VZCZCXRO3739
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0085/01 0311444
ZNR UUUUU ZZH
P 311444Z JAN 07
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC PRIORITY 3802
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY

UNCLAS SECTION 01 OF 03 LILONGWE 000085 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR AF/S - DAN MOZENA, LOIS CECSARINI, KAMANA MATHUR 
USAID FOR AFR/SD - JEFF HILL, AFR/SD/EGEA - TOM HOBGOOD 
USAID FOR EGAT/ESP/IRB - ROB BERTRAM 
 
E.O. 12958: N/A 
TAGS: EAGR ECON PGOV MI
SUBJECT: MALAWI POISED FOR GOOD MAIZE HARVEST, BUT LOW 
PRICES WORRISOME 
 
 
¶1. Summary: Although it is too early to say for certain, 
Malawi appears to be headed for another year of surplus 
maize production, the result of good rains, improved maize 
seed provided donors, and an extremely expensive, but 
generally effective, government subsidy program that 
supplied fertilizer to a wide segment of the population. 
While the prospect of ample food in the coming year is 
certainly welcome, there is also concern that government 
policy will result in excessive surpluses, low producer 
prices, and disincentives to future production. With a 
significant surplus from last year's bumper crop still on 
hand, maize prices have already dropped fifty percent in 
recent months, due largely to a caution-inspired government 
ban on exports, even as the world price of maize has risen. 
Unless the government lifts the maize export ban soon and 
moves away from interventionist policies, Malawi risks 
continued market distortions that could lead to future food 
shortages.  With national elections slated for 2009, 
however, there is little incentive for President Mutharika 
to abandon his popular subsidy scheme in the next two 
growing seasons, or to allow exports before the 2007 
harvest is ensured.  End Summary. 
 
¶2. The government of Malawi's (GOM) fertilizer subsidy 
program, now in its second year in this incarnation, has 
encountered both political controversy and technical 
problems, including opaque coupon distribution, use of 
counterfeit coupons, a rumored overrun of legitimate 
coupons, and lawsuits and criminal charges against leaders 
who provided coupons to political allies rather than needy 
farmers.  Nevertheless, the GOM has accomplished its basic 
goal of getting inputs to farmers, and for the first time 
has included private input traders in the distribution 
channel. The inclusion of private traders is a direct 
result of donor pressure, and alleviates major concerns 
that another year of a "parastatal only" subsidy program 
would drive the private input dealers out of business. 
 
¶3. As of mid-January, fertilizer uptake under the subsidy 
program reached a record figure of 152,000 tons -- 47,000 
tons more than last year's subsidy program.  There have 
been very few complaints of fertilizer shortages, and those 
have been localized in very small areas.  Malawi has also 
benefited from a contribution of 5,000 tons of improved 
maize seed (including 3,000 tons of hybrid seed) from the 
donor community.  The unprecedented high applications of 
fertilizer and improved seed are expected to enable Malawi 
to meet its national food requirement provided good rains 
continue throughout the growing season (November to April). 
Given that it has rained every day in Lilongwe since mid- 
December, and noting meteorological reports indicating most 
of the country has received adequate or above-average 
rains, it seems likely that sufficient moisture will be 
available.  In Malawi, as in Iowa, moisture plus fertilizer 
equals a good crop, and all reports indicated that this one 
is going to be exceptional, absent a cessation of the rains 
in the next five weeks. Maize is flourishing everywhere -- 
including in the flower beds at the entrance to the Foreign 
Ministry -- and some is beginning to tassel. 
 
--------------------------------------------- ---------- 
GOM Food Security Policy Working in the Short-term, but 
Likely to Backfire 
--------------------------------------------- ---------- 
 
¶4. This year's maize price pattern is virtually 
unprecedented in recent memory.  During this pre-harvest 
period, usually referred to as the "hungry season" -- when 
maize stocks are scarce and prices high -- maize remains 
abundant and affordable owing to the 2006 bumper harvest. 
Boosted by subsidies and favorable weather, Malawi 
experienced a record harvest of 2.6 million tons in 2006, 
exceeding national demand by some 500,000 tons.  Because of 
a maize export ban imposed in 2005 (due to food scarcity at 
that time), grain traders and processors have been unable 
to sell off their remaining stock, which is estimated at 
300,000 tons or more. The ban is a political imperative 
here: Every Malawian recalls the disaster of the 2001-2002 
crop, and the famine that followed.  The low harvest was 
caused by lack of rain and inputs, but Malawians attribute 
the famine to the fact that the previous government 
permitted maize exports to continue through the crop 
season.  Thus the GOM is unlikely to lift the ban -- and 
indeed the President is passionately on the public record 
to this effect -- until the maize tassels in February or 
March, allowing for an estimate of 2007 production, and 
there is no assurance the ban will be lifted even if a 
surplus is predicted.  Note, however, that if the crop 
 
LILONGWE 00000085  002 OF 003 
 
 
estimates forecast a significant surplus, both farm and 
export prices will fall significantly. 
 
