a snap shot of tobacco1 by HC120704043328


									                         FINAL REPORT
                         University of Malawi
   (Agricultural Policy Research Unit/ Centre for Social Research)

A Snapshot of Tobacco Cultivation and Crop Diversification in

                             Submitted to

             Research for International Tobacco Control
                  P.O. Box 8500, Ottawa, Ontario K1G3H9 Canada


                              Charles Mataya, PhD
                                Sidon Konyani
                                Maxton Tsoka

                                August 23, 2002

The study team is indebted to organisations that opened their offices for us to visit and individuals who
spared their time to respond to questions posed by the team. The team would like to specifically
acknowledge the contribution of the following people who willingly spared their precious time to provide
the requested information:

        Mr. Mtukuso, Director, Agricultural Research and Extension Services, Ministry of Agriculture
        and Irrigation
        Mr. Chikhosi, Deputy Director, Agricultural Services, Ministry of Agriculture and Irrigation
        Mr. Ian Kumwenda, Project Coordinator, MASIP, Ministry of Agriculture and Irrigation
        Dr. G. Chapola, General Manager, Tobacco Control Commission (TCC)
        Dr. Chilembwe, General Manager, Agriculture Research and Extension Trust
        Mr. Chirambo, General Manager, Tobacco Association of Malawi (TAMA) Mr. Mbale, General
        Manager, Tobacco Exporters' Association of Malawi (TEAM) Mr. Masipa, Statistician, Tobacco
        Exporters' Association of Malawi (TEAM) Mr. Nsonthi, PRO, Auction Holdings Limited (AHL)
        Mr. A. Liao, Production Manager, DIMON
        Mr. N. Nyirenda, Director of Planning, Malawi Investment Promotion Agency (MIPA)

The study team is grateful to the management of the University of Malawi for assisting in facilitating the
agreement between Research for International Tobacco Control (RITC) and research institutions namely:
the Agricultural Policy Research Unit (APRU) and the Centre for Social Research (CSR). We would also
like to sincerely thank the management of CSR and APRU and the Secretary to the Programme Manager
of the Agricultural Policy Research Unit, Bunda College of Agriculture for facilitating the work of the

Last but not least, the study team would like express its gratitude to RITC for providing financial
assistance for this study. The team would like to specifically pay tribute to Dr Montasser Kamal and
Rosemary Kennedy for their understanding and encouragement throughout the study period.

Dr Charles Mataya                 Sidon Konyani                  Maxton Tsoka
Director (APRU)                   Research Fellow (CSR) Research Fellow (CSR)
Team Leader

                                       List of Acronyms
ACP       African, Caribbean and Pacific
ADMARC    Agriculture Development and Marketing Corporation
APRU      Agriculture Policy Research Unit
AHL       Auction Holdings Limited
ARET      Agriculture Research and Extension Trust
CIMMYT    International Maize and Wheat Improvement Centre
CIP       International Potato Centre
CSR       Centre for Social Research
DARTS     Department of Agriculture Research and Technical Services
DEVPOL    Statement of Development Policies
DfID      Department for International Development
DRC       Domestic Resource Cost Ratio
ELUS      Estate Land Utilisation Study
EU        European Union
GDP       Gross Domestic Product
GOM       Government of Malawi
GTZ       German Technical Corporation
IITA      International Institute of Tropical Agriculture
ICRISAT   International Crops Research Institute for the Semi-Arid Tropics
IMF       International Monetary Fund
IPM       Integrated Pest Management
MASH      Malawi Association of Spices and Herbs
MCCI      Malawi Chamber of Commerce and Industry
MEPC      Malawi Export Promotion Council
MGPPP     Malawi-German Plant Protection Project
MIPA      Malawi Investment Promotion Agency
MNF       Most Favoured Nation
MoAI      Ministry of Agriculture and Irrigation
MOPAM     Multiple Objective Policy Analysis
MPTF      Malawi Maize Productivity Task Force
NSCM      National Seed Company of Malawi
NSO       National Statistical Office
NTB       Non-Tariff Barriers
ODA       Overseas Development Administration
RITC      Research for International Tobacco Control
SADC      Southern Africa Development Community
SAP       Structural Adjustment Programme
SARRNET   Southern African Root Crops Research Network
TAMA      Tobacco Association of Malawi
TCC       Tobacco Control Commission
TEAM      Tobacco Exporters' Association of Malawi
UNCTAD    United Nations Conference on Trade and Development
UNTCEF    United Nations Children's Fund
WHO       World Health Organization
Executive Summary
This report disseminates the results of a collaborative research study undertaken by two research
arms of the University of Malawi, namely the Centre for Social Research (CSR) at Chancellor
College and the Agricultural Policy Research Unit (APRU) at Bunda College of Agriculture.
The study was carried out with the aid of a grant from Research for International Tobacco
Control (RITC), an international secretariat housed at the International Development Research
Centre (IDRC), in Ottawa, Canada.

The specific purpose of this study was to review and synthesize the available information on the
value-chain with respect to tobacco production in Malawi and to document previous
experiments in alternative crops and livelihoods in the country. The study was undertaken with a
view to identifying remaining gaps in the information and raising outstanding issues that relate
to research or policy implications for tobacco growing in Malawi.

Tobacco is the principal export crop in Malawi. Its production by small farmers and estates
provides the single highest number of work opportunities in the country. Likewise, its
transportation from farms to auction provides the most lucrative business for most of the idle
transport capacity in towns and rural areas. The marketing of tobacco at the auction floors
provides jobs for labourers, processors, floor operators and exporting outfits. In total, the
tobacco industry supports over 10% of the population and contributes about 61% of the
country's foreign exchange earnings. The contribution of tobacco towards the generation of
foreign exchange has been declining over the years, but slowly enough to preclude serious
questioning of its importance, or formulating a replacement strategy for any other crop as a
leading foreign exchange earner.

There is a well-developed infrastructure that supports the production, processing and marketing
of tobacco in Malawi. The Tobacco Control Commission, a parastatal organization, oversees all
aspects of tobacco. Farmers and buyers have strong associations that support the tobacco
industry from research to exporting the processed tobacco. This support infrastructure ensures
that Malawi tobacco is produced in the right quantity, has the right quality, is properly marketed,
and fetches prices that are reasonable.

The government of Malawi and the private sector have had only minimal involvement in terms
of their support to other crops. Due to this lack of attention to other crops, crop diversification
efforts have had little success in Malawi. While there is a loud rhetoric by the government on the
need to diversify the economy, there is little action. The studies that have been commissioned to
look at the matter show that tobacco is still and is likely to continue to be the mainstay of the
economy although several crops can be promoted as a substitute. There has been no organized,
systematic effort to experiment with the aim of finding an alternative to tobacco. No strong
institutions exist in Malawi to ensure that alternatives are developed and successfully entered
into the relevant domestic and international markets.

