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Malawi Tobacco going up in smoke

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Malawi’s $165-million-a-year tobacco industry has fallen on hard times, with a growing number of farmers complaining that they can no longer make a decent living.

Since 2010 it has been hit by unstable and falling prices – which growers blame on a buyers’ cartel – sales volumes that have not recovered from a massive crash in 2012, and a high rate of rejection at auction.

Tobacco is the backbone of Malawi’s economy, contributing 11% of GDP and 60% of its foreign exchange earnings. There are 350 000 growers in the industry, which provides 80% of rural jobs.

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An amaBhungane investigation revealed that the price plummeted by 50% in 2011 to 92c per kilogramme. It has more than doubled to $203 the following year, but since then has drifted down to $1.75 – a 14% drop.

Production this year, at 190-million kilogrammes, was slightly down on last year, but almost 20% down on 2011.

Central to growers’ grievances are hefty deductions from their earnings and growing debts, which they blame on the integrated production system (IPS) they believe buyers are forcing on them.

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Based on seasonal contracts, the system involves buyers in production from the outset and ties growers into loans for inputs.

According to tobacco buying companies, IPS is market-driven. They want better quality control and say their “Blue Chip customers” need assurance that tobacco is produced in a “compliant” manner.

In a “pariah industry” that has to keep its nose clean, this means no child labour and environmentally friendly practices that avoid deforestation and pollution.

According to government, 80% of Malawi’s tobacco is now sold on contract. Before IPS was officially introduced in 2012, sale by auction was a legal requirement.

But the system has hit resistance. In February, farmers petitioned parliament and the agriculture ministry over their frustrations with IPS and the deductions it entails. In April President Peter Mutharika acknowledged that farmers were experiencing many challenges with it, including expensive loans, lack of price agreement with buyers and high rejection rates.

In an interview Jedeni Clifford, who has farmed tobacco for 12 years in Kasungu, complained that his profits keep dwindling.

“There was a time when I could sell my tobacco and make a fortune – no more,” he said.

In 2013/2014, he took out a loan in the form of inputs from a buyer without knowing how much he owed. “I didn’t know the interest rate either. But I had to get into a contract to survive,” he lamented.

Clifford said that the contract assured him of a market, but he was not given a guaranteed price.

After paying his labourers and other costs, he could not repay the debt. “I have received no penalty for now. But I know failure to pay back the loan can cost my property.”

Jamila Banda, chairperson of the Mau Msamatha tobacco farm club, also in Kasungu, said he took a K700 000 loan, also in form of inputs. He later noticed “a huge deduction after my sales”.

Corporate Affairs Manager for Auction Holdings Limited (which manages tobacco floors), Mark Ndipita, observed that IPS helps farmers with inputs and loans. Its drawback, however, was that some farmers take out loans every year and a good number cannot repay them.

The growers also see a covert campaign by buyers to force them into contracts. They say that during the last season, IPS farmers got better prices than those outside the system – despite having leaf of the same quality.

They also complain that buyers are rejecting more and more non-contract tobacco.

Auction Holdings’ Ndipita confirmed that the rejection rate in auctions last year rose as high as 90%.

“We don’t take sides or blame buyers. But the 2015 statistics indicated that farmers that were not sponsored received low prices,” he said.

But the major buyers, Alliancene, Limbe Leaf and Japanese Tobacco International, insist growers are free to reject contracts and that their awareness of what they are getting into is fundamental to the model.

They said they do not impose penalties on loan defaulters and absorb the losses, but that defaulters are not re-registered for the next season.

Farmers also blame the companies for the weakness of the tobacco price. Said Banda: “Buyers have realised our weakness of only relying on tobacco as a cash crop. They are taking advantage of this to abuse us.”

Buyers respond that over- production the underlying cause. “Over-production is usually followed by low prices and low production is followed by high prices,” said Alliance One International’s corporate affairs manager, Francoise Malila.

Agriculture minister Allan Chiyembekeza dismissed claims of a buyers’ cartel as “hearsay at the moment. Nobody has come forward with evidence for government to act on”.

The levels of indebtedness accompanying the new system are also disputed. Alliance One indicated it has a low defaulting rate – about 8% over the past three years. The company expects 27,000 farmers on IPS in 2015/16 season.

However, Limbe Leaf indicated that it has experienced high rate of default due to lack of proper “grower identification system”.

“We have written off huge amounts of money in the past. It should be appreciated that IPS is an expensive model for buyers,” said Febbie Chikungwa, Limbe’s corporate affairs manager.

She added that Limbe Leaf supported it “because it is the model Malawi’s customers are looking for. Without it, some important customers will shift their focus and source tobacco from countries that have a compliant source …”

Malila said prices are not included in the contracts because the Tobacco Control Commission (TCC) approves them only late in the season.

She argued that farmers know the quantity and the value of inputs through invoices and delivery notes. Bank charges, interest and other deductions depend on when they repay back loans and the exchange rate.

Malila said low financial farmer literacy is a challenge, and that the company has started training farmers.

Also angering farmers is a growing move by buyers into production. The chief executive of the Tobacco Association of Malawi (Tama), Graham Kuimba, remarked: “I wouldn’t conclude that this is why they are offering low prices, but it could be a contributing factor,” he said.

Alliance One responded that it has moved into farming because of the decline in commercial tobacco growing, especially of the flue-cured variety, where output has fallen from about 23-million to eight million kilogrammes.

Malila said the move was endorsed by government, which asked the company in 2002 to grow specifically for the Asian market.

Deepening the sector’s woes is the lack of an updated tobacco law. Years after the launch of IPS, the agriculture ministry only submitted draft legislation to the justice ministry a few weeks ago.

“IPS has become global practice. But the current Tobacco Act makes no reference to it,” observed TCC chief executive officer Albert Changaya.

Jayne Munthali, JTI’s communications manager said a comprehensive law was needed “to ensure that the interests of both the grower and buyer are adequately provided for and protected by the law.”

amaBhungane has learnt that IPS is operating under regulations passed by Parliament in January last year under the old Act. A lengthy bureaucratic delay is likely before the new law takes effect.

Kuimba observed that the hiatus had led to disorder, with too many actors. Currently, 11 tobacco growers’ associations are recognised by the government.

Diversification into other crops – particularly given Malawi’s perennial food insecurity –might seem an answer.

However, Civil Society Agriculture Network (Cisanet) notes in a study that the diversification strategy launched 30 years ago has failed, in part because of “poor dissemination of technical and economic information”.

Banda echoed this, saying that he has little knowledge of crops other than maize, which he grows on a small scale for domestic consumption.

“No government extension worker has visited this area to educate us on crop diversification,” he said.

Minister Chiyembekeza conceded the marketing system is unstable but said Malawi “cannot stop growing tobacco overnight”.

“We have strategies to gradually diversify to other crops, but can’t just stop farmers from growing tobacco. There’s still a market out there and we have to produce according to demand.”

Sidebar:

The website of the International Tobacco Growers Association notes that anti-tobacco campaigners have focused on Malawi and Indonesia as key examples of exploitative practices in tobacco growing that trap farmers in a vicious cycle of debt.

Farmers feel trapped in contract system they blame for low prices and growing debt

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