5 TOBACCO IN MALAWI

5.1 INTRODUCTION

Malawi has a predominantly agricultural economy. Of the total population of about 10.5 million, more than 75 percent live in rural areas, with some 3.5 million rural labourers forming 78 percent of the total labour force. Thus, agriculture stands out as the single largest sector in the national economy over the past few decades. The GDP in 1999 was Malawi kwacha (K) 80 billion (US$ 1.83 billion) while total agricultural production reached K 30 billion, or 38 percent of GDP. Tobacco, the largest cash crop, generated about K 12 billion of export revenue in 1999 and accounted for more than one third of total revenue from agriculture and about 15 percent of GDP in the same year.

Concerns about the health risk of smoking have promoted global efforts to reduce smoking. Various measures have been proposed, including raising cigarette taxes, bans on cigarette advertising and promotion, and smoking restrictions. However, at the same time there is concern that effective reduction in demand for tobacco would weaken the economy and induce unemployment in countries that depend on tobacco, in particular Malawi, where tobacco is a major component of the national economy. This study was undertaken to identify the relationship between tobacco production and the economy, and to explore the likely adjustment processes and possible measures to minimize the adverse effects if world demand for tobacco declines.

5.2 TOBACCO PRODUCTION

Malawi has a long history of tobacco production, traceable back to the early 1920s. However, steady and rapid expansion in production was not seen until the late 1970s (Table 5.1). Average annual output in 1961-1963 was 15 000 tonnes, but increased by about 90 percent to 29 000 tonnes in the early 1970s, and reached more than 110 000 tonnes in the 1990s. Production climbed to nearly 160 000 tonnes in 2000, which made Malawi one of the ten largest tobacco producers in the world. Burley tobacco leaf amounted to 142 000 tonnes in 2000, about 89 percent of total production.

Table 5.1: Area, yield and production

Sources: 1960-1990 from FAOSTAT, and 1990-2000 from Malawi Tobacco Control Commission.

Although production has tended upward since 1960, it has been volatile from year to year, fluctuating in response to changes in prices and weather conditions. Increases in tobacco production over the past decades have been driven by expansion in area and increased yields, both of which tripled between 1960 and 2000. However, there has been some weakening of yields since 1995, possibly reflecting the rapid expansion in the hands of inexperienced tobacco farmers.

5.3 PRODUCTION POLICY

Tobacco production was tightly controlled by the government before 1989. All tobacco producers had to obtain a licence from the government regulatory body, the Tobacco Control Commission, and only estates and landowners were eligible to apply for production licence. In addition, a grower had to reach a certain production scale to be eligible to sell tobacco leaf directly on the auction floor. Thus, many small-scale farmers and farmers with rented land were essentially excluded from tobacco production. In early 1995, with assistance from the World Bank and the IMF, Malawi embarked on a structural adjustment programme designed to re-establish financial stability and set the basis for sustainable economic growth. The structural reforms were aimed at liberalizing the economy and facilitating the development of the private sector. In the agricultural sector, reforms under the adjustment programme included allowing smallholder farmers to produce cash crops, and liberalizing marketing of agricultural outputs and inputs. These measures contributed greatly to the rapid expansion in tobacco production since 1995.

Table 5.2: Tobacco prices (US$/kg) in selected markets

Table 5.3: Tobacco auction quantity, value, price and sellers in 2000

Note: The number of growers includes only those who had sales in 2000.
Source: Compiled from data provided by Auction Holding Limited.

Under the 1995 reforms, hundreds of thousands smallholder farmers were allowed to produce tobacco. Although there was still a minimum quantity requirement to sell output in the auction market, the introduction of “intermediate buyers” for tobacco made it possible for every farmer to produce tobacco, regardless how much they wanted to produce. The intermediate buyers functioned as the middlemen between small-scale tobacco growers and the auction market, buying tobacco leaf from many small-scale growers at a negotiated price and them selling them on the auction floor at the market price. Thus, every farmer was able to produce tobacco without any quantity restriction. In 2000, there were about 700 intermediate buyers who registered at the auction markets, with sales of 3 500 tonnes. All sales were of burley tobacco.

The establishment of tobacco production clubs nationwide after 1989, when the Special Crops Act was removed, and especially in 1995, when the structural reforms were launched, also provided many small-scale farmers with the opportunity to produce tobacco. Under the club system, several smallholders work collectively to produce and sell tobacco. About 93 percent of sales by the clubs have been of burley tobacco.

