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Wednesday, August 27, 2008

Boom Time for Malawi 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

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.

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.

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

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

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.

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