(Adds details, background, paragraphs 7-18)

By Roberta Rampton

DES MOINES, Iowa, Oct 16 (Reuters) - The Obama administration wants more flexibility in how it allocates food aid dollars to complement its new strategy to help small farmers in poor countries boost their food production, Agriculture Secretary Tom Vilsack said on Friday.

Vilsack and Secretary of State Hillary Clinton, who is leading the administration's three-year, $3.5 billion global food security initiative, did not rule out using U.S.-grown food aid as a tool for development projects.

But they told reporters food aid funding should also be used to buy crops in or near poor countries as a way to benefit local farmers while supporting U.S.-led development projects.

"We've relied on food aid to fill our gap in support for agriculture, and most importantly, to reach the poorest people," Clinton said, noting government funding for overseas agriculture development has dwindled over the past decades.

"We're seeking to close that gap between development and human assistance by dedicating development resources to engage the poorest in the growth process and to support community development," she said.

The United States will no longer rely on food aid as its primary tool to help reduce world hunger, Vilsack said, but will continue to use it where needed.

The focus of its initiative will be on helping small-holder farmers get access to seed, fertilizer, irrigation and markets so that they can feed themselves and earn a living.

"We've got to make farmers around the world more productive," Vilsack said.

The U.S. effort is part of an agreement by the world's richest countries to focus on food security. The international commitment has now grown to more than $22 billion to be spent over three years, Clinton said.

Commodity-based food aid has enjoyed strong political support in the United States from farm groups that grow the crops, shipping companies that transport them, and humanitarian aid groups that support overseas projects with the food.

But some have criticized the aid as too slow to arrive in times of disaster, and more expensive than crops produced closer to where the food is needed.

"This is not a circumstance where we want to continue to perpetuate the notion that this is only for the benefit of American agriculture. I think it's a combination, it's a partnership," Vilsack said.

The 2008 farm law authorized a $60 million test of food aid through local purchases instead of through U.S.-grown food. Lawmakers rejected proposals to allot a larger portion of relief money to local purchase.

The farm law also set minimum funding levels for development assistance under the "Food for Peace" program, rising to $450 million in fiscal 2012. Food for Peace, the major U.S. food aid program, was allotted $1.69 billion for this fiscal year.

Monetization -- the practice of selling donated food in a country to raise cash for development projects -- has been criticized because it competes with crops produced elsewhere.

"I don't think we're necessarily going to rule out monetization, but I think there is a need for us to be flexible in terms of how we utilize it," Vilsack said.

The new strategy may require regulatory change, Vilsack told reporters. The administration is reluctant to open up the farm bill, set to expire in 2012, that authorizes the food aid programs, he said.

(Additional reporting by Charles Abbott in Washington; Editing by David Gregorio)

AlertNet news is provided by