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 -------------- SUMMARY -------------- ¶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. -------------- ANOTHER STOP & START OVER PRICING -------------- ¶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. -------------- 2004 LEFTOVERS WILL BOOST SALES -------------- ¶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. -------------- COMMENT: FOREX IMPLICATIONS -------------- ¶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