Identifier
Created
Classification
Origin
06LILONGWE275
2006-03-27 14:51:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lilongwe
Cable title:  

MUTHARIKA TO TOBACCO BUYERS: "CALL ME A DICTATOR"

Tags:  ECON EAGR 
pdf how-to read a cable
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RR RUEHDU RUEHJO RUEHMR
DE RUEHLG #0275/01 0861451
ZNR UUUUU ZZH
R 271451Z MAR 06
FM AMEMBASSY LILONGWE
TO RUEHC/SECSTATE WASHDC 2551
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHTO/AMEMBASSY MAPUTO 6384
RUEHFR/AMEMBASSY PARIS 0089
RUEHLO/AMEMBASSY LONDON 0197
RUEHNR/AMEMBASSY NAIROBI 2477
RUEHJO/AMCONSUL JOHANNESBURG 0199
RUEAIIA/CIA WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHDC
UNCLAS SECTION 01 OF 02 LILONGWE 000275 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR AF/S DAN MOZENA, LOIS CECSARINI, GABRIELLE MALLORY
STATE FOR EB/IFD/ODF LINDA SPECHT AND ELAINE JONES
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
STATE PLEASE PASS TO MCC FOR KEVIN SABA
PARIS FOR D'ELIA
NAIROBI FOR FAS KEVIN SMITH

E.O. 12958: N/A
TAGS: ECON EAGR
SUBJECT: MUTHARIKA TO TOBACCO BUYERS: "CALL ME A DICTATOR"

REF: 2005 LILONGWE 696

LILONGWE 00000275 001.2 OF 002


-------
SUMMARY
-------

UNCLAS SECTION 01 OF 02 LILONGWE 000275

SIPDIS

SENSITIVE
SIPDIS

STATE FOR AF/S DAN MOZENA, LOIS CECSARINI, GABRIELLE MALLORY
STATE FOR EB/IFD/ODF LINDA SPECHT AND ELAINE JONES
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
STATE PLEASE PASS TO MCC FOR KEVIN SABA
PARIS FOR D'ELIA
NAIROBI FOR FAS KEVIN SMITH

E.O. 12958: N/A
TAGS: ECON EAGR
SUBJECT: MUTHARIKA TO TOBACCO BUYERS: "CALL ME A DICTATOR"

REF: 2005 LILONGWE 696

LILONGWE 00000275 001.2 OF 002


--------------
SUMMARY
--------------


1. (SBU) President Bingu wa Mutharika opened the
state-controlled tobacco auctions today with fiery populist
rhetoric, accusing American buyers of collusion and telling
them they must pay higher prices or "pack up and go." He
announced that the GOM is establishing a minimum price for
"strategic" agricultural commodities, including tobacco,
cotton, and tea. The proposed minimum price for tobacco is
well above market rates, driving speculation that the GOM
will have to retreat from its position to ensure the crop is
sold. While most of Mutharika's talk about price floors and
government intervention is probably bluster, he may disrupt
the market enough to interrupt desperately needed export
earnings. End summary.



2. (SBU) According to exporters, the GOM is once again trying
to impose a price floor on tobacco in the midst of rising
production costs and declining world prices. Since the
mid-1990's, tobacco growing in Malawi has shifted from the
exclusive domain of a few large estates to Malawi's most
widely grown cash crop, with some 500,000 smallholders
demanding subsidized inputs and guaranteed prices. That
shift has made tobacco prices the locus of highly charged
politics, with frequent demonstrations and stoppages. Along
with the politics have come increasingly unreasonable
demands, which the government has responded to by blaming and
threatening the exporters who buy the leaf at auction and
export to international cigarette makers. (Two of the three
exporters are controlled by American tobacco companies
Universal Leaf and Alliance One.)

--------------
"YOU SHOULD PACK AND GO"
--------------


3. (U) At today's ceremony opening the auction floor for the
season, Mutharika lambasted the exporters in front of a
cheering crowd of growers, saying that he knows tobacco
farmers who cannot afford "a bicycle, a house, or even food,
because they have been cheated at this floor." Buyers have

been accepted as guests in Malawi, he said, "only to cheat
our people" with prices they have conspired to keep
artificially low. "If buyers are not prepared to be fair,"
said Mutharika, "they should pack up and go...We can sell the
tobacco ourselves; don't dare to threaten me...If someone
calls me a dictator, so be it." At each of his most pointed
remarks, Mutharika directed his gaze directly at the Charge
and emboffs.


