Malawi tobacco prices: Where are we getting it wrong?

It is an undisputed fact that in spite of a global economic downturn, anti-smoking campaign and poor prices offered to peasant farmers, the local tobacco industry has continued to generate strong growth as well as profits.

On the global arena, many legal problems continue to dog the tobacco industry as governments around the world continue to put in place strict regulations to curb the use of tobacco.

The health impact of tobacco is that many and many smokers are suffering from cancer or other side effects of tobacco consumption.

While tobacco concerned players continue to initiate campaigns to stop children from consuming tobacco, they are also pursuing research and development efforts to develop cigarettes that reduce the health risks related with smoking.

Despite all these concerns and actions, Malawi authorities have times without number conceded that the country will continue to grow tobacco, which wires in more than half of the country’s foreign exchange and contribute 13 percent to the gross domestic product (GDP), in the years to come.

Agriculture experts have said there is, at the moment, no single crop that can replace the leaf, dubbed Malawi’s green gold, employing millions of Malawians directly or indirectly.

But despite authorities’ insistence that the country will continue to grow the crop, it is farmer that toils in the fields, but is not getting the just rewards for the sweat.

And as a reaction that the prices are not conducive, tobacco growers at Limbe Auction Floors halted sales of the leaf due to below minimum prices buyers were offering.

This happened just half an hour after Deputy Minister of Agriculture Bintony Kuntsaila officially opened the market.

On the day, the prices ranged from 85 cents per kilogrammes (kg) to $1.40 per kg, which the growers argued were below last year’s starting price of $1.05 per kg, of the same grade.

The government-set minimum prices for both contract and auction have been set at $1.76 per kg from last year’s $1.69 per kg for burley, $2.65 per kg from $2.63 9 per kg for flue cured and $2.10 per kg from $1.80 per kg for dark fired tobacco.

Four weeks into the sales season, the prices have not improved either. In any case, they have worsened in view of the fact that now most of the growers are bringing to the auction floors quality leaf, according to some of the farmers we have spoken to.

Two growers from Zomba, Feston Paudala and Esther Dauda, found at Limbe Auction Floors last week said in an interview the prices the buyers are offering are still pathetic.

“The prices the buyers are offering are still not favourable and not in line with the cost of production. We spend a substantial amount on fuel and transportation costs. We feel the buyers are stealing from us because the prices are not in line with the cost of production,” said Paudala.

On the other hand, Dauda said the cost of production this year was high because fuel and transportation costs have gone up.

“We spent a lot to produce the leaf, and it was also at the time the kwacha had depreciated which meant that most of the farm inputs were priced way beyond many of us. We had to borrow money to ensure that we are in business,” she said.

Paradoxically, the sales are also taking place at a time the kwacha has been appreciating, which means that farmers’ earnings in kwacha will be much more reduced.

Tobacco Control Commission (TCC) chief executive officer Bruce Munthali said the minimum prices for different types and grades of the leaf are to ensure that the grower gets a fair reward for his/her labour.

This means that each grade and type of tobacco has a minimum starting price and government’s intention of coming up with the minimum price is to ensure that no buyer is allowed to buy any tobacco at below the minimum price.

Most often the buying price has been contrary to government’s wish and much to the chagrin of the farmers.

Munthali, however, said farmers should not despair because the situation is bound to improve as the leaf’s sales progresses.

But why are Malawian tobacco growers not getting the just rewards for their sweat when their colleagues in neighbouring countries are smiling all the way to the bank?

While in Malawi, burley and flue cured tobacco prices average $1.24 per kg, in Zambia, the average price of the leaf ranges from $2.40 per kg to $4.80 per kg, with the national average at $4 per kg.

In Zimbabwe, where tobacco accounts for 10.7 percent of GDP, the outlook for tobacco production looks rosy with export prices reaching an all time high.

About 180 million kg are expected to be delivered to the country’s three auction floors as compared to 166 million kg delivered last year.

The prices in Zimbabwe have, however, not been disappointing.

Despite being depressed this year as compared to last, the leaf’s price in Zimbabwe is way above what buyers in Malawi are offering which are averaging $3.65 per kg, down from $3.82 per kg offered during the same period last year.

Last growing season, the Malawi Government adopted Integrated Production System (IPS)—a contract system of tobacco growing and marketing approved in 2012—which officials say has helped to stabilise Malawi’s tobacco market and resulted in better prices than before.

Minister of Agriculture James Munthali, in an earlier write-up noted that most farmers who participated in IPS in 2012/13 season benefited from superior returns, since it provided them with training and access to loans and fertilisers.

“All of these combined, enabled burley tobacco farmers to have better yields. Under IPS the growers have doubled their yields per hectare as compared to that of the non IPS farmers. In addition, improved quality, in turn, led to better average prices for IPS farmers,” he said.

But still some farmers are not convinced.

Available figures from the Ministry of Agriculture for last year showed that IPS farmers achieved an average price of $2.05 per kg against the $1.95 per kg paid on auction.

This year, output is around 180 million kg from 168.7 million kg the year before which was a big jump from 79.8 million achieved in 2012.

Last year’s output raked in revenue of $361.8 million from $177 million [K69 billion] the year before. With the current trend, officials say revenue could be slightly more than last year.

Out of last year’s output and as is the case this year, two thirds of the burley tobacco—grown by a majority of smallholder farmers—is sold on contract, representing 80 percent while just one third on auction.

Munthali said contract prices were 21 percent higher over minimum prices compared to 15 percent for non-contracted tobacco farmers.

The tobacco regulatory body hired a consulting firm which reviewed the efficacy of IPS in view of the teething problems that the system faced. The results are yet to be made public.

IPS which is also being implemented in Zimbabwe and Zambia is specifically intended to address the issues of over-production that has suppressed market prices, discouraging tobacco farmers leading to underproduction and worsening the country’s foreign exchange deficit.

Munthali said the problems associated with the IPS were inevitable for a system that is new, but argued that government has worked with all players in the industry to address the issues.

“For example, some farmers expressed concern that they were contracted without any price indication prior to the start of the season. This is obviously contrary to the basic principles of this system and is an administrative issue, unlikely to happen again,” he said.

Currently, the final draft of the amended Tobacco Act is yet to be discussed by parliamentarians but there is hope that the revisions to the Tobacco Act, which incorporates IPS, will benefit the country and the economy as a whole.

A tobacco farmer who is also president of Central Region Tobacco Growers Association (CRTGA) Ernest Chadzunda earlier told Business News that poor prices are still persisting and that most of its members are still weeping.

He call on the buyers to jack-up the prices, but expressed hope that as the market progresses, quality tobacco will be coming which would improve prices for growers for them to benefit.

But Tobacco Association of Malawi (Tama) chief executive officer Graham Kunimba, however, noted that most of the challenges that characterised early days of opening are still persisting, citing increased no sales and low prices.

“I think most of the problems are still there, for instance, cases of no sales and buyers sticking to paying minimum prices. That is a problem because prices are not favourable,” he said.

Industry players generally agree that the early days of the market is filled up with tobacco from vendors who hope to cash in on good prices despite their leaf not being properly graded.

But now that good leaf is coming onto the floors, why are buyers sticking to paying minimum prices which are pathetic in view of the appreciation of the kwacha? It remains to be seen if the situation will improve since there is still a long way to go.