August 27, 2008

MALAWI: Boom Time for Tobacco Sales?

By Masina, Lameck

Despite the anti-smoking lobby, championed by the World Health Organisation, that has threatened the future of the tobacco industry in many African countries, for the past two-years Malawi has experienced a boom in tobacco sales. Lameck Masina reports Last year's tobacco selling season, for the first time in seven years, saw the commodity fetch good prices on Malawi's auction floors. At the start of the 2007 selling season in April the average price of tobacco ranged from $1.40 to $1.70/kg with some lots fetching as much as $200/kg. This was in sharp contrast to the previous season's sale when the average price hovered around $0.70-$0.90/kg, substantially less than the $1/kg the industry says it costs to produce the 'golden leaf'.

These prices were realised, among other reasons, as a result of a series of meetings that the government had with buyers prior to the opening of the floors. The talks had been called to address the issue of declining prices which had marred the previous season's sales. President Bingu wa Mutharika, himself a tobacco farmer, had previously accused foreign buyers of fixing prices, an allegation that the buying companies - from the US and Switzerland - had denied. In 2006, Mutharika had threatened to expel from Malawi buyers conniving to corner the market and fix the crop's price.

The Tobacco Control Commission (TCC) attributed last year's higher prices to a newly introduced system of setting the minimum price of the various grades of tobacco at $ 1.10/kg for the low quality leaf and $1.40/kg for the high quality tobacco.

This year the minimum price was increased to $2.20/kg. Despite the price fluctuations that followed, there were expectations that the revenues earned from tobacco would reach an all-time high by the close of the selling season in September. In its April newsletter, National Bank of Malawi had predicted that this year's tobacco earnings would reach $452.7m, with sales averaging $3/kg.

Malawi largely derives its foreign exchange earnings from tobacco, which contributes about 70% of export earnings. The green gold, as tobacco is fondly known in Malawi, accounts for 13% of the country's gross domestic product (GDP). About one in six of the country's 12m people depend on tobacco and its related industries for their livelihood.

Poor prices over the past years have led to more farmers leaving tobacco farming. The Tobacco Farmers Association of Malawi (TAMA), a grouping of tobacco growers, had reported that between 2000 and 2006 about 40,000 tobacco estate farmers left the industry due to declining prices.

This year, the tobacco auction floors had opened in Malawi's capital city Lilongwe in March on a high note with a kilogram of tobacco fetching from $6 to $11 well above the minimum prices set by the government of $2.20. This had given hope to farmers who had struggled to make any profit from the trade over the last few years.

The TCC general manager, Godfrey Chapola, had attributed the high prices to a tobacco shortage on the global market. He said some tobacco-growing countries had either stopped or dramatically reduced production levels leading to demand exceeding supply.

However, the exceptional prices did not last. By the second day of the auction sales, hope had dwindled that tobacco would continue to realise such high prices. The value of the leaf dropped drastically to between $2.30 and $0.60 for the same quality crop.

Disagreements on the auction prices had led to the suspension of sales more than five times in less than 30 days of trading as growers attempted to get real value for their leaf but buyers showed little willingness to dig deeper into their pockets.

In mid-April, violence broke out between the farmers and the security guards at Mzuzu Auction Floors in Northern Malawi. The farmers had physically blocked the buyers from continuing with sales. The farmers were not prepared to drop their demand for a higher price after hearing about the worldwide shortage of tobacco.

Angered by the buyers who continued to offer low prices, the TCC suspended the sales. Later, growers from southern Malawi flocked to the Blantyre Agriculture Development Division offices calling for an audience with Mutharika. The growers believed only Mutharika could call a halt to the plummeting tobacco price.

The economists argued that the prices offered were defying market forces that play such a crucial role in pricing. The president of the Economist Association of Malawi, Charles Mataya, said he suspected the main tobacco buyers in the country had a hand in the plummeting prices.

"Frankly speaking, I am at loss as to why there are low prices when the demand is high. My fear is that two or three buyers who are influential are conniving to keep the prices low. With what is happening at the auction floors we can not rule out collusion," Mataya told a local daily newspaper.

Recent statistics from the TCC had indicated that revenue from the country's number one forex earner was this year expected to rise by 78% due to improved prices and production figures.

In 2007, Malawi realised a total of $196m from 110m/kg when annual sales for all types of the crop averaged $1.77/kg. The TCC said that, as at May 2008, tobacco sales had recorded revenues of $ 163m from 69.5m/kg, a figure reflecting a 43% increase over the same period in 2007. With 82m/kg yet to be sold on the auction floors, the TCC had expressed optimism that the 2008 revenue figures would be double the previous years.

Malawi is one of the world's top 10 producers of tobacco accounting for 5% of the world's total exports and 2% of total global production. According to the World Bank, Malawi produces some 20% of the world's total harvest of burley tobacco.

Tobacco: A commodity that is running out of puff? Not in Malawi, it would seem.


Zimbabwe tobacco up in smoke

The continuing political and economic crisis in Zimbabwe has negatively impacted the country's once thriving tobacco industry. Reports indicate that since 2000, the tobacco selling seasons have been plunged into disarray as tobacco farmers withdrew their crops from sales, complaining about low prices and delayed payments.

This year's season was characterised by off and on selling as farmers sought improved prices - even if the value of those higher prices was quickly wiped out by the country's staggering 100,000% inflation rate.

The official opening of the tobacco selling season this year was scheduled for the month of April. It was delayed by over two weeks when farmers refused to send their crops to the tobacco auction floors in Harare, demanding a review of prices.

Farmers had objected to the tobacco being sold in us dollars while they got paid in local currency at the official exchange rate, which was not commensurate to their labour input.

Last year similar wrangles had led to indefinite postponement of the sales after farmers indicated that they were not ready to sell their tobacco until they got a special exchange rate. They rejected the official exchange rate of Z$250/$1 that applied at the time. Although the rate was later adjusted upwards to a special rate of one z$30,000/$1, the tobacco farmers insisted that this was still not enough. The US dollar was at the time fetching 20 times more on the parallel market, which is where most of the farmers were obtaining foreign currency to buy farming Implements. The impasse was only resolved after the intervention of the government which pegged the price of tobacco at $1.50/kg last year. This year the price was moved up to $2.26/kg, although the farmers had demanded a rate of $4/kg.

In May, business ground to a halt over non-payment at the country's three main auction floors in the capital Harare Burley Marketing Zimbabwe, the Tobacco Sales Floor and the Zimbabwe Tobacco Auction Centre. Farmers had complained that they had sold their crop 21 days previously but had still not received payment despite government promises.

A few fanners said they had received only Z$5, while the balance was deposited in their accounts or paid out in cheques. Historically, Zimbabwe has been the world's second largest exporter of tobacco. During the 1980s and 1990s the 'golden leaf was the county's main export product accounting for about half of Zimbabwe's total foreign exchange earnings. The January 2008 global production figures from the US Department of Agriculture had shown that Zimbabwe was not even among the top six tobacco exporters which now comprise Brazil, US, India, Malawi, Italy and China.

According to the Zimbabwe Tobacco Association (ZTA), production of tobacco plunged from a record level of 267m/kg in 2000, when the government the introduced its ill-fated land reform policies, to 73m/ kg in 2007.

Copyright International Communications Aug/Sep 2008

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