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Tobacco auction to phase out?

23 February 2007, Nation Online

In a desperate bid to improve dwindling margins from the country’s number one forex earner—tobacco, and motivate growers to produce more, government on Saturday unveiled plans to try out the contract buying system of the leaf on a large scale to assess if the new system will offer better than the auction system.

Tobacco Control Commission (TCC) general manager Godfrey Chapola said in Mangochi during the Tobacco Association of Malawi (Tama) annual area meeting that the contract system of buying was working well in other countries and Malawi wanted to sample the model.

Under contract buying, farmers and buyers agree on a price the leaf on fetch based on quality while the tobacco is in the field while in the auction system the price is determined by market forces of supply and demand plus quality.

In recent years, growers have been crying foul over low prices offered by buyers at the auction floors which they claim were too low to enable them recover production costs.

Currently, contract buying and auction system run hand in hand but the quota for contract tobacco is low at about five million kilogrammes compared to over 150 million kilogrammes sold through the auction system.

This year, on trial basis, contract buying quota has been increased to 25 million kilogrammes, according to TCC.

Tribac Africa Leaf is expected to buy about one million kilogrammes of the leaf from small-scale farmers under contract buying, Tama said.

If the system proves to be a success, Auction Holdings Limited (AHL)—managers of the tobacco auction floors—will have no role to play in the tobacco market in the future.

“We are weighing options. If the trials prove to be a success and if people want to grow and sell through auction or contract then we will have no choice but follow the system that will be a success,” said Chapola, hinting that contract marketing was rewarding to farmers as prices are not just imposed on farmers.

Last year, flue-cured tobacco under contract system fetched an average price of US$1.57 per kilogramme compared to US$1.13 per kilogramme at the auction floors.

“There are two types of contracts. The first one is contract growing where a farmer grows the leaf using farm inputs supplied by the buyer and the leaf is bought at the agreed price. This year about five million kilogrammes of burley is contracted.

“The second type is where a buyer agrees with the farmers to produce so much kilogrammes that will be bought at a given price at the factory. This year we have increased the quota for this system to 25 million kilogrammes,” said Chapola.

He said because buyers were not willing to buy tobacco at good prices government has to find ways of improving prices.

Chapola said government recommends that prices should be agreed in May each year.
Recently, a high level delegation comprising government and tobacco stakeholders visited Thailand and Brazil to assess how tobacco is sold there.

Industry, Trade and Private Sector Development Minister Ken Lipenga, his principal secretary Newby Kumwembe, Deputy Minister of Agriculture and Food Security Bintony Kutsaira and his principal secretary Patrick Kabambe, Chapola, AHL general manager Evans Chipala and Tama executive secretary Felix Mkumba made the delegation.

Members of the delegation refused to speak on record on main findings from the trip saying protocl requires that they brief President Bingu wa Mutharika first.

However, speaking on condition of anonymity, told Business Review that the contract system was the best way to go in as far as improving tobacco prices was concerned.

“Contract system beats the problem of price fixing as buyers are forced to offer good terms to encourage a farmer to grow a good and high quality leaf. With auction system, the problem of prices will be there forever,” he said.

Tama president Albert Kamulaga indicated that in the past the problem of prices emanated from the fact that buyers were sharing prices before auctioning of tobacco.

Tama Area 5 councillor and tobacco farmer in Mangochi Denis Dias said signficant reforms taking place in the tobacco sector would bring changes in the tobacco sector.

“These are indeed good developments and we as farmers are looking forward to the benefits because for a long time farmers have been suffering due to poor prices,” he said

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