The development of intermediate buyers and of tobacco production clubs attracted many smallholder farmers to tobacco production over the past decade. As a result, the number of tobacco growers increased rapidly after 1990, especially after 1994. The number of registered tobacco growers for burley and flue-cured increased sixfold, from 9 500 in 1990 to 68 150 in 2000. The planted area increased from around 100 000 ha in 1993 to 170 000 ha in 2000.

5.4 STRUCTURE OF PRODUCTION

Despite the increased involvement of small-scale growers in tobacco production, estates still dominate, selling about 84 000 tonnes at the auction markets in 2000, accounting for 68 percent of the total sales. About 35 000 estates sold tobacco in 2000, about the same number as in the early 1990s. Most estates were small. According to the estimates in the Estates Land Utilization Study, more than 67 percent of estates were below 20 ha and only about 10 percent of estates had more than 40 ha. Many small estates hired labour, but large estates adopted the tenancy system.

Very few producers, even the large estates, specialize intensively in tobacco. The rotation pattern used by many growers results in each piece of land being used for tobacco production every three years. Almost all tobacco growers also produced maize for their own consumption. Although the average size of estates was more than 20 ha, the average area allocated to tobacco production on each estate would have been only about 2 to 3 ha in 2000. The average output per household in tobacco growing clubs was less than 200 kg of tobacco leaf in 2000. Thus tobacco production is generally on a small scale and not specialized.

Tobacco production is heavily dependent on manual labour. Almost no machinery is used in tobacco growing and harvesting. Even the large estates rely virtually entirely on labour, including one of more than 600 ha. Wages for farm labour are very low, the minimum wage being only about US$80 annually, which stimulates the use of labour.

5.4.1 Prices

Table 5.4: Malawi average tobacco production cost estimates for 2000/01

Source: Tobacco Association of Malawi (TAMA)

Auction prices have declined since 1996, when they were around US$2.27/kg for flue-cured tobacco and US$1.61/kg for burley tobacco. In 2000, the average auction prices were US$1.35/kg for flue-cured tobacco and US$1.01/kg for burley tobacco, which dropped by 40 and 37 percent, respectively. As a result, the total output of burley tobacco in 2000 was 20 percent higher than in 1996, but the total revenue was 24 percent lower than in 1996. Along with lower production, the total revenue for flue-cured tobacco in 2000 was 58 percent lower than in 1996. Thus, although more inputs - including land, labour, fertilizer and others - were used in tobacco production in 2000, and more tobacco leaf was produced, the revenue was much less than in 1996, when about 25 percent less land was used for tobacco.

Two major factors appear to have been responsible for the significant decline in prices over the past few years. First, the growth in production outpaced the growth in export demand, which resulted in lower export prices for Malawi tobacco, and, second, the increasing involvement of new and marginal growers tended to produce low quality tobacco leaf because of their lack of experience and inputs. The Agricultural Development and Marketing Corporation (ADMARC), the government tobacco marketing agency, which bought tobacco leaf directly from small-scale growers, received only half of the average price for tobacco leaf at the auction market in 2000.

According to Tobacco Association of Malawi (TAMA) estimates, the cost of production in 2000 was about K 72 136/ha. If all production expenses were financed by bank loans, the total production cost including interest payment would have been nearly K 108 000/ha, so some tobacco growers would make no profit from tobacco if they had to rely on hired labour and transportation. Table 5.4 summarizes the estimated production budget. Labour, fertilizer and transport accounted for more than 60 percent of the total cost.

5.4.2 Tenant system

The tenant system is used by many large estates, whereby the estate provides tenants with basic inputs, food and housing. The tenants sell tobacco to the estates in order to repay the costs of their fertilizer, food, etc. Under this system, the estates profited from supplying land and from marketing the tobacco grown by their tenants.

Many small estates, and even grower clubs, hired labourers. However, even with the low minimum wage rate, which in 2000 was K 37.5/day (about US$0.5), their profit from tobacco production would be very small if they had to rely completely on hired labour.

