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Fate of Malawi’s tobacco farmers goes under the hammer

The free market, its advocates say, helps the poor by spreading economic gains. But what if the market is opaque, unregulated and skewed against the poor?

For a chauffeur, Solomon Bakaya is a common man with one expensive taste. Working for a private corporation based in the heart of Malawi's commercial city of Blantyre, Bakaya smokes only Peter Stuyvesant cigarettes – also a favourite of the company executives he drives around. He has to shell out nearly US$1.40 for a packet of 10 of these cigarettes – more than a day's wages for most people in Malawi, one of the world's poorest countries.

While Bakaya can afford to pay for his expensive smoke, Malawian farmers growing the tobacco that ends up in these cigarettes are finding it hard to survive.

For three years, tobacco growers in this southern African country have fought pitched battles with buyers on the auction floors, claiming tobacco prices are artificially depressed, and frequently rioting and disrupting trading.

Bakaya may not be aware of this, but Malawian tobacco not only holds a pre-eminent position in the national economy, it also accounts for much of the stuffing that goes into cigarettes sold around the world.

It is also the backbone of Malawi's trade with the rest of the world – something that in theory is meant to benefit the country's poorest, but in reality is leaving them worse off.

The reason, say a lot of people from the Malawian President downwards, is that the market is being skewed in favour of big companies involved in tobacco buying.

Sliding prices

Official figures from Auction Holdings Limited (AHL), a state-owned company that runs the country's three major auction floors and sells the leaf on behalf of growers, show that prices have been sliding on the auction floors for the last three years.

Burley tobacco, which is the commonest variety grown by small farmers and is used in American-style blended tobacco, fetched an average of US$0.60 per kg at the beginning of the selling season in April this year, down from US$0.67 last year and US$0.78 in 2004.

In comparison, the minimum price set by the government this year is US$1.10 for low grade and US$1.70 for top grade tobacco.

"This (low price) is attributable to lack of strong competition under auction and a calculated desire not to compete in order to buy the tobacco cheaply," says the Tobacco Control Commission general manager Dr Godfrey Chapola.

He says the situation is worsened by the fact that buyers know that growers have no market alternatives – even when prices are not acceptable. There are some 300,000 registered smallholder farmers growing tobacco across Malawi's three regions (North, Centre and South). Most of them earn less than US$300 a year after deductions.

While poor growers have no option but to sell on the auction floors, big farmers deal directly with buyers and grow tobacco under contract. At an average of US$1.06 per kg, the price of contract tobacco is higher than that on the auction floors and is agreed before the start of the selling season.

Since the choice of who to contract is left to the buyer, only good growers are contracted, says Dr Chapola, adding, "unless everyone is accommodated equitably, the poor and not-so-good farmers will be disenfranchised".

In turn, the buyers supply multinational cigarette manufacturers such as Philip Morris and British American Tobacco (BAT) for even higher prices.

Boiling point

The situation appeared to reach a boiling point in March when President Bingu wa Mutharika, an economist, threatened to expel the largest tobacco buyers if they continued to offer prices lower than the government's minimum.

"Poor smallholder farmers in Malawi have remained poor because they are cheated by an international cartel that connives to buy our tobacco at exploitative prices and yet they sell the same tobacco at huge profits in their countries," he said.

"If you dare to threaten me some of you will find yourselves in handcuffs," he told buyers.

The President's reference to the existence of a buyers' cartel in Malawi is backed by two studies – one by a Brussels-based European competition lawyer Clive Stanbrook and the other by a government group sponsored by the World Bank.

The Tobacco Association of Malawi (TAMA), an umbrella body of growers, is calling for urgent reforms in the sector, which accounts for nearly 60 per cent of the country's total foreign exchange earnings and 13 per cent of the Gross Domestic Product. One in five Malawian households depends on tobacco production and employment.

The Association argues that the prices offered at the auction floors are below the cost of production. According to research by the Agricultural Research and Extension Trust, it costs a farmer US$1.22 to produce a kilogramme of Burley tobacco.

"It is clear that farmers have lost out as the auction prices paid are nowhere near the cost of production," says TAMA executive secretary Felix Mkumba.

"The big question that arises here is why do tobacco buyers then not pay the cost of production or even more to enable the tobacco farming enterprise to survive and also sustain itself?" asks Mkumba.

The Tobacco Exporters Association of Malawi, a club of leaf buyers, denies the existence of a cartel and maintains that the prices paid on the auction floors are determined by global demand and supply. But the buyers have so far refused to say why they are not paying the government's reserved minimum price.

Believing that the current two principal buyers – US subsidiary companies Alliance One and Limbe Leaf – can hardly claim to bring genuine competition on the auction floors, the government is setting up another tobacco buying company.

Agriculture Minister Uladi Mussa says the company, to be known as Malawi Leaf, will ensure that there are no cartels fixing prices in corporate boardrooms and later pretending to be competing on the auction floors.

As of this year, the government has also incorporated small tobacco farmers into its fertiliser subsidy programme alongside maize producers as a strategy to step up production and make Malawi food secure.

For its part, TAMA plans to boost farmers' earnings from tobacco exports – whose prices average about US$3.50 per kg – by investing in machinery and warehousing.

Observers say the one issue at the heart of the controversy is the lack of transparency surrounding tobacco pricing. The report by lawyer Stanbrook, never made public, has been quoted as saying in a local paper: "One of the reasons that the contract sales for flue cured [Virginia] tobacco were at better prices than on the auction floor this year may have been because they were carried out in less transparent circumstances."

Responding to the Stanbrook report, managing director of Limbe Leaf Tobacco Company, C A M Graham, said in an advertisement, "such transparency does not lend itself to confidentiality for anyone participating on the auction floors and this 'open auction system' may not suffer sufficient confidentiality for buyers and their customers."

As tobacco farmers count their losses amid accusations and mutual recrimination on the auction floors, so will Malawi, whose economy largely depends on the crop for stability.

Ayam Maeresa is a journalist at Television Malawi.

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08/08/2006

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