achieving supply impacts stemming from the expertise gained by the
lead agent and the additional time and money that can be devoted to this
objective. However, in cases where a CS can identify the benefits of
conducting an individual monetization rather than an umbrella
monetization, USAID will not deny the request of the CS to monetize
individually.

**A.    Role of Umbrella Sales Agent**

   The role of the Sales Agent is generally limited to preparing for and
conducting the sale of commodities. The Agent\'s responsibility
terminates when the proceeds of the sale have been deposited into the
individual CS\'s bank accounts.

**B .     Joint Monetization Agreement**

   A Joint Monetization Agreement detailing the terms and conditions of
the umbrella monetization must be executed by each of the participating
CSs and submitted to FFP, where possible, with each of the CS\'s DAPs
but otherwise prior to the first call forward.

**C .     Monetization Committee**

   It is recommended that a Monetization Committee be established in all
countries where two or more CSs intend to conduct a monetization,
whether jointly or on an individual basis. The committee must be
comprised of representatives from the CSs and the Mission, preferably
the FFP Officer, as well as other individuals with monetization or
market expertise. Mission representatives will participate only in a
non-voting capacity.

**X.    COORDINATION WITH OTHER DONOR AND DONOR SUBSIDY PROGRAMS**

In countries where more than one donor or CS is importing food aid,
Missions must facilitate regular coordination of activities and
exchanges of information, especially with regard to market information.
The CS should actively participate in coordination efforts.

**XI.    THIRD-COUNTRY MONETIZATION**

Third country monetizations are subject to the same review and
evaluation criteria as identified in Section VIII of the Policy
Framework section of this manual. In addtion the following are required
prior to FFP/W approval:

1\.    CS\'s must address the following order of precedence of countries
in their monetization request:

   A.    CS\'s Activity Country

   B.    All LIFDCs in the region.

   C.    All non-LIFDCs in the region.

The CS must first demonstrate that commodity sales, in the country in
which they have their activity, are impracticable.

Once the above is determined then the CS may consider sales in other
LIFDCs in the region. Special consideration will be given to a CSs who
determine that the benefits from the sale of commodities in a third
country, LIFDC, will be greater than the benefits that would accrue to
the CS\'s Activity Country.

Only after all LIFDCs in the region have been considered, may the CS
propose monetizations in non-LIFDCs. For a current list of LIFDCs,
contact FFP/W.

2\.    The USAID Mission operating in the country where the monetization
sale takes place has the responsibility of reviewing and either
concurring with or disapproving the CS\'s market and storage analysis,
i.e, making the Bellmon Determination. If there is no Mission, the
determination will be made by FFP/W.

3\.    CS shall work with the USAID Mission, in the country in which the
monetization of commodities occurs, to ensure that the third country
government does not object to proceeds generated under the sale, being
transferred out of the country to fund activities in the CS\'s proposal.

4\.    Third country monetizations are subject to Usual Marketing
Requirements. CS\'s monetization request(s) for third country
monetization will be evaluated by FFP/W in coordination with USDA to
determine if further UMR analysis is required. Potential UMRlimitations
will be reviewed by USAID, USDA and the Department of State. FFP/W will
notify CSs regarding the determination.

5\.    Benefiting Missions shall play a role in assisting the third
country Mission in providing all clearances. (See Implementation
Section, III, E.)

6\.    CS should be aware that monetization proceeds generated in a
third country can be converted to a hard currency for transfer to the
country of program activity.

**XII.    TITLE II ACTIVITY CLOSE-OUT**

Refer to [[Title II Close-out Plan
Guidance.]{.underline}](http://www.usaid.gov/hum_response/ffp/closout.htm)

**Appendix A - Market Analysis Overview**

Appendix A and B are supplemental to the 1985 Background Paper and Guide
to Addressing

Bellmon Amendment Concerns on Potential Food Aid Disincentives and
Storage.

The CS\'s market analysis, upon which part of the Mission\'s Bellmon
Determination is based, must attempt to capture potentially significant
effects on marketing and production incentives. A complete market
analysis will address the following points.

