Tobacco continues to be a vital crop in the economy of this country. It remains one of the most organised and well-oiled crop value chains—from research and development, input suppliers, extension and training to transportation, sales and marketing.
Each player along this value chain is in business to make profits.
In the tobacco value chain, the farmer is a king in producing the crop is concerned. The grower, however, loses this crown as soon as marketing or sales begin.
The farmer is at the mercy of the buyers, who set the price to boost their business interests.
Burley accounts for over 80 percent of the tobacco grown and sold in the country.
However, farmers, particularly smallholder growers, do not have a say or power to decide or negotiate the price with buyers.
In 2002, discussions began to determine the cost of production for tobacco that would accurately reflect all the crop produced in the country.
This discussion led to the establishment of the cost of production, which has become a yardstick for setting minimum prices for tobacco grades in the country.
The official cost of production, first released in the 2003/2004 growing season, calculates the cost of producing a kilogramme of tobacco annually.
It broadly focuses on variable and fixed costs.
Variable or direct costs are easy to determine since they depend on the size of the enterprise while fixed costs require a deep understanding of the functionality of these to break them down to a kilogramme of produce.
On the other end of the equation is yield per area. These two sides must be researched and determined as accurately as possible to calculate a meaningful cost of production.
Tobacco in Malawi is sold in US dollars. Therefore, all kwacha calculations must be converted to US dollars using the official exchange rate.
The assumption during this conversion is that all input prices were determined using the official rate, used for tobacco sales at the auction floors.
The final figure determined as the cost of production per kilogramme holds a much broader significance than the cost of many other crops.
While many other crops have only a single grade or two, tobacco has about 52 grades, according to Tobacco Commission’s classification.
The tobacco cost of production represents all the categories of farmers as well as all the styles and grades of tobacco.
The single figure along with a reasonable profit margin set by regulators is tabulated into a matrix to determine the minimum price for every grade of tobacco. The matrix is designed to ensure that all production costs are recovered and a reasonable profit is made when all tobacco is sold at various grade prices.
A stable exchange rate is, therefore, crucial in tobacco production where US dollars are used during sales.
The most ideal situation is to have an exchange rate that is relatively stable during the production and marketing cycle.
Ironically, government tends to devalue or realign the currency during the marketing season, often towards the end. This negatively affects farmers.
If this currency realignment is necessary, then it should be at the opening of the marketing season to help cushion the farmers as they return to the open market to purchase inputs whose prices may have been adjusted as a result.
Tobacco continues to be a vital crop in Malawi. The country’s top export injected $517 million into the ailing economy.
Until such time that other commodities surpass its significance, stakeholders must ensure that farmers are fairly compensated to support continued production.
