US embassy cable - 05LILONGWE331

UNCLAS LILONGWE 000331 
 
SIPDIS 
 
 
STATE FOR AF/S ADRIENNE GALANEK 
STATE FOR EB/IFD/OMA FRANCES CHISHOLM 
STATE FOR EB/IFD/ODF LINDA SPECHT 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN 
 
E.O. 12958: N/A 
TAGS: EFIN, EAGR, ECON, MI, Agriculture, Economic 
SUBJECT: MALAWI TOBACCO SELLING AGAIN 
 
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SUMMARY 
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1. Malawi's tobacco auction floor reopened on March 12 after 
being closed for a week and a half in a dispute over prices. 
While the negotiated base price is an improvement over last 
season's closing price, the size of the crop is estimated to 
be down nearly 20 percent from last year's.  Large leftover 
stocks should help boost sales to near normal, providing 
relief for thin foreign currency reserves.  End summary. 
 
 
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ANOTHER STOP & START OVER PRICING 
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2. Malawi's state-run tobacco auction floor opened as usual 
on March 30.  As has become too usual in recent years, sales 
came to a halt after two days as farmers protested low 
prices.  The Tobacco Control Commission stepped in to help 
the parties negotiate a production cost-based minimum price 
of $1.15/kg for smallholders' burley tobacco, an improvement 
over last season's closing price of $1.09/kg.  Higher 
quality leaf, all from larger commercial farms, has been 
commanding prices of up to $1.70/kg.  After two full days of 
auctioning, prices appear to be holding 
 
3. BACKGROUND NOTE: Prices typically follow a standard 
distribution curve through the course of the season.  Leaves 
come to market as they are hand picked from the tobacco 
plant, from the ground up. Mid-season prices are highest 
because the middle leaves contain the optimum concentrations 
of sugar and nicotine.  Lower prices at the beginning and 
end of the season reflect less than optimum chemistry of 
bottom and top leaves respectively.  End note. 
 
 
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2004 LEFTOVERS WILL BOOST SALES 
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4. Second-round crop estimates are putting actual production 
at about 140 million kg, 80 percent of last year's bumper 
harvest of 180 million kg.  But this year's total auction 
volumes are estimated to be off only 9 percent from last 
year, owing to the large stocks of harvested tobacco 
remaining from last season.  The Tobacco Control Commission 
estimated before the pricing agreement that total auction 
sales will be down about 14 percent from 2004; this number 
should increase if agreed pricing holds. 
 
 
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COMMENT: FOREX IMPLICATIONS 
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5. The big question is what this means for final export 
sales of finished leaf, and thus what foreign currency 
earnings the country can expect over the next six months. 
The GOM is closely focused on this question, because foreign 
currency reserves have dwindled to barely over one month. 
One industry source told us that no fewer than six cabinet 
ministers attended the stakeholder meeting on prices, which 
usually attracts only the agriculture minister.  Whether 
prices hold through the selling season remains to be seen, 
but the negotiated minimum is promising.  The most important 
development is that the auction has resumed, probably as a 
result of political pressure on buyers to tolerate thinner 
margins. 
 
GILMOUR