MALAWI TRIES NEW TOBACCO MARKETING SCHEME

UNCLAS LILONGWE 000127 SIPDIS SIPDIS SENSITIVE STATE FOR AF/S G. MALLORY PARIS FOR D'ELIA JOHANNESBURG FOR FCS E.O. 12958: N/A TAGS: EAGR ECON ETRD MI SUBJECT: MALAWI TRIES NEW TOBACCO MARKETING SCHEME ¶1. (U) At the insistence of the World Bank, the GOM has announced plans to take a baby step toward liberalizing its state-controlled tobacco market this season. The Tobacco Control Commission will establish three local commodity exchanges as an experimental alternative to the sale of tobacco through the state auction floors. The exchanges--in effect local, liberalized auction floors--will allow any registered buyer to buy tobacco from any seller in a sealed bid auction. The buyer can then export directly or resell to another registered buyer, but any resale within Malawi would have to go through the state auction floor. The exchanges themselves will be run by licensed exchange operators, who will be responsible for collecting taxes and levies on all tobacco sold. The operators will generate revenue by imposing a transaction fee or commission to cover their operating costs plus profit. ¶2. (SBU) The director of the Tobacco Control Commission, Godfrey Chapola, is reluctantly implementing the directive to move forward with the local exchanges. A life-long veteran of the old state tobacco monopoly, he recently told us tha4 he "does not fully understand" how the exchanges will work. Chapola conceded that the local exchanges should reduce transport costs and queueing times for tobacco farmers. He cited a loss of control over quality and a lack of transparency as the main drawbacks. Whether this fear is realistic or not, it resonates with a widespread distrust of "middlemen," who are blamed for taking advantage of il$iterate smallholders and compromising quality. The local exchanges are expected to introduce a wider range of buyers, mainly middlemen who will consolidate lots for export or resale. ¶3. (U) Predictably, tobacco buyers have a more sanguine perspective on the new exchanges. One of the biggest costs to producers--and risks to buyers--is the very limited capacity of Auction Holdings Limited, the parastatal operator of the state-run floors, to deal with the seasonal surge of tobacco leaf. Tobacco trucks have to wait in line for at least two weeks and often more than two months to be offloaded at the floor. Local exchanges help this situation by being located closer to farmers and by offering more points for the initial sale. In addition, one local exporter told us the local markets are likely to improve quality, since more farmers will be able to see firsthand the effect of quality and presentation on price. ¶4. (U) COMMENT: The tussle over this small experiment brings into sharp relief the differing interests of the old state institutions (like the Tobacco Association of Malawi, Auction Holdings, and the Tobacco Control Commission) and those of buyers and sellers. While the`xtate institutions continue to present themselves as champions of high quality for buyers and high prices for sellers, they are increasingly seen as relicts of the past, adding cost but not value. This view has yet to spread to unsophisticated smallholders, but the new markets may help. Certainly if they succeed, they will help dislodge the almost genetically ingrained idea that tobacco, as a strategic crop, must be controlled by the state. GILMOUR