This report points out a serious gap in policy and legislation to promote alternatives to tobacco.
The benefits from tobacco seriously undermine the long-term viability of any alternative

      Table of Contents
1     Introduction................................................................................ 7

    1.1     Background......................................................................... 7

    1.2     The report ........................................................................... 3

    1.3     Role of Tobacco in Malawi's Economy and Society ............ 4

2     Dynamics of Tobacco Production in Malawi .............................. 7

    2.1     Value of the Tobacco Crop in Malawi ................................. 7

    2.2     Key Institutions Involved in Tobacco Production and
    Marketing in Malawi.................................................................... 10

       2.2.1      Member-Based Associations...................................... 10

       2.2.2      Government Parastatal Bodies ........................................ 11

       2.2.3      Private Company ........................................................ 12

    2.3     Discussion on Quantity, Quality, Value and Marketing of
    Malawi's Tobacco ....................................................................... 12

       2.3.1      Quantity ...................................................................... 12

       2.3.2      Quality ........................................................................ 12

       2.3.3      Marketing ................................................................... 13

       2.3.4      Value .......................................................................... 14

    2.4     Policy Implications and Research Questions .................... 15

3      Crop Diversification and Alternatives to Tobacco ................... 16

    3.1     Any Alternatives to Tobacco? ............................................... 16

    3.2     Constraints to Crop Diversification .................................... 17
          3.2.1       Internal Factors .......................................................... 17

          3.2.2       External Factors ......................................................... 20

       3.3     Roles of Various Institutions and Systems in Crop
       Diversification ............................................................................. 21

          3.3.1       Crop Experimentation................................................. 21

          3.3.2       Crop Diversification .................................................... 23

       3.4     Policy Implications and Research Questions on Alternatives
       to Tobacco ................................................................................. 23

   4      Summary of Policy Issues and Research Questions .............. 24

       4.1     Summary of findings ......................................................... 24

       4.2     Summary of research questions ....................................... 25

       References ................................................................................. 26

       Appendices ................................................................................ 28

       Appendix 1 - List of organisations where documents are obtained
       ................................................................................................... 28

       Appendix 2 - Proposed list of participants in dissemination seminar
       ................................................................................................... 28

1 Introduction
1.1     Background
Malawi is a very small country with an estimated area of 11,832,167 hectares, of which Lake
Malawi occupies one fifth (National Statistical Office 1995). Of 9,408,000 hectares of land,

approximately 56% or 5,307,000 hectares are arable. Malawi's economy is characterised by a high
dependence on agriculture, a narrow industrial base, and weak inter- and intra-sectoral linkages.
The agricultural sector currently accounts for about 42% of the gross domestic product (GDP),
while the manufacturing sector only accounts for 12% of the GDP. The agricultural sector
accounted for about 74% of export earnings in the year 2000 (National Economic Council, 2001).

Although the government has implemented several economic reforms since the early 1980s
including the short to medium term plans contained in the "Statement of Development Policies,
DEVPOL" (Malawi Government, 1988) and the World Bank and IMF-supported Structural
Adjustment Programme (SAP), the country has never again realized the 6% per annum economic
growth rate of the 1960s and late 1970s. As observed by the World Bank, the economy has to grow
at the rate of 6% per annum in order to prevent an increase in the number of people living in

Although the performance of Malawi's economy has been quite unsatisfactory in the past years,
relative stability and growth have been experienced, but only with insignificant margins. The major
reasons for this are numerous, including high levels of inflation, fiscal imbalances and external
shocks. Major underlying factors to the poor performance included depreciation of the Malawi
Kwacha exchange rate against the US Dollar, high interest rates and poor tobacco prices offered at
the auction floors (National Economic Council, 2001).

Poor economic performance has translated into the deterioration in Malawians' welfare, 85% of
whom live in rural communities. The country's GDP per capita has declined from US $210 in 1992
to US $200 in 1997 and to approximately US $160 in 1999 (Mataya 2002). Income disparity as
measured by the gini ratio has worsened from 0.48 in 1968 to 0.62 in 1995 (World Bank 1995). The
widening income gap between individuals coupled with rising inflation implies a worsening
situation in food insecurity. Rising cost of capital due to inflation-driven rates of interest have made
both small-scale and large-scale farming uncompetitive in Malawi. Lack of local manufacturing of
important factor inputs such as fertilizer, feed and agricultural chemicals have worsened the

The agriculture sector, which is the mainstay of Malawi's economy, experienced a 46% drop in the
growth rate from 10.1% in 1999 to 5.4% in 2000 (National Economic Council, 2001). This is
attributed to a significant decline in the performance of the small-scale agricultural sector. The
growth rate of the smallholder sub-sector dropped sharply from 13.4% in 1999 to 1.7% in 2000
(National Economic Council, 2001). The decline emanated mainly from the poor performance of
the tobacco industry. The large-scale agricultural sector performed better, rising from a growth rate
of 1.9% in 1999 to 21% in 2000 (National Economic Council, 2001). This is a result of good
performance of the sugar and tea industries.

Domestic exports amounted to MK22.056 billion in 2000 compared to MK18.444 billion in 1999
(National Economic Council, 2001). Tobacco was the major export commodity in both periods
followed by tea and sugar. According to National Economic Council, the major challenges for
Malawi commodity trade has been price competitiveness, quality and production levels. Malawi's
prices have been higher in a number of markets, which rendered Malawi's exports unattractive. In
addition, production levels for a number of commodities have remained low recently. Quality is
also critical, requiring good physical appearance and, in some cases, chemical content of
commodities. There is also poor flow of market information to small exporters particularly those in
rural areas (National Economic Council, 2001). This could be the reason for low production of
some export commodities.

The expected ratification of the international Framework Convention on Tobacco Control (FCTC)
in 2003 is highly relevant for Malawi, being a major tobacco producing country. Malawi and
Zimbabwe are the only two countries worldwide that depend significantly on raw tobacco for their
export earnings. A strong international convention will eventually have an impact on global
demand for tobacco, however, any decline in demand will occur only gradually. The impact of
declining demand on national economies will vary depending on each country's dependence on
tobacco growing, yet even those countries that are highly dependent on tobacco farming will not
experience immediate drastic reductions in employment in the tobacco industry, because the fall in
global demand will extend over several decades (World Bank, 1999). Malawi was among the WHO
member nations pledging support for the FCTC at the 2000 World Health Assembly, with country
representatives noting that the benefits to the country as a whole from tobacco growing are not
commensurate with the profits enjoyed by the multinational tobacco companies (Yach and
Bettcher, 2000). The Johannesburg Declaration on the FCTC, adopted by African member states of
the WHO, calls upon the International Negotiating Body of the FCTC to pay special attention to the
unique social and economic realities of the African continent, and urges the international
community to provide financial resources to support diversification into other economically viable
farming options and alternative livelihoods. Clearly, Malawi needs to work with its current and new
development partners to systematically assess alternatives to tobacco production. Since tobacco is a
key element of the economy, it is necessary to first understand its economic value to the different
stakeholders in the country. Such an analysis would assist in identifying groups that could be
vulnerable during the process of shifting away from tobacco, and to devise strategies to address
such losses.

1.2 The report
Through this study, the Agricultural Policy Research Unit (APRU) and the Centre for Social
Research (CSR) of the University of Malawi have taken important steps in: identifying the
dynamics of tobacco cultivation in Malawi; describing efforts undertaken in the country to
experiment with alternative crops; and explaining the roles of different institutions involved in both
processes in the country.

The specific objectives of the study were to:
    •   search, collect, review and synthesize the documents that are available in Malawi regarding
        the dynamic process of tobacco cultivation with a particular emphasis on both the
        mechanism of the build-up of the monetary value of the tobacco crop for different size
        farmers and organizations at the district and national level (including how the crop's value
        is determined throughout the production and marketing cycle in Malawi);

    •   search, collect, review and synthesize the available documents regarding the role of the
        different national, international, government, non-government, private, and research
        institutions in influencing the different features of the tobacco crop in Malawi (introducing
        and testing varieties, quantity, quality, value, protection, marketing, etc.);

    • identify issues that are not yet known or studied about the dynamics of the crop (micro and
       macro levels) or the role of various institutions, covering potential policy implications and
       research questions;

    • search, collect, review and synthesize the documents showing previous experiments in
       growing alternative/mixed crops and/or livelihoods, on the farm, district or national levels,
       covering issues of outcome, feasibility, and practical limitations or enabling factors;

    • search, collect, review and synthesize the available documents regarding the role of
       different national, international, government, non-government, private and research
       institutions in experimenting with alternative crops or crop diversification;

    • identify issues that are not yet known or studied about alternative crops or the role of
       various institutions in this regard, covering potential policy implications and proposed
       research questions.

