MALAWI TOBACCO SELLING AGAIN

UNCLAS LILONGWE 000331

SIPDIS


STATE FOR AF/S ADRIENNE GALANEK
STATE FOR EB/IFD/OMA FRANCES CHISHOLM
STATE FOR EB/IFD/ODF LINDA SPECHT
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN

E.O. 12958: N/A
TAGS: EFIN EAGR ECON MI
SUBJECT: MALAWI TOBACCO SELLING AGAIN

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SUMMARY
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1. Malawi's tobacco auction floor reopened on March 12 after
being closed for a week and a half in a dispute over prices.
While the negotiated base price is an improvement over last
season's closing price, the size of the crop is estimated to
be down nearly 20 percent from last year's. Large leftover
stocks should help boost sales to near normal, providing
relief for thin foreign currency reserves. End summary.


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ANOTHER STOP & START OVER PRICING
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2. Malawi's state-run tobacco auction floor opened as usual
on March 30. As has become too usual in recent years, sales
came to a halt after two days as farmers protested low
prices. The Tobacco Control Commission stepped in to help
the parties negotiate a production cost-based minimum price
of $1.15/kg for smallholders' burley tobacco, an improvement
over last season's closing price of $1.09/kg. Higher
quality leaf, all from larger commercial farms, has been
commanding prices of up to $1.70/kg. After two full days of
auctioning, prices appear to be holding


3. BACKGROUND NOTE: Prices typically follow a standard
distribution curve through the course of the season. Leaves
come to market as they are hand picked from the tobacco
plant, from the ground up. Mid-season prices are highest
because the middle leaves contain the optimum concentrations
of sugar and nicotine. Lower prices at the beginning and
end of the season reflect less than optimum chemistry of
bottom and top leaves respectively. End note.


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2004 LEFTOVERS WILL BOOST SALES
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4. Second-round crop estimates are putting actual production
at about 140 million kg, 80 percent of last year's bumper
harvest of 180 million kg. But this year's total auction
volumes are estimated to be off only 9 percent from last
year, owing to the large stocks of harvested tobacco
remaining from last season. The Tobacco Control Commission
estimated before the pricing agreement that total auction
sales will be down about 14 percent from 2004; this number
should increase if agreed pricing holds.


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COMMENT: FOREX IMPLICATIONS
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5. The big question is what this means for final export
sales of finished leaf, and thus what foreign currency
earnings the country can expect over the next six months.
The GOM is closely focused on this question, because foreign
currency reserves have dwindled to barely over one month.
One industry source told us that no fewer than six cabinet
ministers attended the stakeholder meeting on prices, which
usually attracts only the agriculture minister. Whether
prices hold through the selling season remains to be seen,
but the negotiated minimum is promising. The most important
development is that the auction has resumed, probably as a
result of political pressure on buyers to tolerate thinner
margins.

GILMOUR