   1.    Market analysis must consider possible effects on marketing
agents as well as producers.

   There has been a tendency to focus on the potential disincentive
effects on producers, while ignoring the potentially damaging effects on
private sector marketing agents who transport, process, distribute and
sell a variety of foodstuffs. Even if a given commodity is not produced
domestically, private sector marketing agents may buy and sell the
commodity and be harmed by sudden price falls.

   2.    Monetized food aid commonly has an effect on food prices.
Market Analysis must seek to understand the magnitude of the price
effect.

   Market analysis often rests upon the widely held supposition that
monetized food aid does not depress domestic prices if it meets a
national shortfall. In actuality, whenever local food prices are largely
determined by competitive forces, any sale of Title II food aid
effectively results in an increase in supply, which then can reduce
prices. Whether the resultant fall in price is negligible or whether it
is significant depends upon a host of factors.

   3.    In a market analysis, the amount of food aid to be monetized
during a particular time period must be contrasted to the amount of food
in local food markets during that time period, not simply to \"total
domestic consumption or production.\"

   Past market analyses have measured the possible disincentive effects
of food aid by comparing the amount of monetized food aid to \"total
domestic consumption.\" For example, it has been suggested that
disincentive effects may exist only when the amount of food aid exceeds
five percent of total domestic consumption for the upcoming year. Such
comparisons are very misleading since, in many countries, marketed
surplus is a very small proportion of total production and consumption.
That is, compared to total consumption, relatively small amounts of a
given commodity are marketed. As a result, food markets in developing
countries are often \"thin\" and volatile. This means that small changes
in quantities supplied during specific time periods can have a large
impact on prices. By extension, monetization of relatively small amounts
of food aid can have enormous effects on thin and fragile domestic food
markets.

   4.    Market analysis must consider the timing of flows of food
through local markets in determining the potential for any disincentive
effect.

   Market analysis often ignores the concentrated time frame within
which a given CS monetizes food aid. Food markets in developing
countries exhibit a predictable pattern in the timing of food flows into
the market. A comparison of the amount of food aid that is monetized by
a CS during a two- or three-week period to a nation\'s total annual food
consumption may present a deceptive picture of the likely impact of the
infusion of monetized food.

   5.    Market analysis must demonstrate that monetized food aid will
have little impact on incentives for traders to engage in intra-annual
storage or on farmers\' planting decisions. Above all, monetized food
aid should not be viewed as a tool to prevent normal price fluctuations.

   Market analysis often contributes to the assumption that food aid
monetization can play a valuable price fluctuation \"mitigation\" role
during periods of high food prices that may have a negative effect on
the household food security of targeted groups. Often food aid is
monetized during the \"hungry season\"\--right before harvest when
prices are highest\--based upon the assumption that food aid can
\"stabilize\" markets. The hungry season seems to be an appropriate time
to monetize food aid. Such monetizations may lead to lower food prices,
benefiting consumers. However, monetizing food aid may impair the
development of food systems that assure year-round indigenous, locally
produced or imported food supplies. Commodity flows may be greatest
immediately after harvest, but in most years, sales by producers and
middlemen to others in the food system occur throughout the year.
However, by monetizing food aid, incentives to private traders to
perform valuable storage functions may be severely damaged.

   6.    Market analysis must consider the possible cross-price effects
on substitute commodities.

   Market analysis also often ignores potentially high cross-price
elasticities of demand when analyzing the effects of the monetization of
a particular commodity. In other words, simply because a commodity is
not produced domestically does not imply that the monetization of this
commodity will have little or no effect on local food markets. Consumers
often have an array of food consumption choices and choose among
potential substitutes based upon relative prices. Even if wheat is not
grown in a particular country, monetization of wheat may have effects on
rice prices by inducing people to shift from rice to wheat.

   7.    Market analysis must consider the aggregate effects of multiple
monetizations in a particular country.

   Market analysis, when undertaken by a particular Cooperating Sponsor,
fails to consider the aggregate effect of monetized or distributed food
aid supplied by multiple CSs and other donors. For example, if six CSs
are each monetizing 10,000 tons of wheat per year, each CS may
independently make the determination that a 10,000-ton monetization has
few effects on local incentives, failing to consider the aggregate
effects of all six monetizations. To the extent possible, it is
recommended that CSs prepare a joint market analysis.