        This study was carried out using literature review and semi-structured interview methods.
        In search of the tobacco and alterative crops literature, the team visited a number of
        institutions. The institutions included the Ministry of Agriculture and Irrigation, the
        Ministry of Commerce and Industry, the National Economic Council, the Tobacco Control
        Commission, the Tobacco Association of Malawi, the Tobacco Exporters' Association of
        Malawi, Auction Holdings Limited, the Malawi Investment Promotion Agency, Chitedze
        Research Station, Bunda College of Agriculture, DIMON (a tobacco processor), and
        Agriculture Research and Extension Trust. These institutions are all based in the city of
        Lilongwe. This literature search was complimented by some interviews with personnel
        from key institutions in tobacco crop production and marketing and those involved in the
        search for alternative crops. The. collected data was validated through cross-referencing
        between the interviews and the literature.

The presentation of this report follows the above objectives for this study. In order to contextualise
the findings of the report, a brief overview of the role of tobacco in Malawi is presented first.

1.3 Role of Tobacco in Malawi's Economy and Society
Tobacco is the most widely grown crop in Malawi after maize, covering more than 150,000
hectares. Malawi's tobacco accounts for about 20% of the world's total tobacco production (Keyser,
1997). Malawi is ranked eighth among the top thirty raw tobacco producing countries in the world
(World Bank, 1999). Burley and flue-cured tobacco are the most widely grown tobacco varieties.
Burley tobacco is grown by both estate (commercial or large scale) and smallholder farmers,
although most is grown by estate farmers. Except under special schemes such as the Kasungu
Flue-Cured Tobacco Growers' Trust, which is a flue-cured tobacco small growers' association,
flue-cured tobacco is grown mostly by estates. This is mainly due to the high capital outlay required
to grow and process the crop before sale. Export projections for 2001 were put at 10 million
kilograms for flue-cured and 100 million kilograms for burley (National Economic Council, 2001).
Cost implications have made burley production the preferred crop by most smallholder farmers
after the restriction for smallholders not to grow and market burley tobacco was lifted. Before the
1990/1991 agricultural season, the growing of burley tobacco , was restricted, favouring mostly
large-scale farmers operating on leased or freehold land. Land policy

       Land tenure arrangements in Malawi are enshrined in the 1965 Malawi Land Act which
       categorizes and defines three types of land:

i.         Public land: Land which is occupied, used or acquired by the
Government, and any other land not being customary or private land.
ii.        Customary land: Land which is owned, held, occupied or used under
customary law, not including any public land.
iii.       Private land: Land which is owned under private ownership. This class of
private land is called Customary Freehold Land (customary land converted into
private land under the Customary Land Development Act 1967). This land
category is only found in the Lilongwe Agricultural Development Division and
was based on the concept that "...customary land tenure arrangements are an
obstruction to agricultural development and, that economic systems are viable
only when operated under a sound system of land tenure based upon security of
individual land ownership and negotiability of title" (GOM, 1965 and Commission
of EC and Ministry of Agriculture, 1993 in Bota 1999).

       was used as one instrument to implement the Special Crops Act, which prevented smallholder
       farmers from growing this lucrative crop.

       Estimates by the Estates Land Utilization Study carried out by the Ministry of Lands and Housing in
       1995, show that there are about 30,000 tobacco estates ranging in size from 10 to 10,000 hectares,
       with an average size of 35 hectares. The structure of the tobacco estates is heavily skewed towards
       small and medium size (i.e., below 40 hectares). Around 88% of the estates are less than 40 hectares
       and 67% are less than 20 ha (see Table 1). The average estate size declined from over 200 hectares
       in the 1970s to about 50 hectares by the end of 1980s and, in recent years, most of them have been
       less than 20 hectares. This was due to the opening up of relatively smaller estates as years

               Table 1. Percentage of Tobacco Estates in Five Size Categories
Estate Size Groups (ha)                                        Percentage

10-< 20                                                                                67
20-<40                                                                                 21
40-<100                                                                                7
100-<500                                                                               5
>500                                                                                   2

Source: Ministry of Lands and Housing (1995). Estate Land Utilisation Study, Lilongwe
Estimates by Price Waterhouse Coopers (2000) indicate that tobacco production in 1999 in Malawi
was 134,390 metric tons with a market value of US $187.5 million. During the 1999
growing season, a total of 147,249 metric tons of leaf (including carryover stocks) was exported,
generating revenue of US $272 million. This represents approximately 58% of total export earnings
and 15% of the country's GDP of US $1.8 billion. Burley tobacco constitutes approximately 83% of
the total leaf produced and exported. Approximately US $26 million (or only 12.8%) of the US
$204 million in total burley sales in 1998 was received by smallholder farmers, while estate farmers
received most of the rest.

Price Waterhouse Coopers observes that the tobacco industry employs 1.57 million people, which is
more than 45% of the national labour force. Of the labour force in the tobacco industry, 86,000 are
farmers, 385,000 are tenants and 1.1 million are farm workers1. An estimated 38,150 people were
also employed in activities associated with the tobacco industry.

  Tenants are given land on the farm to grow their own tobacco for sale to the landlord. Farm
workers, on the other hand, only work on the estate for a wage and are not given land to grow

              2 Dynamics of Tobacco Production in Malawi
              2.1 Value of the Tobacco Crop in Malawi
              Malawi's export base is predominantly agricultural with tobacco contributing approximately 61%
              of the total country's export earnings in the year 2000, followed by tea (approximately 10%) and
              sugar (approximately 6%) (Table 2). The country has long depended on tobacco as its major foreign
              exchange earner. 4

              Table 2. PRINCIPAL DOMESTIC EXPORTS BY MAIN COMMODITIES 1994-2000 (MK million)

Commodity                1994                             1995                   1996                        1997
                         Value            %               Value       %          Value         %             Value         %
Tobacco                  2,241            68.9            4,051       61.8       4,935         62.0          5,780         62.0
Tea                      261              8.0             428         6.5        497           6.3           701           7.5
Sugar                    229              7.0             482         7.3        498           6.3           393           4.2
Cotton                   15               0.5             58          0.9        24            4.1           191           2.0
Groundnuts               0                0.0             4           0.1        10            0.1           0             0.0
Rice                     8                0.3             25          0.4        25            0.3           29            0.3
Coffee                   127              4.0             262         4.0        289           3.6           209           2.2
Pulses                   1                0.4             126         1.9        240           3,0           106           1.1
Maize                    17               0.5             81          1.2        0             0.0           0             0.0
Other Exports            274              8.4             856         13.1       899           11.0          1,644         18.0
Total Domestic Exports   3,185            98.0            6,72        97.1       7,717         98.0          9,053         97.0

Re-exports               69               2.1             188         2.9        191           2.4           250           2.7
Total                    3,254            100.0           6,559       100.0      7,909         100.0         9,302         100.0

     Commodity                   1998                             1999                           2000
                                 Value            %               Value         %                Value            %
     Tobacco                     10,306           62.0            12,109        61.0             14,305           61.2
     Tea                         1,248            7.5             1,735         8.8              2,271            9.7
     Sugar                       1,563            9.3             1,020         5.2              1,470            6.3
     Cotton                      155              0.9             235           1.2              138              0.6
     Groundnuts                  0                0.0             0             0.0              0                0.0
     Rice                        74               0.4             110           0.6              52               0.2
     Coffee                      327              2.0             392           2.0              330              1.4
     Pulses                      134              0.8             285           1.4              364              1.6
     Maize                       0                0.0             0             0.0              0                0.0
     Other Exports               1963             12.0            2,559         13.0             2,901            12.4
     Total Domestic Exports      15,770           94.0            18,444        93.0             21,833           99.0

     Re-exports                  965              5.8             1,352         6.8              1,533            1.0
     Total                       16,735           100.0           19,795        100.0            23,366           100.0

                     Source: National Economic Council (2001), National Statistical Office, Treasury and Reserve Bank of Malawi

As may be seen in Table 3, output (especially that of burley tobacco) increased after removal of the
restrictive Special Crops Act in 19 892. The repeal of the Special Crops Act was part of the World
Bank/IMF structural adjustment program. The rationale for repealing the Act was to improve the
well-being of smallholders by allowing them to grow tobacco on the assumption that this would
result in a rise in their incomes. The increase in tobacco output reflects a rising number of
smallholder growers and intermediate buyers3, as well as a rise in the area cultivated by the estate
sub-sector. This increase in tobacco output after the repeal of the restrictive crop act in 1989 was
induced by the inherent comparative advantage of burley tobacco relative to other crops, rather than
an increase in the real value of the crop.

