US embassy cable - 05LILONGWE696

UNCLAS LILONGWE 000696 
 
SIPDIS 
 
STATE FOR AF/S KENDRA GAITHER 
 
E.O. 12958: N/A 
TAGS: EAGR, ETRD, EINV, ECON, MI, Agriculture, Economic 
SUBJECT: MALAWI TOBACCO SHUT DOWN OVER PRICES 
 
REF: LILONGWE 331 
 
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SUMMARY 
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1. Frustrated over low prices at Malawi's state-controlled 
auction floors, smallholder tobacco farmers have closed down 
the auctions for the sixth time this season.  In the past two 
weeks, Malawi's president and parliament have joined the 
fray, accusing international buyers of price collusion and 
threatening to bring in new competitors.  This threat would 
be difficult to carry out in the short term, but the current 
fracas may drive some much-needed reform in the market here. 
End summary 
 
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PRICE PROTEST SLOWS FOREX INFLOWS 
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2. A now-familiar price dispute between tobacco farmers and 
large buyers has brought Malawi's auction floors to a halt 
several times in recent weeks.  Though such disputes are a 
seasonal phenomenon here, this year's wrangling is especially 
intense and disruptive, particularly in view of the country's 
dire shortage of foreign currency. The slower pace of sales 
has resulted in continued pressure on the kwacha, which has 
depreciated about 20 percent since March.  Tobacco exports 
provide the majority of Malawi's foreign currency income. 
 
3. As previously reported (reftel), a stoppage on the second 
day of the auctions in April resulted in a renegotiated base 
price.  That price ($1.15/kg) has not held on the generally 
poorer-quality smallholder tobacco, which has sold for as 
little as $0.65/kg.  The prices for top-quality tobacco, 
meanwhile, has been upwards of $1.50/kg.  Because larger 
estates (often owned by white farmers) produce better 
tobacco, the low prices for poor-quality leaf have led to 
charges of racial discrimination and price collusion. 
 
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POLITICIANS THREATEN ACTION 
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4. The three tobacco processor/exporters here, all of which 
have significant U.S. ownership, have generally refrained 
from responding to the charges.  That has not kept the 
rhetoric from heating up.  The GOM has played both sides, 
with President Bingu wa Mutharika publicly calling the 
tobacco market a "glaring example of neocolonialism," and 
threatening directly to close down the current buyers and 
bring in new ones.  On the other hand, the Ministry of 
Agriculture recently stopped a TAMA press briefing about a 
private British study alleging collusion.  More recently, 
Parliament's agriculture committee has promised to look into 
the matter and possibly reform the market structure. 
 
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COMMENT: A WELCOME OPPORTUNITY FOR REFORM 
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5. Politicians are unlikely to follow through on their 
threats against buyers, for two reasons: there are few 
primary exporters on the world market to replace the current 
ones, and the barriers to entry in Malawi are high.  As well, 
government action against foreign buyers would create a 
strong disincentive for new buyers to enter the market here. 
Parliament-driven reform of the grossly inefficient auction 
system is slightly more likely--a welcome change and a help 
to growers, should it occur.  But the notion of an 
unregulated tobacco market is alien to Malawi, and entrenched 
interests are unlikely to allow the depth of reform that is 
needed. 
 
CLOUD