VZCZCXRO8428
RR RUEHDU RUEHJO RUEHMR
DE RUEHLG #0294/01 0900956
ZNR UUUUU ZZH
R 310956Z MAR 06
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 2578
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLO/AMEMBASSY LONDON 0199
RUEHFR/AMEMBASSY PARIS 0091
RUEHNR/AMEMBASSY NAIROBI 2480
RUEHJO/AMCONSUL JOHANNESBURG 0201
RUEAIIA/CIA WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC

UNCLAS SECTION 01 OF 02 LILONGWE 000294 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR AF/S 
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 EINV EFIN MI
SUBJECT: MALAWI TOBACCO MARKET RELAXES 
 
REF: LILONGWE 275 
 
LILONGWE 00000294  001.2 OF 002 
 
 
This message is sensitive but unclassified--not for Internet 
distribution. 
 
------- 
SUMMARY 
------- 
 
¶1. (U) Malawi's tobacco market has started to work again, 
after being disrupted by the GOM's new minimum price scheme. 
Buyers and sellers both seem to want to return to 
demand-driven pricing, but the market appears to be dealing 
with the government's prices for the moment.  Buyers predict 
more problems later in the season, as higher grades of 
tobacco come to market.  The net effect of Mutharika's price 
scheme may be to lower the price fetched by low-grade tobacco 
as buyers try to average out the higher prices paid for 
middle grades.  End summary. 
 
--------------------------------------- 
A WOBBLY AUCTION AND PROTESTING FARMERS 
--------------------------------------- 
 
¶2. (U) After President Bingu wa Mutharika's March 27 
announcement of government-mandated minimum tobacco prices 
(reftel), the tobacco auction has experienced an unusually 
sharp opening wobble.  Selling appeared to be proceeding 
along more or less normal lines on opening day, although the 
lowest grade of tobacco--representing the largest volume in 
this market--went largely unsold at the new $1.10/kg minimum 
price.  This caused little upset among the growers at first, 
because they did not realize that their bales were not sold. 
When it became clear the next day that many of the day's 
sales were not sales after all, the growers asked for a stop 
to trading. 
 
¶3. (SBU) A fresh round of negotiations between growers, 
exporters, and the government finally produced an 
understanding that allowed the auction to proceed on March 
¶30.  Industry sources have told us the principal pressure 
during these negotiations came from growers, who wanted to 
sell quickly at whatever price the market would pay, never 
mind the new minimums.  While the GOM has not conceded to 
adjust its minimum prices, it has made clear that tobacco 
classified as damaged or moldy can sell at whatever buyers 
want to pay for it.  (At the start of the season, much of the 
tobacco does fit this description; quality improves during 
the course of the five-month selling season and drops again 
toward the end.) 
 
----------------- 
A TEMPORARY PEACE 
----------------- 
 
¶4. (SBU) A visit by Embassy staff to the auction floor 
confirmed that order had been restored, though the auction 
was not operating as efficiently as normal.  Several traders 
told us that the new price scheme was still causing 
confusion, and there seemed to be a consensus among buyers 
and sellers that eventually things would have to return to 
demand-driven pricing.  Around half the tobacco on the floor 
appeared to have been classified as moldy, though we saw 
plenty of higher-grade burley selling for good prices. 
 
¶5. (SBU) As long as the market is dealing mostly in 
substandard tobacco, everyone is happy.  The problems, we are 
told, will come later, as better grades make up more and more 
of the trading.  So far, the higher-grade price floors have 
not been greatly tested against market demand.  If those 
prices prove too high, either government will have to give or 
growers will pressure graders to give their tobacco a lower 
grade--a perverse but very real opportunity for graft. 
Government is not thought likely to follow through on its 
threat to export the tobacco itself if no one buys at the 
minimum prices or above.  (On the other hand, the parastatal 
operator of the auction floor recently launched a 
buying/exporting company, Malawi Leaf Ltd.  It is not yet 
 
LILONGWE 00000294  002.2 OF 002 
 
 
clear how the company is being financed, and other exporters 
are wary of the possibility of anti-competitive behavior 
between the state, the auction operator, and the new company.) 
 
--------------------------------------------- ---- 
COMMENT: ANOTHER BACKFIRED POLICY OF INTERVENTION 
--------------------------------------------- ---- 
 
¶6. (SBU) COMMENT: Though the situation has calmed for now, it 
is bound to flare up again.  It appears that buyers may 
low-ball the substandard tobacco in an effort to compensate 
for higher prices in the middle grades.  This will do 
precisely the opposite of what Mutharika intended with his 
prices: poor, low-volume, low-quality producers will get 
artificially low prices.  He may yet have to pay a political 
price for raising expectations and failing to deliver.  In 
any case, this episode demonstrates once again Mutharika's 
instinct to interfere with markets to produce a 
social-welfare benefit; the same behavior has kept Malawi's 
fertilizer and maize markets out of balance and 
underdeveloped. 
 
 
GILMOUR