Despite the 18.9% increase in sales from 134.5 million metric tons in 1999 to 159.8 million metric
tons in 2000, the real value in the year 2000 has been lower than in 1999 due to a fall in prices
offered at the auction floors. The fall in prices has probably arisen from the quality of tobacco
offered that year. Average prices per kilogram for all types of tobacco declined to US$1.0309 in
2000 from US$1.3956 in 1999 representing a 26.1% decline in tobacco price in the year 2000
compared to 1999 (National Economic Council, 2001).

The increase in sales in the year 2000 could have been higher had smallholder production not fallen
in the year 2000 compared to 1999. According to the National Economic Council (2001),
smallholder tobacco production is estimated to have declined by 9% from 98,675 kg in 1999 to
87,307 kg in the 2000 growing season. This drop in production is attributed to declining yield levels
and hectarage by 8% and 2%, respectively. The decline in yield was mainly a result of excessive
rains in the main tobacco growing areas.

  The Special Crops Act restricted the growing of high value crops such as burley and flue-cured
tobacco to leasehold or freehold land farms only. Small-scale farmers operating on unregistered
customary land were thus excluded from growing such high value crops. (The concepts leasehold
and freehold are as defined in land tenure arrangements outlined in Section 1 above).
  Intermediate buyers are private traders who are registered to buy tobacco directly from
smallholders, for future sale at the auction floors. This was part of the IMF Structural Adjustment
Program geared at expanding the role of the private sector in marketing of smallholder crops.
Previously, only ADMARC was empowered to buy tobacco grown by smallholders on customary

       Table 3. Burley, Flue-Cured and Western (Fire and Smoke Cured) Tobacco Production, 1988-2001.
Year        Burley Tobacco              Flue-Cured Tobacco            Western Tobacco           Total
            (million mt)                (million mt)                  (million mt)              (million mt)
1988        46                          21                            N/A                       N/A
1989        61                          20                            N/A                       N/A
1990        64                          22                            N/A                       N/A
1991        75                          25                            N/A                       N/A
1992        99                          25                            N/A                       N/A
1993        103                         25                            N/A                       N/A
1994        71                          20                            5.5                                          97.5
1995        101                         20                            8.8                                         130.1
1996        119                         15                            8.3                                         141.6
1997        134                         15                            9.3                                         158.1
1998        114                         14                            6.7                                         134.4
1999        111                         14                            8.8                                         134.5
2000        142                         11                            6.8                                         159.8
2001        *115                        8                             *1.0                                       * 124.6
                                                               * Estimate
                                             Source: Tobacco Association of Malawi Brochure

            The long-term costs and benefits of reliance on tobacco as the major foreign exchange earner for
            Malawi's economy must be carefully considered. Although the entry of smallholder farmers into
            burley production was viewed as a means for reducing poverty at the household level, there is
            mounting fear that overproduction may ultimately result in loss of quality and market share, and
            decline in the world price of burley tobacco. These fears are not altogether unwarranted considering
            that Malawi is a major world producer of burley tobacco. The negative income effects of a decline
            in the world price would be more severe in Malawi than other countries since burley tobacco
            contributes substantially to farmers' household income and the country's foreign exchange earnings.
            In addition, the long-term negative environmental effects of tobacco production resulting from
            deforestation, reduction in biodiversity, and siltation of rivers and lakes needs to be weighed against
            the immediate economic benefits of tobacco growing.

            Dependence on one crop has also been one of the main problems addressed in the World Bank and
            IMF structural adjustment program ever since it was launched in the country in 1981. Considering
            the pervasiveness of tobacco control campaigns in Western countries and the pending ratification of
            the FCTC, which could result in a gradual reduction in the global demand for tobacco over the next
            several decades, the need for Malawi to diversify away from tobacco as a major source of economic
            livelihood and foreign exchange is justified. Diversification into other lucrative crops such as spices
            and oilseeds has been mentioned in several Donor-Malawi Government dossiers as a means to
            address deep-rooted structural weaknesses of the economy. The need to diversify away from
            tobacco is further demonstrated by the declining efficiency of resource use as evidenced by a rise in
            the Domestic Resource Cost (DRC) Ratio between 1994
            and 1997 from 0.28 to 0.50 for estate burley tobacco and from 0.32 to 0.364 for smallholder burley
            tobacco (Jaffe, 1997).

            4 DRC - Domestic Resource Cost Ratio, a measure of the contribution of value added to the domestic
            resource. See detailed discussion in Section 3.

In summary, dependency on tobacco in Malawi's economy has not wavered despite the steady
decline of its revenues. This is perhaps a sign of the existence of systemic barriers that prevent
effective attempts to reduce this dependency.

2.2 Key Institutions Involved in Tobacco Production and
    Marketing in Malawi
This section discusses the key institutions that play a significant role in Malawi's tobacco industry.
-The Tobacco Act regulates the activities of all the key institutions in terms of the production,
manufacture and marketing of tobacco in Malawi.

2.2.1 Member-Based Associations
Tobacco Association of Malawi (TAMA)
TAMA is owned by its members and was formed in 1929 to promote and develop the flue-cured
and burley tobacco industry in Malawi and protect the interests of all tobacco growers (Matthews
and Wilshaw, 1992). Membership in TAMA in 1991 was comprised of 2,789 flue-cured and 13,500
burley tobacco growers. Any person, company, syndicate or partnership registered as a grower of
flue-cured or burley tobacco by the Tobacco Control Commission is automatically enrolled as a
member of TAMA. There is no fee for membership. TAMA is registered under the Trustees
Incorporation Act in 1982 (Matthews and Wilshaw, 1992).

TAMA runs a Tobacco Classification Scheme. The objectives of this Scheme include: the
classification of all members' bales of tobacco sold on the auction floors; provision of statistical
information on tobacco grades and prices that relate directly to other tobacco producing countries'
statistics; the undertaking of production surveys for accurate forecasting of tobacco quality before
tobacco sales start; and the provision of information on the performance of the market from week to
week or season to season to enable comparison with tobacco markets in other countries (Matthews
and Wilshaw, 1992).

Tobacco Exporters' Association of Malawi (TEAM)
TEAM is owned by tobacco buyers and exporters and was established in 1930. TEAM receives its
entire revenue from the contributions of its members. Over the years, TEAM has been actively
involved in matters relating to the growing, marketing and exporting of all types of tobacco grown
in Malawi. At present, Malawi's tobacco is exported worldwide to over sixty countries (Matthews
and Wilshaw, 1992). Originally, membership was restricted to tobacco buyers and exporters but as
the industry developed, processing organizations and manufacturers subsequently became eligible
for membership (Mathews and Wilshaw, 1992). TEAM represents all buyers of tobacco on the
auction floors. The tobacco buyers are the following seven independent companies:
         •       Limbe Leaf
        •        Dimon
        •        Stancom
        •        Africa Leaf
        •        Tobacco Marketing
        •        Premier Leaf
         •      B. J. Wallace.
TEAM is also the body responsible for discussions with representatives of TAMA should disputes
arise between buyers and sellers.

