1. (U) Malawi's tobacco market has started to work again,
after being disrupted by the GOM's new minimum price scheme.
Buyers and sellers both seem to want to return to
demand-driven pricing, but the market appears to be dealing
with the government's prices for the moment. Buyers predict
more problems later in the season, as higher grades of
tobacco come to market. The net effect of Mutharika's price
scheme may be to lower the price fetched by low-grade tobacco
as buyers try to average out the higher prices paid for
middle grades. End summary.



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A WOBBLY AUCTION AND PROTESTING FARMERS


--------------------------





2. (U) After President Bingu wa Mutharika's March 27
announcement of government-mandated minimum tobacco prices
(reftel), the tobacco auction has experienced an unusually
sharp opening wobble. Selling appeared to be proceeding
along more or less normal lines on opening day, although the
lowest grade of tobacco--representing the largest volume in
this market--went largely unsold at the new $1.10/kg minimum
price. This caused little upset among the growers at first,
because they did not realize that their bales were not sold.
When it became clear the next day that many of the day's
sales were not sales after all, the growers asked for a stop
to trading.



3. (SBU) A fresh round of negotiations between growers,
exporters, and the government finally produced an
understanding that allowed the auction to proceed on March


30. Industry sources have told us the principal pressure
during these negotiations came from growers, who wanted to
sell quickly at whatever price the market would pay, never
mind the new minimums. While the GOM has not conceded to
adjust its minimum prices, it has made clear that tobacco
classified as damaged or moldy can sell at whatever buyers
want to pay for it. (At the start of the season, much of the
tobacco does fit this description; quality improves during
the course of the five-month selling season and drops again
toward the end.)



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A TEMPORARY PEACE


--------------------------





4. (SBU) A visit by Embassy staff to the auction floor
confirmed that order had been restored, though the auction
was not operating as efficiently as normal. Several traders
told us that the new price scheme was still causing
confusion, and there seemed to be a consensus among buyers
and sellers that eventually things would have to return to
demand-driven pricing. Around half the tobacco on the floor
appeared to have been classified as moldy, though we saw
plenty of higher-grade burley selling for good prices.



5. (SBU) As long as the market is dealing mostly in
substandard tobacco, everyone is happy. The problems, we are
told, will come later, as better grades make up more and more
of the trading. So far, the higher-grade price floors have
not been greatly tested against market demand. If those
prices prove too high, either government will have to give or
growers will pressure graders to give their tobacco a lower
grade--a perverse but very real opportunity for graft.
Government is not thought likely to follow through on its
threat to export the tobacco itself if no one buys at the
minimum prices or above. (On the other hand, the parastatal
operator of the auction floor recently launched a
buying/exporting company, Malawi Leaf Ltd. It is not yet

LILONGWE 00000294 002.2 OF 002


clear how the company is being financed, and other exporters
are wary of the possibility of anti-competitive behavior
between the state, the auction operator, and the new company.)



--------------------------



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COMMENT: ANOTHER BACKFIRED POLICY OF INTERVENTION


--------------------------



--------------------------





6. (SBU) COMMENT: Though the situation has calmed for now, it
is bound to flare up again. It appears that buyers may
low-ball the substandard tobacco in an effort to compensate
for higher prices in the middle grades. This will do
precisely the opposite of what Mutharika intended with his
prices: poor, low-volume, low-quality producers will get
artificially low prices. He may yet have to pay a political
price for raising expectations and failing to deliver. In
any case, this episode demonstrates once again Mutharika's
instinct to interfere with markets to produce a
social-welfare benefit; the same behavior has kept Malawi's
fertilizer and maize markets out of balance and
underdeveloped.


GILMOUR