**Appendix B - Market Analysis Procedures**

**A. Introduction**

Markets are defined by specialization, trade and usually a medium of
exchange. Primary markets, as opposed to secondary or resale markets,
represent a delicate balance between producers and consumers. Consumers
procure required foodstuffs and producers receive currency (money)
representing a promise of future goods or labor. Markets may be
controlled by State regulation and intervention or dominated by private
trading. In markets dominated by private trade, competition brings
products to consumers in a cost effective manner. Maintaining
competition over time requires a balance among competitors in terms of
access to capital and products.

Monetization potentially has an impact both on the balance between
producers and consumers, as measured through market prices, and on the
balance among traders, as measured by the participation and degree of
competition in the market. In order to understand the impact of
monetization on each of these balances, a thorough and ongoing
understanding of local markets is required.

The intent of this appendix is to suggest a number of analytical
considerations that will help the CS narrow the range of information
required to monetize their commodities effectively. For most CSs, it
will not be cost effective to understand the entire food market.
Therefore, the key will be to understand the broad market setting well
enough to recognize possible opportunities, and then to understand
individual commodity markets in enough detail to be able to anticipate
the effects of intervening.

The steps outlined in this appendix represent one approach to market
analysis. It is recommended that the CS consider this material
particularly with reference to understanding the food security impacts
of monetization. The appendix is not designed to repeat or replace the
work of other guides to monetization.

**B. Purpose**

In broad terms the purpose of market analysis is to determine if there
is a niche for monetizing P.L. 480 commodities in a particular country.
A niche for monetization will depend on the expected returns from the
sale and on the food security impacts of adding food to the market.
These effects of monetizing food aid should be considered apart from the
anticipated use of the proceeds for developmental purposes. USAID will
look favorably upon those proposals that demonstrate a clear
understanding of markets. However, it is hoped that the driving
motivation in studying markets will be a recognition by the CS that
market systems have profound implications for vulnerable people and that
good food programming depends on an understanding of local markets.

In addition to the generation of proceeds for developmental activities
(returns from the sale), monetizations may save foreign exchange for the
host country. This can have the effect of supporting the value of the
currency and enhance government revenues, depending on the use of the
proceeds. Exchange savings may come at the expense of usual commercial
imports or, in the case of a crop short-fall, replace one-time
purchases. This section will not focus on these aspects of monetization,
i.e., exchange savings and usual commercial imports, which are treated
in more detail in Appendix A - Market Analysis Overview. Rather, we will
consider here the more narrow issue of how monetized food aid can be
used to develop markets.

Monetized food aid can be used to further the development of
agricultural and food markets when the sales methodology directly
affects the structure of the market. Although perhaps difficult to
target in terms of market structural effects, large quantities of food
aid have the potential to affect markets in dramatic ways, especially if
a program continues over several years. Demonstration of potential food
security impacts of a monetization typically requires the identification
of a market inefficiency. There are several types of market
inefficiencies that one frequently encounters in a developing country,
which usually translate into higher costs for the marketed product.
Marketing costs may be high due to: insufficient investment, a small
number of traders, quasi-monopolistic or oligopolistic practices, the
irregular or seasonal functioning of the market, a paucity of supply or
limited demand. These, among other conditions, are common
characteristics of developing country markets which food aid
monetizations may seek to address. Food aid monetizations may induce
traders to come into the market and invest; they may supply needed
commodity on a regular basis; they may broaden the extent of the market
and assure better means of payment and settlement of accounts. The CS
will need to understand how the market has failed and how a monetization
will have an impact on redressing this situation. In short, in order to
have a food security impact, the CS must identify a problem and identify
how U.S. resources will have a positive impact on the solution via the
monetization.

In addition to determining opportunities, market analysis will provide
the CS with guidance on how to execute the monetization. Market analysis
will identify suggested methods of determining the price, specific
requirements of the commodity, timing considerations, and potential
risks. The data in the market analysis will provide some of the
information required to do a Bellmon Determination properly. Ultimately,
most management decisions taken during the successful execution will be
based on information obtained in the market analysis.

