VZCZCXRO2931
RR RUEHDU RUEHJO RUEHMR
DE RUEHLG #0275/01 0861451
ZNR UUUUU ZZH
R 271451Z MAR 06
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 2551
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHTO/AMEMBASSY MAPUTO 6384
RUEHFR/AMEMBASSY PARIS 0089
RUEHLO/AMEMBASSY LONDON 0197
RUEHNR/AMEMBASSY NAIROBI 2477
RUEHJO/AMCONSUL JOHANNESBURG 0199
RUEAIIA/CIA WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC

UNCLAS SECTION 01 OF 02 LILONGWE 000275 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/S DAN MOZENA, LOIS CECSARINI, GABRIELLE MALLORY 
STATE FOR EB/IFD/ODF LINDA SPECHT AND ELAINE JONES 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN 
STATE PLEASE PASS TO MCC FOR KEVIN SABA 
PARIS FOR D'ELIA 
NAIROBI FOR FAS KEVIN SMITH 
 
E.O. 12958: N/A 
TAGS: ECON EAGR
SUBJECT: MUTHARIKA TO TOBACCO BUYERS: "CALL ME A DICTATOR" 
 
REF: 2005 LILONGWE 696 
 
LILONGWE 00000275  001.2 OF 002 
 
 
------- 
SUMMARY 
------- 
 
¶1. (SBU) President Bingu wa Mutharika opened the 
state-controlled tobacco auctions today with fiery populist 
rhetoric, accusing American buyers of collusion and telling 
them they must pay higher prices or "pack up and go."  He 
announced that the GOM is establishing a minimum price for 
"strategic" agricultural commodities, including tobacco, 
cotton, and tea. The proposed minimum price for tobacco is 
well above market rates, driving speculation that the GOM 
will have to retreat from its position to ensure the crop is 
sold.  While most of Mutharika's talk about price floors and 
government intervention is probably bluster, he may disrupt 
the market enough to interrupt desperately needed export 
earnings.  End summary. 
 
 
¶2. (SBU) According to exporters, the GOM is once again trying 
to impose a price floor on tobacco in the midst of rising 
production costs and declining world prices.  Since the 
mid-1990's, tobacco growing in Malawi has shifted from the 
exclusive domain of a few large estates to Malawi's most 
widely grown cash crop, with some 500,000 smallholders 
demanding subsidized inputs and guaranteed prices.  That 
shift has made tobacco prices the locus of highly charged 
politics, with frequent demonstrations and stoppages.  Along 
with the politics have come increasingly unreasonable 
demands, which the government has responded to by blaming and 
threatening the exporters who buy the leaf at auction and 
export to international cigarette makers.  (Two of the three 
exporters are controlled by American tobacco companies 
Universal Leaf and Alliance One.) 
 
------------------------ 
"YOU SHOULD PACK AND GO" 
------------------------ 
 
¶3. (U) At today's ceremony opening the auction floor for the 
season, Mutharika lambasted the exporters in front of a 
cheering crowd of growers, saying that he knows tobacco 
farmers who cannot afford "a bicycle, a house, or even food, 
because they have been cheated at this floor."  Buyers have 
been accepted as guests in Malawi, he said, "only to cheat 
our people" with prices they have conspired to keep 
artificially low.  "If buyers are not prepared to be fair," 
said Mutharika, "they should pack up and go...We can sell the 
tobacco ourselves; don't dare to threaten me...If someone 
calls me a dictator, so be it."  At each of his most pointed 
remarks, Mutharika directed his gaze directly at the Charge 
and emboffs. 
 
¶4. (SBU) Along with the rhetoric were specifics about minimum 
prices.  Mutharika declared that the GOM was henceforth 
considering tobacco, cotton, and tea to be "national 
strategic commodities," which would have minimum price 
floors.  For tobacco, the range of prices will depend on 
grade, with $1.10/kg for the lowest grade of green (i.e., 
unprocessed, field-dried leaf) and $1.70/kg for the highest 
grade.  After the event, tobacco exporters and growers 
characterized the low-grade price as completely unworkable. 
Last year's average for all grades was $0.99/kg; at the 
minimum prices dictated today, the average would be in the 
neighborhood of $1.28/kg.  When econoff asked one of the 
largest growers whether anyone would buy the low-grade leaf, 
he declared, "No one knows; it's chaos!"  Both main exporters 
expressed similar confusion; one has told us he could sell 
against blue-chip contracts (forward-buying arrangements from 
the largest cigarette producers) at these prices, but buying 
inventory on speculation would probably be impossible. 
 
¶5. (SBU) Mutharika's ire has been sharpened by a November 
2004 World Bank-funded report that has recently resurfaced, 
alleging that the tobacco exporters "probably" collude on 
 
LILONGWE 00000275  002.2 OF 002 
 
 
prices paid at auction.  The report bases this allegation on 
a statistical analysis of prices paid, which shows a close 
correlation between the American buyers.  The report 
recommends further investigation by a then yet-to-be-formed 
Competition Commission.  Mutharika has extrapolated this and 
other vague rumors of price collusion into a firm conviction, 
shared by many Malawians, that the American companies 
routinely collude on prices. 
 
-------------------------------- 
GOVERNMENT TO THE RESCUE--YIKES! 
-------------------------------- 
 
¶6. (SBU) As threats intensify, the exporters are beginning to 
wonder what, if any, arrows the GOM really has in its quiver, 
apart from more blustering.  One hopes the threat of throwing 
the parastatal ADMARC into the tobacco buying business is 
empty: the company has neither the capacity for processing 
tobacco nor the considerable expertise needed to offer 
product that the market will buy.  It is plain to nearly 
everyone--though perhaps not to the government--that doing so 
at the grower prices the GOM is insisting on is probably 
impossible.  Still, sources in the industry tell us that the 
parastatal Auction Holdings Ltd. has set up an export 
subsidiary.  Whether this is to introduce more competition 
into the marketplace or to provide a contingency for an 
ADMARC is unclear; in any case, the new company has failed to 
find commercial financing for operations. 
 
------------------------------------- 
COMMENT: EVERYTHING LOOKS LIKE A NAIL 
------------------------------------- 
 
¶7. (SBU) Today's rabble-rousing rhetoric and the past week's 
tough private meetings between government and exporters is 
probably a negotiating tactic, but it may paint the 
government into a political corner by stoking the hopes for 
higher prices and scapegoating exporters.  The nightmare 
scenario would be for Mutharika to somehow force the price 
floor by bringing ADMARC into the picture to mop up the 
overpriced low-grade tobacco.  While it is hard to say how 
the exporters would react (assuming the GOM could find a way 
to finance an intervention), such a move could disrupt the 
market and thus the foreign currency flows on which Malawi 
depends.  With about 1.5 months of forex reserves, a huge 
backlog of import payments, and the IMF insisting on a looser 
forex policy, there is little room for error. 
 
¶8. (SBU) More worrying in the long run is the possibility 
that Mutharika actually believes the central-planning 
economic perspective he exhibits in his public remarks.  His 
government has often intervened in markets, particularly 
agricultural markets, with the apparent idea that there is a 
"right" price for commodities.  Generally, the "right" price 
happens to coincide with political expediency: maize and 
fertilizer for import should be cheaper, but tobacco for 
export should be more expensive.  In an agricultural economy 
that has been optimized for subsidized subsistence farming, 
the need for structural reform presses more urgently with 
every season, and the governments attempts to avoid painful 
reform take it further and further from market 
liberalization.  Quite apart from his populist rhetoric, his 
actions suggest that state control is the only tool he really 
knows how to grasp. 
GILMOUR