4. (SBU) Along with the rhetoric were specifics about minimum
prices. Mutharika declared that the GOM was henceforth
considering tobacco, cotton, and tea to be "national
strategic commodities," which would have minimum price
floors. For tobacco, the range of prices will depend on
grade, with $1.10/kg for the lowest grade of green (i.e.,
unprocessed, field-dried leaf) and $1.70/kg for the highest
grade. After the event, tobacco exporters and growers
characterized the low-grade price as completely unworkable.
Last year's average for all grades was $0.99/kg; at the
minimum prices dictated today, the average would be in the
neighborhood of $1.28/kg. When econoff asked one of the
largest growers whether anyone would buy the low-grade leaf,
he declared, "No one knows; it's chaos!" Both main exporters
expressed similar confusion; one has told us he could sell
against blue-chip contracts (forward-buying arrangements from
the largest cigarette producers) at these prices, but buying
inventory on speculation would probably be impossible.


5. (SBU) Mutharika's ire has been sharpened by a November
2004 World Bank-funded report that has recently resurfaced,
alleging that the tobacco exporters "probably" collude on

LILONGWE 00000275 002.2 OF 002


prices paid at auction. The report bases this allegation on
a statistical analysis of prices paid, which shows a close
correlation between the American buyers. The report
recommends further investigation by a then yet-to-be-formed
Competition Commission. Mutharika has extrapolated this and
other vague rumors of price collusion into a firm conviction,
shared by many Malawians, that the American companies
routinely collude on prices.

--------------
GOVERNMENT TO THE RESCUE--YIKES!
--------------


6. (SBU) As threats intensify, the exporters are beginning to
wonder what, if any, arrows the GOM really has in its quiver,
apart from more blustering. One hopes the threat of throwing
the parastatal ADMARC into the tobacco buying business is
empty: the company has neither the capacity for processing
tobacco nor the considerable expertise needed to offer
product that the market will buy. It is plain to nearly
everyone--though perhaps not to the government--that doing so
at the grower prices the GOM is insisting on is probably
impossible. Still, sources in the industry tell us that the
parastatal Auction Holdings Ltd. has set up an export
subsidiary. Whether this is to introduce more competition
into the marketplace or to provide a contingency for an
ADMARC is unclear; in any case, the new company has failed to
find commercial financing for operations.

--------------
COMMENT: EVERYTHING LOOKS LIKE A NAIL
--------------


7. (SBU) Today's rabble-rousing rhetoric and the past week's
tough private meetings between government and exporters is
probably a negotiating tactic, but it may paint the
government into a political corner by stoking the hopes for
higher prices and scapegoating exporters. The nightmare
scenario would be for Mutharika to somehow force the price
floor by bringing ADMARC into the picture to mop up the
overpriced low-grade tobacco. While it is hard to say how
the exporters would react (assuming the GOM could find a way
to finance an intervention),such a move could disrupt the
market and thus the foreign currency flows on which Malawi
depends. With about 1.5 months of forex reserves, a huge
backlog of import payments, and the IMF insisting on a looser
forex policy, there is little room for error.


8. (SBU) More worrying in the long run is the possibility
that Mutharika actually believes the central-planning
economic perspective he exhibits in his public remarks. His
government has often intervened in markets, particularly
agricultural markets, with the apparent idea that there is a
"right" price for commodities. Generally, the "right" price
happens to coincide with political expediency: maize and
fertilizer for import should be cheaper, but tobacco for
export should be more expensive. In an agricultural economy
that has been optimized for subsidized subsistence farming,
the need for structural reform presses more urgently with
every season, and the governments attempts to avoid painful
reform take it further and further from market
liberalization. Quite apart from his populist rhetoric, his
actions suggest that state control is the only tool he really
knows how to grasp.
GILMOUR