5.5 MARKETING OF TOBACCO LEAF

Tobacco leaf is generally sold in the auction markets, located in Lilongwe and Limbe, and run by Auction Holding Limited, in which the government holds about 51 percent of shares. A commission of 3.95 percent of sale value is imposed on sales. All fees and payments, including input credit, Tobacco Association fee, tobacco research contributions and other payments, are directly deducted at hammer fall. Although auction buyers (tobacco exporters) pay in US dollars for tobacco at the auction, most sellers receive payment in local currency calculated at the exchange rate at the time of sale.

Price determination at auction is expected to be the result of interaction between buyers and sellers. However, given a small number of buyers and urgent needs for cash by small-scale growers, buyers have greater market power than sellers. On some occasions, it has been a buyers’ market. Although TAMA was in the market to represent small-scale growers, it had limited influence on the auction price.

Seven major tobacco-exporting companies are active in Malawi. Most of them are agents or divisions of multinational companies based in the United States of America or in Europe. The three largest of the exporting companies accounted for nearly 90 percent of total tobacco exports. These exporting companies buy tobacco leaf from the auction markets and export it after processing. Many of them have established processing facilities and have technical and market expertise for tobacco exporting. Under the government regulations, any company is eligible to buy tobacco leaf from the auction floor if they have sufficient bank credit and qualified personnel and have paid a licence fee. However, no new exporters have emerged in recent decades, possibly because the substantial investment required to establish processing factories acts as a barrier to new entrants.

In addition to buying for orders, exporters also purchase leaf and hold it for speculation. Speculation buying ensures that all tobacco leaf is sold.

After the structural reform initiated in 1994/95, the government has progressively withdrawn its intervention in tobacco trading. In an attempt to raise additional revenue, the government imposed a temporary levy of 10 percent on tobacco exports in 1995, but as it reduced the competitiveness of exports, it was reduced to 8 percent in 1996, 4 percent in 1997 and abolished in 1998. Since 1998, no export levy or tax has been imposed on tobacco. The major revenue the government has collected from tobacco exports has been from a tax on tobacco exporters’ profit. In the past few years, the government revenue from the tax accounted for more than 20 percent of total national tax revenue.

5.6 TOBACCO EXPORT DEMAND

Demand for Malawi’s tobacco has been largely driven by exports. Domestic consumption has been met entirely by imports, so that all tobacco produced has been for export. As shown in Table 5.5, in the early 1960s Malawi exported around 12 000 tonnes of tobacco leaf, making it only a marginal exporter in world market terms. By 1998, it was the fifth-largest tobacco exporter in the world, after Brazil, the United States of America, Zimbabwe and Turkey, and accounted for about 6 percent of global tobacco exports.

Imports amount to around 1 000 tonnes annually.

Tobacco exports from Malawi have varied considerably from year to year (Table 5.5), largely due to changes in production. Thus, severe droughts lead to substantial declines in production and so in exports. Since the early 1990s, exports have shown more stability, due largely to the higher output level, which allowed exporters to build up stocks in good years. For instance, in 1994, production dropped by nearly 24 percent from the previous year but exports were only slightly lower than the previous year’s level.

Table 5.5: Exports of tobacco from Malawi

Source: FAOSTAT.

Table 5.6 provides a gross overview of the changes in destinations of Malawi tobacco exports in 1998 compared with 1988. While total numbers of Malawi tobacco trading partners increased from 45 in 1988 to 78 in 1998, the total exports more than doubled. Imports to countries in western Europe, such as Germany and the Netherlands, nearly doubled, to reach 65 000 tonnes in 1998, accounting for about half of Malawi’s total exports. North America, mainly the United States of America, was the second largest destination, importing more than 22 000 tonnes in 1998, three times the level of 1988. While exports to Asia and rest of the world experienced slow growth, exports to countries in eastern Europe and the former Soviet Union increased significantly, from nil in 1988 to about 12 000 tonnes in 1998. Indeed, North America and eastern and western Europe accounted for most of the increase in Malawi tobacco exports during this period, which was linked with the expansion of multinational cigarette manufactures into countries in eastern Europe and the former Soviet Union.

Table 5.6: Destinations of Malawi tobacco exports in 1988 and 1998

Source: Compiled from FAOSTAT.

There have been significant changes in the types of tobacco exported over the past decades (Table 5.7). Between 1985 and 2000, exports of burley tobacco increased from 26 000 tonnes to nearly 80 000 tonnes, while Virginia tobacco fell sharply, from 24 000 tonnes in 1993 to 9 530 tonnes in 2000. Other types of tobacco leaf also experienced a substantial decline. Dark fire-cured tobacco dropped from 16 000 tonnes in 1985 to just 7 000 tonnes in 2000. This increasing proportion of burley tobacco reflects the inability of small-scale growers to meet the capital requirements of producing flue-cured types of tobacco.