According to the Malawi Tobacco Directory written by the Ministry of Agriculture and Irrigation,
the functions of TEAM are as follows:
(a)         to represent the interests of the tobacco industry in respect of buying, processing and

(b)               to co-ordinate and act upon the views of all its members;

(c)         to co-operate with Government in all matters relating to tobacco production, selling
over the auction floors and exporting;

(d)         to determine world market requirements in terms of types of tobacco and qualities; to
obtain information on production and marketing of competing countries throughout the world; and
to obtain information on new markets as well as accessibility and restrictions in all tobacco
importing countries;

            (e) to help coordinate activity to counter the efforts of tobacco control lobbyists.

2.2.2        Government Parastatal Bodies

Tobacco Control Commission (TCC)
TCC was established in 1938 through the Tobacco Auction Floors Act of Parliament. The TCC
office is centralized and is located in Lilongwe. Its primary function is to market tobacco and act as
an intermediary between the farmer and the buyer. Other functions of TCC, as defined in Section 7
of the Tobacco Act, include: control and regulation of the sale of tobacco on the auction floors in
Malawi; promotion and expansion of tobacco sales; collation of statistics relating to tobacco;
distribution of market studies and information relating to tobacco; and providing advice to the
Government on the sale and export of Malawi's tobacco.

Other duties under TCC jurisdiction include the estimation of crop sizes, the determination of
quotas5, allocation and enforcement of tobacco delivery quotas, and the organization, supervision
and arbitration of auction sales of all tobacco varieties other than Oriental, which is a sun-cured
variety and grown in very small quantity under contract for direct sale to Limbe Leaf Tobacco
Manufacturing Company. The literature available to the research team did not cover the mechanism
under which TCC enforces growers to grow tobacco without exceeding their quota. TCC is also
responsible for the licensing of the Auction Floors, Auction Floor Buyers and Commercial Graders
subject to the approval of the Ministry of Agriculture and Irrigation. It inspects all tobacco grading
sheds, issues grading licenses, tobacco selling numbers, certificates of origin for all tobacco
exported from Malawi, and import and export permits (Matthews and Wilshaw, 1992).

Agriculture Research and Extension Trust (ARET)
ARET is a Trust established by TAMA in 1995 and operates under a Trustees Act. ARET facilitates
close linkages between farmer-focused research and extension activities (ARET Brochure). The
creation of ARET was intended to create a favourable environment for more effective identification
and prioritisation of farmers' needs in terms of promoting tobacco production, land use planning,
soil and water conservation, afforestation, farm management and agricultural diversification. The
ARET brochure states that its overall objective is to promote economic growth and stability in the
agricultural sector, thereby alleviating poverty, and to improve sustainable utilization of natural

    Please refer to Section 2.3.1 of this report for more information on TCC's role in determining quotas.

2.2.3 Private Company

Auction Holdings Limited (AHL)
AHL has three auction floors, one in each of the Malawi's three regions. The auction floors are
opened from April to August each year, the months during which tobacco is sold. The most
important function of AHL is the operation of the tobacco auction floors in the cities of Mzuzu in
the Northern region, Lilongwe in the Central region, and Blantyre in the Southern region, in
accordance with the terms of the licence granted by the Government.

2.3 Discussion on Quantity, Quality, Value and Marketing of
    Malawi's Tobacco
This section provides a discussion of the regulations set by Government and roles that the key
institutions play in influencing tobacco quantity, quality, value and marketing.

2.3.1 Quantity
TCC plays more or less the greatest role in influencing quantity. The Tobacco Act has given TCC
powers to allocate and enforce tobacco quotas. Each registered tobacco grower is given a quota on
the basis of the grower's titled land. Likewise, each registered smallholder club6 is given a quota,
the maximum being 1,500 tonnes. The quota of growers with titled land is dictated by the size of
their land (a grower is required to plant tobacco on a maximum of 25% of his or her land7) and the
national tobacco yield (TCC estimates that on average, tobacco yield is about 1,500 kg per hectare).
The maximum quota given is 1,500 kg multiplied by 25% of the size of the grower's land holding.
In practice, before TCC sets the quotas for various growers, it solicits indicative demand from
buyers before the start of the growing season. As outlined in Section 2.2.1 of this report, the buyers
are all private companies. The buyers provide information that includes the types of tobacco likely
to be required. This information is routinely known by the buyers because they are closely
connected to major importers of tobacco (and indeed manufacturers of tobacco products). TCC then
sets the quotas based on this potential demand.

As tobacco is being sold on the auction floors, TAMA monitors price trends of various tobacco
leaves. This information is fed to ARET, which responds by researching and breeding varieties that
are most in demand. According to the ARET brochure, varieties of tobacco are developed to
promote production through breeding for resistance to common diseases. In addition, ARET's
extension department contacts groups of tobacco growers to share information on good tobacco
husbandry practices in an effort to promote production. ARET's current research emphasis is on
testing for the most effective tobacco herbicides and suckercides in order to reduce tobacco
production labour demand. This research could potentially enable some labour to be released to
work on other alternative crops.

2.3.2 Quality
The Government, through the TCC, enforces quality through most of the laws stipulated in the
Tobacco Act. The Act emphasizes the uprooting of tobacco stems at dates announced over the radio
and/or indicated in the government gazette. The uprooting of harvested tobacco plants is done
mainly to avoid the carryover of tobacco diseases to the next season's crop, thus ensuring good

  A smallholder club is comprised of at least 10 smallholder farmers. Since smallholders have
limited land to meet the minimum tobacco quota required for sale at the auction, they are permitted
to form clubs in order to meet the established quota.
  TCC determined the 25% on the basis of Government's recommendation of a 4-year rotation system for tobacco.
This limit allows the farmer to grow other crops, especially food crops, and provide some land for afforestation.

    quality tobacco that is free from infections. The Act stipulates that any person who fails to uproot
    tobacco plants prior to the announced date shall be guilty of an offence. The Act mandates the TCC
    to ensure that all growers use only TCC approved tobacco seeds, and no one is allowed to grow
    tobacco from seed without written permission of the TCC. These regulations are meant to strictly
    control the growing of seed that produces only the best quality tobacco for Malawi's ecological

    The Act also mandates the TCC to register tobacco growers. For registration of growers on
    customary land, the Act stipulates that the TCC may refuse to register a given potential tobacco
    grower. The grounds for refusal are mostly based on concerns for ensuring production of the best
    quality of the tobacco crop. An applicant may be determined unsuitable to grow tobacco for any or
    all of the following reasons:

(a) the land on which the applicant intends to grow tobacco, or the climatic conditions in the area, are
    not suitable;

(b) the applicant's methods and standards of cultivation, or of curing or handling tobacco, are unlikely
    to produce leaf of an approved type and of reasonable quality;

(c) the applicant has inadequate or unsatisfactory curing space and facilities at his/her disposal;

(d) the applicant has been previously convicted of failing to uproot tobacco;

(e) the applicant has used or intends to use seed of a type that is not approved.
    Another of TCC's roles for ensuring quality tobacco is to define tobacco grades and classes. The Act
    stipulates that once the grades are defined, all tobacco sold on the auction floor must be graded
    accordingly. No one is allowed to establish a grading business without a grading license issued at
    the TCC office and TCC conducts grading courses to assist businesses in obtaining such a license.
    In addition, buyers are barred from being licensed as graders.

    TAMA classifies all bales on the auction floor following internationally set standards before the
    tobacco is sold.
    The role of AHL is to remove from auction all tobacco suspected of being infested with stored
    tobacco beetle and to ensure that no auction floor accepts tobacco from a person whose tobacco is
    rejected. This control is assured since all auction floors belong to the AHL.

    As with the setting of quotas, buyers also play an indirect role in determining the quality of tobacco
    that is produced and sold, since they specify both the type and quality of tobacco that they desire to
    purchase. This information is fed to ARET and farmers to ensure that the growers produce tobacco
    leaf of the quality that was specified by the buyers.