**C. Suggested Procedures**

**1. Information sources** - Market analysis will inevitably involve
many interviews with market participants, including importers as well as
domestic and off-shore traders. This process is often less intimidating
than it sounds. Off-shore suppliers and traders can be contacted by
phone and requested to give price quotes. The CS often purchases foods
in the region and may have these contacts on file. With regard to local
traders, establishing a large network of contacts will help the CS to
ensure that it is provided with fair and accurate price quotes. In
addition to the private traders, WFP, FEWS, GIEWS, and local
governmentagencies often track prices in a systematic way. (Pointer:
Know your product - Suppliers will respect a caller who knows exactly
what product is being priced. For example, wheat flour has many
different specifications. Ask local bakers who may be using the flour
what specs they require and then price on the basis of these specs.)

**2. Short list commodities** - The first step in looking for a niche is
to ask the basic food questions: Which foods are eaten? Which foods are
eaten by vulnerable people? Of the commodities consumed, which ones are
typically a part of the U.S. P.L. 480 food basket? All commodities
available and consumed locally should be initially placed on the short
list.

**3. Prioritize the short list** - To prioritize the short list, two
quick tests should be applied.

**a. Cost Recovery** - Create a list of FAS prices for P.L. 480 type
commodities. Suggested web sites for obtaining commodity price
indications are listed in the Implementation Guidelines section of this
manual. Add to these price indications the costs included in the cost
recovery benchmark calculation to obtain an estimate of the costs of
each commodity. Obtain current wholesale price estimates in the market
in which a sale would be considered. Compare these prices to those
calculated from the P.L. 480 program.

**b. Food Security** - Commodities that are eaten primarily by the poor
may be marketed in a significantly different manner than those purchased
by the wealthier population. Urban and rural markets may also be
organized in different manners as might those for particular
commodities. It is importamt to know how the market for the particular
commodity being monetized is organized and how the monetization might
potentially enhance food security through developing that market.

Note that the two tests will often yield opposing results. For example,
the cost recovery test might indicate advantageous pricing for a certain
commodity while market structure (demand, imports, target population and
target market) might indicate another.

**4. Rationale for more information** - Depending on whether the
commodity meets the criteria of the cost recovery test or the food
security test, the CS will require different additional information.

If the commodity is prioritized based on the initial impression that
sales will meet or exceed the cost recovery benchmark, then the
fundamental questions are whether or not the initial impression was
correct and whether or not the prices can be expected to remain stable
long enough to execute the sale. Judgments about price stability must
rely upon an understanding of the forces driving current prices.

If a commodity is prioritized because it is eaten by the poor and the CS
wants its food to have a positive impact on food security, similar
information is collected, but it is used differently. For example,
market structure information should be able to explain why poor
consumers are charged the prices that they are and suggest ways to
intervene that will reduce poor consumers\' food bills in a sustainable
manner. All price data as well as seasonality are viewed in terms of
whether or not there is a problem for vulnerable people and whether or
not a strategic sale has a reasonable probability of addressing the
problem.

**5. Understand the Traditional Food Market Channel** - For imported
goods, determine import parity prices . To calculate these, it may be
possible to find out what is being paid by importers. Alternatively, it
may be necessary to phone suppliers at the point of origin to obtain
quotes. Freight costs are available through USAID, the International
Wheat Council, and many freight forwarders or brokers. Once in port, the
goods may incur import duties and taxes, port handling charges, port
clearance fees, and inland transportation costs to the first market.
These fees should all be estimated. The prices at major terminal markets
en route from producer to consumer should be determined. For processed
goods, the processing margin should be estimated. Processing margins
usually involve a margin for costs and a margin to recognize that not
all of the raw product is turned into final product. From central
markets, the goods will go to retailers. Retail prices should also be
tracked.

For domestically produced goods, the channel is similar except that the
import prices are replaced with farm prices. Farmers will be able to
tell if the goods are commonly marketed at harvest or throughout the
year.