Table 5.7: Tobacco exports by type, 1985-2000 (tonne)

Source: Malawi Tobacco Control Bureau.

5.7 THE ECONOMIC IMPORTANCE OF TOBACCO TO MALAWI

Tobacco is important in the Malawi economy. Given its predominantly agricultural economy, limited resource base, and slow growth in the national economy and government revenue, tobacco production has a major role in national economic growth, employment and income of rural households and government.

5.7.1 Tobacco in export revenue and trade balance

Exports of agricultural commodities are virtually the only source of export earnings and foreign exchange for Malawi’s economy. In 1999, total national export revenue was about K 18.4 billion and more than 85 percent of that came from exports of tobacco, tea, sugar, cotton, coffee, pulses and rice. Tobacco was by far the largest single export commodity, accounting for K 12.1 billion, or 61 percent of the total export revenue. The second-largest exported commodity, tea, brought about M 1.7 billion in foreign exchange in 1999, only about 14 percent of that generated by tobacco.

Tobacco production is estimated to form 6 percent of total GDP and 17 percent of agricultural GDP.

The dominance of tobacco in Malawi’s exports has weakened only slightly since 1995. Tobacco exports accounted for nearly 67 percent of total export revenue in 1995, but declined to 61 percent in 1999. The annual growth rates in exports of tea, sugar, cotton and rice during 1995 to 1999 exceeded those of tobacco, which experienced the slowest growth rate among all exported commodities except coffee during this period.

Export revenues from tobacco played a very important role in national trade balance. The country has long had a trade deficit (exports minus imports), which amounted to K 3.7 billion in 1999, mainly because domestic demand surpassed domestic outputs. Tobacco export revenue of K 12 billion in 1999 covered more than half the import bill of K 22 billion. Imports of food and fertilizer accounted for 10 and 6 percent, respectively, of the total, while transportation equipment, fuel and medical products accounted for another 25 percent.

5.7.2 Tobacco and employment

Estimates of farmers and workers engaged in tobacco production, marketing and processing range from 650 000 to nearly 2 million. A reasonable estimate would be 1-1.2 million engaged directly in the tobacco business in the country^[3]. Thus, the jobs created by tobacco account for about 20 percent of the total labour force of 5 million. Since there are a lot of marginal growers, who allocate only part of their time to tobacco production, the number of farmers involved in tobacco production would be larger than these estimates.

5.7.3 Tobacco and rural household income and consumption

Tobacco is the major source of cash income for many rural households. Based on data from the 1997-98 Integrated Household Survey, Tables 5.8 and 5.9 summarize household cash income and consumption in selected regions and highlight the importance of tobacco production. In the major tobacco producing regions, sales of tobacco contributed the bulk of rural household cash income, ranging from 65 percent in Lilongwe Rural, to 89 percent in Kasungu and 95 percent in Dowa, where tobacco was almost the only source of cash income. The average cash income from tobacco was K 22 000 per household, or nearly 89 percent of household cash income. In these regions, cash income from other crops was minor. On average, about 1 percent of cash income was derived from sales of maize, and 10 percent from sales of other crops, including groundnut, rice, potato and cassava.

A large proportion of cash income was used for purchasing food. In Lilongwe Rural, 34 percent of cash income was used for food, while shares of cash spent on food in Mchinji and Kasunge were 43 and 39 percent, respectively. Households in Dowa spent nearly 70 percent of their cash income on food. Most food expenses were for basic food such as cereal and cereal products, vegetables and meat, which accounted for more than 50 percent of total food expenses for many regions. Spending on non-food items, such as clothing and other, were small, but the costs of water, fuel and power were higher than many other expenses.

Table 5.8: Mean household expenditure (kwacha) by commodity

Note: All prices have been adjusted to 2000 prices.
Source: Integrated Household Survey 1997-98, National Statistical Office of Malawi.

Table 5.9: Annual average sales, costs and income by activity for selected districts

5.8 ADJUSTMENT IN MALAWIAN AGRICULTURE

From an agronomic point of view, a large range of crops can be produced in Malawi. However, market opportunities for many products are limited. Indeed, the existence of limited market opportunities would explain why many farmers have continued to produce and expand tobacco production and why Malawi has a comparative advantage in the production of tobacco.

