VZCZCXRO5148
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLG #0152/01 0790750
ZNR UUUUU ZZH
R 200750Z MAR 09
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 0392
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHBR/AMEMBASSY BRASILIA 0004
RUEHLO/AMEMBASSY LONDON 0320
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC

UNCLAS SECTION 01 OF 02 LILONGWE 000152 
 
SENSITIVE 
SIPDIS 
 
LONDON FOR AF WATCHER PETER LORD 
 
E.O. 12958: N/A 
TAGS: EAGR EFIN ETRD ECON MI
SUBJECT: MALAWI: AN ACRIMONIOUS START TO TOBACCO SEASON 
 
REF: A. 08 LILONGWE 574 
     ¶B. LILONGWE 77 
 
LILONGWE 00000152  001.2 OF 002 
 
 
¶1. SUMMARY: Malawi's tobacco auction season began on March 16 
in conflict and confusion.  By far the country's most 
important export, tobacco plays a critical role in the 
country's economy.  President Mutharika's attempt to fix 
minimum floor prices in this election year has further 
increased farmers' already high expectations.  At the same 
time, a bumper crop and the global economic slowdown are both 
putting downward pressure on prices.  After bitter auction 
floor disputes in the first several days, sales have to 
resumed at disappointing prices.  The Chinese buyers the GOM 
and growers were counting on ultimately failed to appear. 
Tobacco prices will be a key determinant in how severely the 
global economic downturn impacts Malawi.  End summary. 
 
Tobacco - Malawi's Leading Export 
--------------------------------- 
 
¶2. Malawi's all-important tobacco auction season began 
inauspiciously on March 16.  In overwhelmingly agricultural 
Malawi, maize and tobacco dominate the economy.  While most 
of the country's maize is grown for domestic consumption, the 
entire tobacco crop is exported, as Malawi has no domestic 
production.  Tobacco alone generates over 60% of Malawi's 
export earnings.  With chronically low foreign exchange 
reserves (currently about one month's import cover)(Ref.A) 
the importance of tobacco sales to the country cannot be 
overstated. 
 
¶3. With a limited exposure to the global financial system, 
little manufacturing, and most of its population engaged in 
subsistence agriculture, Malawi has thus far been relatively 
unaffected by the global economic downturn.  Lower world oil 
prices have in fact been a significant benefit to the local 
economy.  The most likely transmission channel for the global 
economic crisis is through the commodity markets, which for 
Malawi means tobacco above all.  How the auction season plays 
out is therefore a key factor in any projections for the 
country's near-term economic health. 
 
Bumper Crop, Global Crisis Threaten Prices 
------------------------------------------- 
 
¶4. Historically Malawi has produced between 150,000 and 
200,000 metric tons of mostly burley (air dried) tobacco. 
With good rains and more acreage planted in tobacco following 
record earnings in 2008, 2009 production is expected to be 
close to 250,000 metric tons.  While enough to make the 
country one of the world's three largest producers of burley, 
Malawi is still a price taker.  To the extent that Malawi's 
production can impact prices, the large 2009 crop will tend 
to exert downward pressure.  Other factors affecting the 
market price are likely to be the global financial crisis, 
which could make financing difficult to obtain for the 
buyers, and the depreciation of the Brazilian real, since 
Brazil is the world's largest producer of burley tobacco. 
 
Presidential Intervention 
------------------------- 
 
¶5. At the same time that the buyers are expecting a softer 
market, the growers expect higher prices, following record 
auction prices in 2008.  President Mutharika's announcement 
that the GOM had set minimum floor prices at USD 2.15/kg 
further raised farmers' expectations.  The GOM claimed it was 
trying to protect small farmers by basing prices on the 
actual cost of production, plus an acceptable profit margin. 
Dramatically higher fertilizer prices in 2008 significantly 
increased production costs in the 2008-09 growing season.  It 
was not clear, however, whether or how the GOM would enforce 
its floor price, which in any case failed to account for 
differences in types and grades of tobacco.  In fact, 
Mutharika was probably referring to an average floor price 
for all types, but failed to make this clear in his remarks. 
 
¶6. Disappointment was widespread on opening day of annual 
tobacco auctions, as the prices offered by the buyers failed 
to reach levels expected by the growers.  Prices paid ranged 
from a low of USD 0.90 per kg to a high of USD 2.65/kg. Few 
sales were made.  Second day results were no better; with 
prices offered well below expectations buying was suspended 
in the morning with only a fraction of the floor's tobacco 
sold.  By March 19, however, auctions had resumed following 
discussions between buyers, sellers and auction officials 
that improved transparency by having grade-specific minimum 
 
LILONGWE 00000152  002.2 OF 002 
 
 
prices displayed on each bale of tobacco prior to auction. 
 
Government Bailout? 
------------------- 
 
¶7. Media reports quote a senior government minister (NFI) as 
promising that the government would buy whatever tobacco is 
not sold to the private sector buyers.  While this would be 
politically popular with tobacco farmers, it is unclear how 
the GOM could finance such a plan if downstream customers are 
otherwise unwilling to absorb all of Malawi's production. 
 
China Stays Away 
---------------- 
 
¶8. GOM officials and growers have recently expressed the hope 
that weakening demand for tobacco in the West would be 
partially offset by greater demand from China.  The entrance 
of Chinese buyers into the Malawi market was also expected to 
dilute the influence of the small circle of traditional 
buyers - including several U.S. firms - and bring higher 
prices to Malawi's farmers.  In the end, however, the 2009 
auction floors opened with no new buyers registered with the 
Tobacco Control Commission.  The Chinese impact was never 
likely to match public speculation, since the Chinese market 
prefers the flue-cured tobacco that represents only a small 
share of Malawi's production (Ref. B). 
 
Comment 
------- 
 
¶9. With elections barely two months away, President Mutharika 
has a powerful incentive to please Malawi's farmers.  In a 
soft market, however, the President may be playing a 
dangerous game.  Setting minimum prices too high risks 
bringing sales to a complete stop, with a potential negative 
backlash.  Malawi's tobacco auctions are interrupted by 
disagreements over price most years, so current squabbles are 
not unique, but farmers and the GOM may well be disappointed 
by this year's crop.  On a macro level, the lower prices paid 
may be offset by larger volumes sold, leaving Malawi's 
balance of payment situation more or less unaffected.  Much 
will depend on how much of Malawi's tobacco crop - which is 
projected to break all previous production records - traders 
ultimately buy.  After a particularly tight few months in 
foreign currency markets, everyone, including the GOM, is 
looking forward to renewed flows of tobacco dollars. 
BODDE