VZCZCXRO1824
RR RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0719/01 2281247
ZNR UUUUU ZZH
R 161247Z AUG 06
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 3144
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEAIIA/CIA WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC
RUEATRS/DEPT OF TREASURY WASHDC 0463

UNCLAS SECTION 01 OF 02 LILONGWE 000719 
 
SIPDIS 
 
STATE FOR AF/S 
STATE FOR EB/IFD/ODF 
STATE FOR EB/IFD/OMA 
USAID FOR AFR/SA - IAN MACNAIRN 
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA 
TREASURY FOR OTA - BOB WARFIELD 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAID EFIN EAGR PGOV MI
SUBJECT: PRESIDENT DECLARES "WAR" ON FOREIGN TOBACCO BUYERS 
 
REF: LILONGWE 275 
 
LILONGWE 00000719  001.2 OF 002 
 
 
¶1. (U) Summary: President Mutharika has again lashed out at 
foreign tobacco buyers, castigating them for paying low prices 
at the state-run auction.  The president singled out for 
criticism the manager of the local subsidiary of an American 
tobacco company, telling him to pay more or leave the country. 
Buyers reacted nervously, concerned that the strong rhetoric 
will scare away international customers and damage Malawi's 
weak investment climate.  End summary. 
 
Declaration of "War" 
-------------------- 
 
¶2. (U) In a reprise of his fiery performance at the opening of 
tobacco season in March (reftel), President Mutharika has 
again attacked foreign tobacco buyers over the low prices that 
Malawi's smallholder farmers are receiving at the state-run 
auction.  In a speech opening the annual Agricultural Fair in 
Blantyre on August 10, Mutharika accused the buyers of 
"stealing from us" and "exploiting us" by paying low prices at 
the auction. 
 
¶3. (U) The president focused his criticism on the manager of 
Limbe Leaf, the local subsidiary of American tobacco company 
Universal Leaf.  Mutharika declared the manager "and his 
cohorts" should pay higher prices or leave the country, 
eliciting a roar of approval from the crowd.  The president 
continued, "this is my home and it's not their home.  So, 
someone has to leave, and the person who will leave is not 
me." 
 
¶4. (U) Ratcheting up the tone, Mutharika bellowed, "This is 
war.  And in any war, of course there are casualties.  I'd 
like them to stay, but they are not going to stay on their 
terms.  They will stay on my terms." 
 
Tough Words Won't Fix the Problem 
--------------------------------- 
 
¶5. (U) Malawi tobacco prices are depressed for a number of 
reasons, primarily relating to basic supply and demand. 
Thanks to good rains and GOM fertilizer subsidies, the country 
has produced a record tobacco crop of approximately 158,000 MT 
this year.  Production has risen steadily in the past 10 years 
since the liberalization of the sector in the mid-1990s. 
Prior to that time, tobacco production was strictly limited by 
law under the Banda-era Special Crops Act.  Under that law, 
permits were issued to friends of the regime who grew tobacco 
on large estates.  Production quantity was controlled, quality 
was good, and prices were high.  Since the abolition of the 
act and the liberalization of the sector, some 400,000 
smallholder farmers have entered the market, steadily 
increasing the quantity of tobacco produced, while the overall 
quality has fallen.  At the same time, global demand for 
tobacco has been flat. 
 
¶6. (U) A further problem is the inefficient method by which 
smallholder tobacco is sold through the government-owned 
auction, with several parastatal agencies taking their cut of 
farmers' meager profits.  Smallholders must also pay steep 
fees for transporting their product to market, and for 
warehousing it at the auction.  Operators of larger farms who 
grow tobacco on contract (thereby avoiding the auction) do 
command higher prices.  But the vast majority of producers are 
trapped in the auction system.  The GOM is, of course, 
reluctant to change a system that provides considerable 
revenue and a large number of patronage jobs. 
 
¶7. (U) With all of these factors, it is easy to see why 
Malawian smallholders are not commanding the kind of prices 
they would wish for.  For several years now, most small 
farmers have only been able to break even growing tobacco. 
 
Buyer Reaction 
-------------- 
 
¶8. (SBU) Local tobacco company executives told us the reaction 
to Mutharika's speech was swift, and they received calls the 
next day from nervous customers as far away as the U.S. and 
Japan.  One local buyer was hosting a group of overseas 
clients who decided to cut short their visit and depart, 
 
LILONGWE 00000719  002.2 OF 002 
 
 
fearful of public reaction to the speech.  Buyers are anxious, 
and concerned that the president's remarks will prompt another 
disruption in the market, as happened earlier in the season. 
Following Mutharika's earlier outburst in March, sales volumes 
at the auction in the first two months of the season were 
seriously depressed, and foreign exchange income fell 
precipitously.  Since June, sales have increased as the market 
settled down, and record volumes have compensated for the 
lower average prices. 
 
Comment 
------- 
 
¶9. (SBU) Mutharika's remarks on this and other occasions 
reveal a basic misunderstanding of the global tobacco market 
and the impediments to smallholder tobacco production in 
Malawi.  His attack on Limbe Leaf is particularly curious, 
since the majority shareholder in the company is the locally- 
owned Press Corporation, and a large portion of Press is owned 
by none other than the Government of Malawi (American company 
Universal Leaf owns less than 50 percent of Limbe). 
 
¶10. (SBU) Mutharika's tough talk may go down well with the 
masses, but the message to investors, both domestic and 
foreign, is more ominous.  Many local and foreign business 
people have told us of their fears that, with such an 
attitude, the GOM might arbitrarily decide to change the terms 
of contracts or nationalize assets. 
 
¶11. (SBU) In the case of tobacco, the president is taking a 
particular risk in attacking the foreign buyers.  Both of the 
major foreign buyers, Universal and Alliance One, have large 
investments and spare capacity elsewhere.  Universal has 
expanded its operations in Mozambique in recent years, and 
company executives have told us that their new processing 
plant in Mozambique has room for expansion.  Malawi is also 
competing against low-cost, high-efficiency producers like 
Brazil.  If the GOM continues to show a hostile attitude, 
those companies might well look to expand their operations 
elsewhere.  With 60 percent of the country's foreign exchange 
income derived from tobacco, Mutharika is taking a gamble 
that, if he loses, could see a sizeable chunk of the Malawi 
economy go up in smoke. 
 
EASTHAM