    2.3.3 Marketing
    The Tobacco Act governs the selling and buying of tobacco in Malawi. The Act stipulates that no
    person shall buy tobacco unless he or she has a buying license. In addition, the seller must have a
    valid registration certificate. The Act empowers the TCC to register growers as sellers and issue
    selling licenses to registered tobacco buyers (also known as intermediate buyers) and buying
    licenses. TCC also issues export licenses to auction floor tobacco buyers who wish to export it. The
    Act also requires that all tobacco (including Western Tobacco, previously only sold to ADMARC,
    which had direct outside markets) be marketed only through an auction. Consequently, the Act
    requires auction floor operators to be licensed through the TCC.

Since the early 1990s, the Government has been loosening the production and marketing of
smallholder tobacco. With the lifting in 1989 of the restrictive Special Crops Act, smallholders are
now allowed to grow any type of tobacco including burley and flue-cured and sell it at the auction
floors through smallholder clubs. Previously only ADMARC was allowed to buy tobacco from
smallholders. Since 1989, private registered buyers are also allowed to buy tobacco grown on
customary land by smallholders and sell it at the auction floors. TCC is empowered to register the
clubs and buyers. To ensure that this smallholder tobacco marketing is done legally, the buyer is
required by law to display where the business is being conducted, the buying license issued by TCC,
and the buyer's prices of different tobacco grades. According to the law, the TCC may fix the prices
at which ADMARC and registered tobacco buyers may buy tobacco from smallholders. In addition,
the buying of tobacco may not be done outside the days and times that the TCC has indicated in the
government gazette and/or announced.

It should be noted that all tobacco, whether produced on customary or titled land, is required by law
to eventually be sold through the auction floors. According to the Malawi Tobacco Directory, AHL
is given an annual license to operate tobacco auction floors. AHL, as the auction floor operator,
provides the starter and the auctioneer. AHL also ensures that a seller is paid within twenty-four
hours of a sale. Each seller is required to have a bank account for receiving money from tobacco

2.3.4 Value
According to the Tobacco Act, the value of most of Malawi's tobacco is determined by supply and
demand at the auction floors. The quality and grading of the supplied tobacco plays an important
role on the bid price. Judging from the number of growers, there is competition on the supply side,
although the flow of tobacco to the floors is controlled by TCC. On the other hand, the demand side
is restricted to only the 7 buyers mentioned earlier in this report, which implies that demand is not
competitive and there are possibilities for collusion. In essence, an imperfect market determines the
value of the tobacco leaf and literature shows that the grower does not get the best deal8.

TAMA monitors market performance both weekly and seasonally. TAMA compares the average
prices of tobacco on the auction with those prevailing in other countries like Zimbabwe. If on
average prices offered by Malawi's buyers are seen to be significantly lower than buyers in other
countries, TAMA negotiates with the buyer on behalf of the farmers. Prices offered at the auction
are not the same for each seller. Therefore, if a particular seller is not satisfied with the price offered
for the purchase of his/her tobacco on the auction (irrespective of the average price being offered by
buyers at the auction) the seller is free to withdraw the tobacco and re-offer it for sale another time
during the buying period. If the seller is still not satisfied with the prices offered later that year, the
farmer is allowed to re-offer his/her tobacco for sale in a future buying season. In such a case, the
farmer must take the tobacco back to the farm, but this rarely happens because of transport costs and
storage problems.

The laws of Malawi state that the responsible Ministry may impose a cess ( which is a form of a tax)
at an expressed rate per stated unit of net weight to be levied, paid and collected in respect of both
tobacco sold in Malawi and tobacco exported from Malawi. The order made may provide for a cess
at different rates for different types of tobacco, or may exempt any type of tobacco from liability for
a cess. As a consequence of this law, TCC, TAMA, ARET and AHL get their entire revenue from a
cess levied on all tobacco sold over the auction floors. For example, 1% of the total value of
Malawi's tobacco sold over the auction floor goes to ARET while AHL gets 3.95% of the buying
price. However, smallholders are not required to pay a cess in the sale of tobacco to ADMARC and

     See Price WaterHouse Coopers. 2000. The Tobacco Industry in Malawi: An Economic Analysis

intermediate buyers because a cess is only charged at the auction floors. Hence, smallholders only
pay a cess if they sell their tobacco directly to the auction floors.

The implication of levying a cess on the tobacco sold through the auction floors is that tobacco
sellers do not get the full value for their tobacco. Whether the services offered to farmers by
institutions charging the cess warrants the levying of this tax is an area for further study. What is
apparent is that the farmers often perceive the levying of the cess as unfair. For example, if AHL
levies a cess, a farmer who fetches a high price for a high quality bale pays more to AHL than the
farmer who fetches less on the sale of a bale of the same weight but lesser quality.

In summary, institutions exist to regulate and manage the quantity, quality, value and marketing of
Malawi's tobacco. The regulatory and institutional environment is built on the strong links between
public and private institutions, with a notable absence of effective participation from organized
small- or medium-scale fanners.

2.4 Policy Implications and Research Questions
Malawi's persistent over-dependence on the tobacco crop is due to a number of factors, some of
which are related to well-developed systems under which tobacco is produced and sold. Weak
institutional capacity in the country in extension activities, research and technology development,
project planning, monitoring and evaluation are also other major contributing factors to
unresponsive agriculture policy reforms. A notable policy implication is the need to articulate a
systemic approach to other crops, particularly with respect to those that can act as a viable substitute
to tobacco.

In the interim, finding answers to the following questions is paramount:

     1       Who gets what from tobacco production and marketing? So far, very little is known
             about what each player obtains throughout the value chain. Less is known about the
             inequity between farmers with different size land holdings. It is a common perception
             that most players, apart from the farmers, receive handsome bonuses at the end of the
             season while farmers seem to remain in poverty.

     2       What has been the impact of the policy on liberalization of tobacco production and
             marketing following the repeal of the Special Crops Act in 1989? Have smallholder
             farmers benefited from this policy change? What has been the effect of this policy on
             established fanners, and on the quantity and quality of tobacco produced? What is the
             relationship between farm size and the economics of tobacco growing? How is
             adaptation to liberalization predicated on farm size and access to capital? What is the
             impact of tobacco liberalization on other sectors of the economy?

     3       What are the precise supply and demand factors that influence tobacco cultivation in
             Malawi? How are these factors different at the local level compared to the national
             level? What are the most suitable methods of measuring the possibility and
             profitability of growing alternative crops in Malawi?

     4       Why don't non-tobacco crops have similar sophisticated management structures?
             What would it take to establish these structures for other crops? Are the existing
             structures the only viable form of crop management in Malawi?

      5        What is the estimated cost and complexity of the research and development that is
               required for a switch from tobacco growing to take place?

3 Crop Diversification and Alternatives to Tobacco
3.1       Any Alternatives to Tobacco?

Crop diversification in Malawi has mostly been driven by the negative impact on farmers of
unfavourable terms of trade facing the traditional export crops and unfavourable weather conditions
and low productivity of food crops. That is why the attempts to diversify have focused on both the
food and cash crops. In fact the need to diversify the production of exports away from traditional
export crops such as tobacco, tea, coffee and sugar has been central to the government's growth
strategy for the past ten years (Jumbe et al, 1999). The current strategy for agricultural
diversification, as contained in the Agricultural and Livestock Development Strategy document
published in 1995 by the Ministry of Agriculture, MoAI, is to promote vertical diversification as to
reduce the country's dependence on a few crops for food and export earnings. Further, the country's
agricultural development strategy has always been biased towards the field crops at the neglect of
the many root and tuber crops as well as high value crops such as spices, cut-flowers etc (MoAI,
1995). It is however being widely acknowledged that some of the horticultural crops, for example,
provide a viable option for diversification and have immense potential of widening the country's
export base. In this regard, there have also been developments towards horizontal diversification
(Jumbe et al, 1999).