¶5. With the 2007 harvest expected to exceed last year's and 
export restrictions still in effect, traders are struggling 
to offload their sizeable 2006 stocks, which risk damage by 
moisture and pests the longer they sit in substandard 
storage. More than six months post-harvest, significant 
storage losses are in fact beginning to occur.  The GOM's 
grain trading agency, the Agricultural Development and 
Marketing Corporation (ADMARC), holds 85,000 tons that was 
purchased at above market prices (USD 138 per ton) through 
GOM guaranteed bank loans. The National Food Reserve 
Agency, another GOM institution, holds 70,000 tons. Private 
grain traders hold more than 100,000 tons that they 
purchased, mainly speculating that the export ban would be 
lifted, enabling them to sell to Zimbabwe.  The quantity 
stored at the household level is unknown but thought to be 
substantial as well. 
 
----------------------------------- 
The Real Cost of Subsidized Farming 
----------------------------------- 
 
¶6. Maize is now selling at USD 104 per ton in most parts of 
the country and for as little as USD 83 in some areas (less 
than half the typical price of USD 210 during the growing 
season). With the next harvest just two months away, prices 
are likely to plummet further and grain traders -- who are 
already selling at a loss -- will continue to suffer. The 
pressure on prices is not likely to ease unless the GOM 
lifts the export ban to release excess maize and stabilize 
prices.  In January, the Grain Traders and Processors 
Association -- which was concerned about falling domestic 
prices and feared that export markets would soon dry up -- 
appealed to the donor community to lobby the GOM to lift 
the ban. 
 
--------------------------------------- 
The Rule at ADMARC - Buy High, Sell Low 
--------------------------------------- 
 
¶7. The subsidy program has been extremely expensive for the 
GOM, not only due to the obvious costs of inputs, but also 
because of losses associated with stock holding.  In 2006 
the GOM instructed ADMARC to buy surplus maize and 
guaranteed its bank loans in anticipation that ADMARC would 
recoup the money through grain sales. But no one is 
interested in buying ADMARC's vastly overpriced maize 
which, at USD 215 per ton, is twice as expensive as 
privately-traded maize, though political pressure is 
building to compel ADMARC to unload this maize to consumers 
at prices below those offered by private traders, thus 
guaranteeing a major government-financed shellacking. 
Unless ADMARC is allowed to export maize soon, the only way 
it can reduce its trading loss, the GOM will likely have to 
cover its sizeable bank loans. 
 
------- 
Comment 
------- 
 
¶8. While generally popular, the GOM's strategy to 
ensure sufficient maize for domestic consumption by 
subsidizing inputs and banning exports is seriously 
distorting Malawi's maize trading market.  If the export 
ban is not lifted soon, falling prices will likely reduce 
maize production in 2008 as disappointed farmers shift to 
more profitable cash crops.  But with the 2009 elections 
ahead of him, and political pressure from opposition 
parties for even higher levels of subsidy, Mutharika shows 
no signs of changing course. Ironically, falling producer 
prices for maize may have the beneficial effect of 
encouraging diversification to other crops better suited to 
Malawi's agronomic conditions. 
 
¶9.  In a recent meeting with donor heads of mission, we 
posed the question "Is maize at less than 10 kwacha/kilo 
good or bad for Malawi food security?"  On the one hand, 
low priced maize stretches household food budgets and 
enables more people to acquire this staple within their 
incomes.  But on the other side, there is a real risk that 
maize prices will drop to a level close to the cost of 
production for smallholder farmers who use paid day labor 
to produce small surpluses as an income producing 
mechanism.  Neither we nor other donors have settled on an 
answer to the question, but it is crucial for Malawi's 
well-being that an answer be found. 
 
LILONGWE 00000085  003 OF 003 
 
 
 
EASTHAM