**6. Compare Price Margins to Costs** - Using prices from point of
supply to the consumer, two simple analyses are possible. First, the
difference between prices at consecutive stages is referred to as the
price margin. Calculate the price margins. Compare these margins to
known costs such as transport, storage, and processing costs. Second,
compare these margins to the costs that would be incurred in getting the
commodity to that stage in the food channel. This analysis may help to
define where to sell and whether to send the raw or a finished product.

**7. Understand Market Structure** - Interview traders and processors to
determine the degree of competition and any government regulations that
may be in place at each stage of the market channel. Particular
attention should be paid to those stages where margins appear to exceed
the estimated costs plus a reasonable profit. For monetizations
motivated by returns, the objective is to get a sense of whether the
factors causing the price spread are cyclical or anomalous. For
monetizations motivated primarily by a desire to have an impact on food
security, the intent is to understand whether or not it would be
possible to improve the performance of the market. (Pointer: Interview
the people who sell to and buy from a particular segment of the market
to get a further sense of the degree to which competition may be
imperfect.)

**8. Understand the Foreign Exchange Market** - When imported
commodities are considered, review the foreign exchange market. Is there
a restriction on foreign exchange? Is there a parallel or street market
for exchange that is different from the official rate? If there is a
margin, what is the spread between official rates and parallel rates?
Are most or all goods available with local currency or is it necessary
to use foreign exchange to purchase a wide cross section of goods? Are
there regular devaluations? For monetizations executed with the intent
to maximize returns, restriction on foreign exchange is often one of the
factors that makes monetized goods attractive. For monetizations
executed with the intent to improve food security, a shortage of foreign
exchange is often cited as the reason that the monetization is important
for the food security of the country. In order to make a sound food
securityargument, it will be important to think about whether or not the
imports are additional or if the ability to purchase in local currency
is simply creating a windfall gain for a trader.

**9. Learning Lessons from Past Prices** - Determine historical prices
when possible. Weekly or monthly price series in central markets will
often be available from FEWS, GIEWS, WFP, or a local government
ministry. This information might also be available from USAID in
countries where the agency sponsors market information projects. Plot
weekly or monthly data for the past year to determine seasonality. For
monetizations designed to generate the maximum amount of foreign
currency proceeds, the objective is to determine whether recent price
fluctuations/ stability can be expected to continue in the near future.
For monetizations designed to have an impact on food security, the
objective would be to determine unacceptable price swings and empower
more vulnerable groups to become involved in the market through a
monetization which would help to smooth radical price swings in the
future. In this case, the historical prices may form a baseline for
reporting.

**10. Understand the Size of the Market** - Obtain an estimate of the
size of the commercial market. This information will help predict the
degree to which prices will be sensitive to additional supplies. USDA
and FEWS are likely to have the relevant information. For monetizations
taking place outside the capital or port, this information may have to
be estimated for the specific location. Traders can be interviewed and
local wholesale markets observed. This information forms the base for
the Usual Market Requirements.

**11. Confirm the Reasons for Short Listing** - Once market analysis has
proceeded to this stage, the CS should be in a position to answer the
following questions:

a\. If prices are above C&F, can they be expected to remain there, and
if so, why aren\'t commercial traders already capturing these margins?
The CS starts out with a number of disadvantages relative to commercial
players. Food aid is shipped under more risk averse freight terms
resulting in higher costs. Food aid shipments often have delivery
schedules that are less well defined than commercial shipments. Food aid
purchases in the U.S. are done by the CCC, which does not have some of
the origination and blending advantages of the commercial players. For
these reasons, if a food aid sale is to meet the cost recovery
benchmark, it must have other unique advantages. For example, the food
aid might be: exempt from commercial duties and taxes; paid for in local
currency, thus preserving precious foreign exchange reserves; destined
for markets in high risk areas; permitted to circumvent formal channels.
In summary, the CS\'s monetization request should be able to explain the
source and magnitude of its commercial advantages.

b\. If the monetization is intended to improve food security, the CS
understands why the market is failing vulnerable households now. The CS
should be able to explain the reasons that prices or trade flows do not
reflect total costs and how a monetization will improve the functioning
of the market. This explanation should include reference to market
structure at stages where the price margins appear out of line and,
wherever possible, some price history to indicate whether or not the
current situation is an anomaly.