The government also launched, in 1998, a Horticultural Promotion Strategy aimed at exploiting the
country's potential in the production of both tropical and temperate horticultural crops due to the
varied climatic conditions (C. B. L. Jumbe et al, 1999). The strategy used an investing strategy i.e. it
identified a number of areas where Malawi enjoys both comparative and competitive advantage.
Using this approach, the priority areas or products included fruits such as mangoes, bananas, and'
apples, plums and peaches; vegetables such as green beans, cabbages, carrots, onions, tomatoes etc;
spices such as paprika, bird's eye chillies, ginger, turmeric, garlic, cardamom, coriander, lemon
grass, vanilla etc; ornamental plants such as roses, lilies, chrysanthemums, carnations etc;
medicinal plants and herbs, mushrooms and tree nuts such as cashew and macadamia.

There have also been a number of studies on agricultural diversification in general and crop
diversification in particular.9 Although the studies span over different time periods and differ on
scope of commodity coverage, their conclusions are similar ~ the country should diversify out of
tobacco and concentrate on commodities that are of high value but less bulky such as spices, oil
seeds, some horticultural crops, cotton, pulses and mushrooms. Another significant conclusion is
that the much-publicised hybrid maize cannot taken to be a substitute for tobacco because on the
basis of static comparative advantage, Malawi has no comparative advantage in maize production
and that this crop should be grown as an import substitute to save foreign exchange.

These conclusions were reached using static comparative advantage and these conclusions could as
well be wrong if current conditions are taken into consideration. For example, the current chilli
prices could as well make chillies competitive. Likewise the recent maize prices could have made

 This section has benefited very much from the following studies: Mataya and Tsonga (2000), World Bank (1995),
Nakhumwa (1995), Keyser (1997), Jaffe (1997), LUSO Consult (1995) and Jansen and Hayes (1994). In the majority
of cases gross margin analysis and Domestic Resource Cost Ratio (DRC) from the Policy Matrix Analysis (PAM)
were used as criteria for identifying alternative commodities to tobacco.

production of hybrid maize competitive domestically. Changing domestic and international market
conditions, therefore, requires constant revisions of all indicators of profitability in order
to continuously search for alternatives to tobacco. More importantly, dynamic comparative
advantage analysis is needed in order to enter swiftly into world markets.

Further, the use of gross margins and DRC ratios ignores multiple objectives associated with the
choice of enterprises or enterprise combinations farmers are engaged in. Jansen and Hayes have
used Multiple Objective Policy Analysis Matrix (MOPAM) to overcome this weakness. However,
MOPAM scores also need to be updated to reflect changes in relative profitability among
competing enterprises. Gross margin and DRC-based indicators alone are inadequate in measuring
opportunity cost between enterprises. Therefore, reviewing these indicators and exploring
additional economic indicators using GOAL Programming and Cost-Benefit analysis will be

However, adoption of these crops has not been widespread because people have not been convinced
about the importance of these alternative crops, compared to the traditional crops to warrant
massive resource allocation to the non-traditional crops (op. cit). Thus although farmers are aware
of the changing comparative advantage between competing enterprises, the magnitude of these
changes is not known with certainty. Apart from a number of constraints as outlined in Section 3.2,
below, lack of information on the feasibility of alternatives partly explains the low speed with
which fanners are engaging in alternative enterprises to tobacco.

Further, there have been a number of projects aimed at promoting smallholder production of crops
for export. These efforts did not yield the required results. It is reported that a vegetables-for- export
project could not thrive due to high freight cost, lack of adequate cooling facilities, lack of irrigation
equipment and above all lack of viable export markets for the produce (op. cit). Similarly, the
Horticulture Development Strategy identified several constraints during the infancy stages. These
constraints include: seasonal and low productivity, lack of access to information regarding
production and marketing, fragmented production, poor access and market infrastructure, lack of
incentives to promote processing, limited availability of a critical mass of specialists in horticultural
production, inadequate financing opportunities, lack of improved seed, lack of planting materials
and limited private sector participation. Although these were identified in 1998, most of these costs
continue to constrain horticulture development into a viable enterprise.

3.2 Constraints to Crop Diversification
Although a number of studies have made recommendations on potential areas for diversification,
Mataya and Tsonga observe that the response from farmers and potential investors has been weak
due to a number of constraints. Some of these constraints are internal and others are external.
Among the internal constraints, are lack of a policy framework and strategy for implementation,
poor dissemination of technical and economic information on potential commodities, lack of
financial support to potential investors, inadequate value-adding activities, and poor infrastructure.
External factors include tariff and non-tariff barriers, weather, high cost of transportation and
competition both at regional and international levels.

3.2.1 Internal Factors Policy

         Trade policies, both domestic and foreign tend to affect the level of diversification. If domestic and
         foreign policies are conducive, more traders will be encouraged to go into business, thereby
         creating more demand, and ultimately improving household income. While diversification has been
         on the agenda for a long time, it was never put into a strategic plan, or diversification strategy.

         To be sure, policy documents simply state the need to diversify without providing details regarding
         the means and mechanisms for diversification. Weak follow-up, however, is the norm. For
         example, the growing of soya beans was being promoted in the early 1990s among smallholder
         farmers without parallel development of agro- processing and utilisation technologies. This meant
         that all the produce was destined for the foreign market outlets. With unfavourable terms of trade
         most farmers abandoned this crop in favour of another - mostly burley tobacco. MoAI has also been
         encouraged growing of paprika in spite of the absence of a guaranteed market outlet. The existing
         local market is characterized by a near-monopoly structure which offers farmers limited scope for
         income generation. Lack of export financing for private traders engaged in the export of this
         commodity further limited the country's capacity to diversify beyond traditional commodities.

         Currency devaluations have often been considered necessary to improve the country's
         competitiveness and balance of payments position. However, recent devaluations have tended to be
         reactive rather than proactive resulting in disruption in business transactions and escalation of
         prices of imported inputs and raw materials. The rising costs of inputs relative to producer prices
         has thus reduced farmers' ability to expand their production capacity as well as engage into new

         Although the government finds it necessary to collect levies and taxes on certain commodities, high
         levels reduce the rate of return to investment and therefore tend to discourage farmers from
         engaging in productive ventures. Other fiscal measures such as fees for licenses and import duties
         work against diversification. For example the cost of animal feed is exorbitant, partly due to tariffs
         imposed on essential ingredients of feed mixes (see Table 4). Except wheat and maize, all other
         ingredients attract different levels of custom duties. Surtax is also imposed on soya bean meal, oil
         cakes and fishmeal.

           Table 4. Surtax Rates on Imports for a Range of Livestock Feeds and Feed Ingredients ____
                               ________________ _______ __________________
         Description of            Custom Duty COMESA %          Custom Duty             Surtax Rate
         Goods                                                   MFN Countries           %
         Wheat and Maize           0                             0                       Exempt
         Sorghum                   Free                          20                      0
         Soya Bean Meal            6                             10                      20
         Meals, Pellets etc        Free                          35                      Exempt
         Oil Cakes                 6                             10                      20
         Fish Meal                 5                             35                      20

         Source: Customs and Exercise (Tariffs Order 1996 and Public Notice
         No. 9/1998) cited in the Ministry of Agriculture and Irrigation. National
         Livestock Development Master Plan, Draft Final Report, 1998. Institutional Infrastructure
The role of relevant institutions such as the Ministry of Commerce and Industry, the Malawi Chamber of
Commerce and Industry, the Malawi Export Promotion Council (MEPEC) and the Malawi Investment

Promotion Agency (MIPA) include identification and development of domestic and foreign markets,
facilitating trade between domestic and foreign investors through trade fares and other exhibits and
information dissemination. Although these organizations have been in existence for quite a while, their
influence the structure of agricultural production and exports appears to be fairly weak. None identified niche
markets for commodities that are comparable to tobacco in terms of employment or foreign exchange
generation. Distribution in Research, Technology Development and
Tobacco and maize-related research activities and technology development have received a considerable
portion of resources, unlike other crops. This situation has tended to marginalise potential substitutes to the
two commodities in terms of cash income generation and food security, respectively. Unlike technology
development and transfer in tobacco, whatever extension and training services on potential alternatives that
exist has not been in the form that is readily usable and understandable, especially among smallholder farmers
most of whom are illiterate. This also reflects an overall weakness in both government and private sector
strategies to promote other commodities for diversification. Undoubtedly a policy that favors the two major
crops -tobacco and maize—is partly responsible. Access to Resources
Lack of access to resources such as land, labour and capital especially among smallholder farmers has limited
the capacity to engage in enterprise that would compete favourably with tobacco.