Given the concerns about uncertain terms of trade and food security prospects for the traditional cash and food crops, Malawi has been pursuing a diversification strategy for more than 30 years. Since the 1960s, many studies have been devoted to searching for alternative crops with potential comparative advantage and better market prospects in Malawi, and a number have been identified. Under smallholder agriculture, grain legumes, cereals such as millet and sorghum, and root crops such as sweet potato and cassava are the food crops that could be substituted for maize because of their drought resistance. Vegetables (especially onions, tomatoes and chilis), beans, groundnut and cotton offer potential as cash crops for smallholders. In the estate subsector, in addition to burley tobacco, roses, cashew nut, spices such as paprika and chili, macadamia, tea and sugar have potential.

Apart from other agricultural products, results of the modelling here suggest that food processing, services and textiles have potential for expansion based on resources that might be released from tobacco production in the event of a downturn in demand. The development of secondary and tertiary sectors may provide Malawi with greater stability based on diversity, but in an economy that is primarily agricultural, their development will not be easy.

Several attempts have been made to foster diversification of both food and cash crops. With donor support, the government established Crop Authorities for tea, coffee, sugar and tree nuts to promote smallholder production of these cash crops. Through parastatal organizations such as the Agricultural Development and Marketing Corporation (ADMARC), the Malawi Investment Promotion Agency (MIPA) and the Malawi Export Promotion Council (MEPC), government, with support from donors, has made several attempts to promote horticultural production. However, these efforts have not had any significant success. There is still a heavy reliance on tobacco and maize, with over 80 percent of smallholder land still devoted to maize production.

5.9 CONCLUDING REMARKS

Table 5.10: Tobacco exports (tonne) from selected exporting countries

The tobacco industry in Malawi relies virtually entirely on the world market, and it would be negatively affected by any reduction in demand for tobacco at the global level. Two key issues to consider in assessing the likely impact on Malawi of a weakening in demand are, first, the ability of Malawi to compete with other tobacco exporting countries for its share of a contracting market, and, second, the capacity of Malawi’s economy to adjust away from tobacco production.

In the event of a contraction in demand, Malawi might be expected to compete favourably with other tobacco-exporting countries, given its demonstrated ability to expand its industry during the past two decades. As illustrated in Table 5.10, Malawi experienced much higher export growth rates in the past 20 years than other major exporters. Thus Malawi might be expected to maintain its exports in the event of a global downturn in demand for tobacco, while other exporters might lose their market share.

Malawi’s exports have been price-competitive and this would have provided the potential to compete successfully with other exporters. The export unit value of tobacco leaf from the United States of America was more than twice the world average, reflecting the higher quality but also higher production cost of United States of America tobacco. The minimum wage rate in the United States of America is about US$5/day, while it is less than US$0.5/day in Malawi. If cigarette manufacturers can continue to develop new processing technologies that allow them to use lower quality leaf, countries such as Malawi, Brazil and Zimbabwe would be able to compete more effectively with the United States of America.

At the same time, any weakening in export revenues for tobacco would call for adjustment in Malawi’s economy. The analysis here provides evidence that despite the large contribution of Malawi’s tobacco sector to production, export earnings and government revenues, if there is potential for structural shifts within the economy, then the impact which any weakening in demand for tobacco might have on the economy would be limited. Although the tobacco sector would suffer enormously from a major decrease in its export price, if other sectors are able to adjust to the new situation by absorbing displaced workers from the tobacco sector, increasing production, and substituting for losses in export earnings, then the damage to the economy overall would be contained.

The challenge facing Malawi, however, is to identify and develop alternatives to tobacco production. While alternatives do exist, lack of resources and lack of ability to compete in world markets, coupled with underdeveloped domestic markets for many agricultural crops, make adjustment difficult. Shortage of capital for investment in the development of other sectors, lack of entrepreneurs, and poorly developed transport, storage and information infrastructure all contribute to the difficulties in adjusting.

The international community has provided various forms of financial assistance to Malawi over recent decades. In the event of a significant contraction in demand for tobacco, Malawi’s need for structural adjustment would become more urgent. It is likely that the economy would suffer markedly, and would require international assistance, focused clearly on facilitating adjustment both within agriculture and between agriculture and other sectors of the economy.