**12. Ongoing Monitoring** - If the market analysis indicates that a
monetization will likely make sense, the CS should establish a process
of regularly monitoring price and other relevantmarket information. In
addition, the CS\'s efforts to understand specific components of the
market structure should be ongoing. Impact analysis for a monetization
will depend upon continued monitoring of the market. Interviews with
traders will be an important part of the follow-up as traders will often
be able to identify implications for the market that external monitoring
of the data will not reveal.

**13. Clarify Commodity Specifications** - Prior to the call forward, it
will be important for the CS to confirm the specifications of
commodities to be monetized. Remember that the buyers of a monetized
commodity must choose the product over other alternatives available in
the market. Understand how the commodity will be used. For example, if
the commodity to be monetized is vegetable oil, will U.S. soybean oil be
acceptable in terms of taste and flash points; if it is wheat, will
strong flour be preferred to weak flour or vice versa; if it is beans,
will U.S. style pinto beans trade at a premium or discount to the prices
observed in local markets? It is advisable for the CS to have a sample
of U.S. product available since verbal descriptions tend to be
inadequate. For refined products, it may be advisable to have a sample
of domestic product analyzed to determine specifications.

**14. Preparing for a Negotiation** - For markets where the level of
competition is inadequate to guarantee a fair tender, negotiation will
be the vehicle for setting the sales price. In this case, a firm sales
agreement must be drawn up to accompany the call forward request. In
general, selling in this manner will not be advisable for monetizations
designed to improve food security but may be necessary in certain
settings where the only objective is to generate as much foreign
currency as possible. When conducting negotiated sales, the CS should be
aware of the least- cost alternate supply of a similar product to the
same market location to be delivered in the proposed time frame. The CS
should impress upon the buyer the advantages to be gained from buying
the monetized commodity, such as:

a\. paying for the commodity in local currency;

b\. purchasing the commodity without assuming risks associated with
dispatch freight terms that are often passed on to commercial buyers;

c\. any advantages that would accrue to the buyer as a result of payment
terms that would be different from full commercial transactions.

**15. Demonstrating Market Competition** - For markets where the level
of competition is adequate to conduct a tender, evidence that the market
is in fact competitive should be included in the monetization request in
the CS\'s proposal.

**D. Summary**

Market analysis is the key to successful monetization. On the one hand,
good market information allows the CS to prevent individual traders from
capturing the entire benefit of the transaction. Perhaps more
importantly, market information protects the market from ill-informed
actions of inexperienced traders who are not subject to the same
restrictions as commercial players. USAID is moving toward requiring
more information in this area. However, it is hoped that the CS
community will collect this information to improve its programming
rather than simply to satisfy USAID requirements.

**Appendix C - Monetization Profile**

COUNTRY
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

FISCAL YR/CALL FORWARD \#
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

COMMODITY TYPE & TONNAGE
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

SALES METHOD USED
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(tender bid, lottery, negotiated sale)

PRICING SYSTEM USED
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(stop-out; fixed price; average of bids; pay-bid)

EXCHANGE RATE USED
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

METHOD OF PAYMENT
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(letter of credit; bank guarantee; cash; bank guarantee/cash)

NUMBER OF BIDS RECEIVED
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

LOWEST BID; HIGHEST BID
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

COOPERATING SPONSOR (CS) TARGET PRICE
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

CS MINIMUM PRICE; MAXIMUM PRICE
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

NUMBER OF BUYERS
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

FAS QUOTATION \_\_\_\_\_\_\_\_\_\_\_\_\_        FOREIGN FLAG ESTIMATE OR
RATE \_\_\_\_\_\_\_

OTHER CHARGES AS APPLICABLE \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

           (See Implementation Section 1.C. Cost Recovery Benchmark)

SALES PRICE(S)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(in U.S. dollars and, if pay-bid used, final sales price by buyer)