Land holding size determines the type and capacity of enterprises. Most smallholder farmers have less than
0.2 ha of land, which is inadequate for the production of both cash and food crops especially given the
prevailing low level of agriculture technology and land management. In the case of beef and dairy farming,
the size of land for grazing is a major limiting factor. For example, the possibilities of large scale beef and
dairy production in the Southern Region is almost nonexistent unless radical changes in the distribution of
land are undertaken. Although cattle production is possible in the Central and Northern Regions, low crop
productivity limits the available land and the capacity to diversify. Land tenure is another constraint
preventing increased investment on customary land. The absence of property rights encourages land
fragmentation and discourages its economic utilisation. Recent moves towards the registration of customary
land will assist.

The level of diversification also depends on the availability of labour especially among resource-poor
households. Adoption of new technologies is usually associated with increased scale of activities and output
that require additional supply of labour. This is mainly true during peak labour periods such as planting,
weeding and harvesting. The problem of labour supply is further exacerbated by conflicting demands for time
allocation between fieldwork and piecework (ganyu) as a coping strategy for vulnerable households. Labour
demand for the two activities often coincide with each other.


Poverty is one of the major contributing factors to lack of capital among smallholder farmers. The few
financial institutions that provide agricultural loans to farmers have in practice not extended their facilities to

non-tobacco activities. Recent estimates suggest that 70 per cent of the smallholder community are outside the
credit system. Since these farmers have to find their own means of acquiring agricultural inputs, their capacity
to diversify is limited. The problem of access to credit is even worse among women-headed households
mostly due to gender bias by the financial institutions.

Poor Road Infrastructure and High Cost of Transportation
While poor road infrastructure and high cost of haulage for Malawi cargo reduce net benefits to traders, they
also influence prices paid to primary producers. For example, road transport from Beira, a port in
Mozambique, to Lilongwe is a major cost item for fertiliser, equivalent to 14.5 per cent of the retail price
(RESAL 1999). Addition of the cost of inward road transport and clearing and bank charges, gives an
estimated cost delivered to a Lilongwe warehouse of some US$221 per tonne, representing 58 per cent of the
present retail price. Nacala in Mozambique is the closest port to Malawi, being only some 600 km from the
border. When compared with other rail rates in the region, the Nacala route is relatively expensive. For
example, whereas the tariff from Nacala to Blantyre is equivalent to US$0,066 per tonne/km, the rail tariff
from Beira to Harare is only US$0,046 per tonne/km (RESAL 1999)

Apart from poorly developed road network, the production structure itself, which is fragmented, inherently
raises the cost of transfer from the farm-gate to points of sale or consumption. In addition, some of the roads
linking the rural production areas and the urban consuming centres are seasonal and create irregularities
between supply and demand.

Societal Values
Societal values are equally important in determining the type and extent of diversification. Some enterprises
can hardly be accepted in certain societies even if returns from the enterprise are high. For example,
introduction of pig-raising farms in Moslem dominated areas will not be accepted.

3.2.2 External Factors
Trade policies in foreign countries tend to affect the level of diversification. These include tariff and non-tariff
barriers, price supports and subsidies as well as bilateral and multilateral conventions. The environment is
another major external factor contributing to diversification.
Although tariffs are gradually being phased out through market liberalization, the pace is not uniform between
nations. For example, while Malawi's textile exports to Zimbabwe have attracted duty, imports from
Zimbabwe have entered Malawi duty free (Donovan and Chigaru 1996). Donovan and Chigaru have observed
that the volume of imports from Zimbabwe to Malawi rose from K72.7 million in 1990 to K901 million in
1993 while Malawi's exports to Zimbabwe fell from K17.6 million to K6.7 million during the same period.
Tariff escalation appears to be associated with value adding. The higher the value added the higher the tariff.
Since value adding is an integral component of diversification, the rise in the tariff rate is a deterrent to
expansion of the export base.

With globalisation, the Most Favoured Nation (MNF) status accorded to Malawi and other African,
Caribbean and Pacific (ACP) nations will gradually come to an end exposing the country to vagaries of
international market forces. Under the LomS convention, Malawi's tobacco enters the European Union duty
free unless imports cause or threaten to cause injury to the EU economy, in which case safeguards may be
invoked. Unless high levels of production efficiency are achieved, world competition would render
diversification efforts futile.

                                                                                       20 Barriers (NTBs)
  The Non-Tariff Barriers (NTBs) take a variety of forms including quotas, restricted market access, licensing,
  phyto-sanitary requirements, quality control, price supports and subsidies. Except for price supports and
  subsidies, NTBs can and do selectively restrict access to foreign markets and limit developing countries
  prospects for diversification. Price-supports encourage overproduction that in turn exert a downward pressure
  on the world market prices. For example, developing countries such as Malawi whose farmers are not equally
  protected from such practices tend to lose in terms of foreign earnings. Among Producers of Similar Commodities
  Countries with similar production structure or producing the same types of commodities tend to hinder each
  other's capacity to diversify. A case in point is the production of burley and flue-cured tobacco in Malawi,
  Mozambique, Tanzania, Zambia and Zimbabwe. This is in spite of availability of information suggesting
  commodities that are best suited to each country based on comparative advantage (see Abalu et al, 1996).
  Apart from under-utilising regional capacity, these countries are virtually producing for the same market
  thereby creating an excess supply situation and unattractive return to investment. Factors
Finally, environmental factors including rainfall, temperature, soil type and altitude also affect diversification.
For a given location, these together will tend to favour specific enterprises. For example in Malawi, tea is only
grown in areas with high rainfall, low temperature, and high altitude of Thyolo, Mulanje and Nkhata-Bay
districts. However, these factors are outside the control of farmers. Improved technology coupled with good
management could minimise the vagaries of poor environmental conditions and still achieve economic returns to

In summary, internal and external factors collude with the result of shaping a pull factors and push factors
towards tobacco cultivation. These factors shape the demand for Malawi's tobacco and the supply chain in the
country. Less is known about the relevance of each factor in shaping the value chain of the crop.

3.3    Roles of Various Institutions and Systems in Crop Diversification
There are a handful of institutions that are concerned with crop experimentation and diversification. The key
institutions are Ministry of Agriculture and Irrigation's Departments of Research and Extension and Agricultural
Planning. Research stations exist under the Department of Research and Extension. A Government Committee
has been at the center for crop diversification efforts.

3.3.1 Crop Experimentation
Malawi's plans are strongly associated with food self-sufficiency, not export crop diversification, according to
the Malawi Agricultural and Natural Resources Research Master Plan of 1999. Both public and private research
institutions are involved in agriculture research, receiving funding from the government's development and
individual stakeholders, respectively (Jumbe et al, 1999). Funding from the government has drastically declined
over the years and as a result public research institutions increasingly depend on development funding (Jumbe et
al, 1999). of National institutions
Agriculture research, conducted by the Department of Agricultural Research and Technical Services (DARTS),
is the driving force in the development and dissemination of agricultural technologies for Malawi. To achieve its
goals, DARTS is operating a network of seventeen experimental sites (Chitedze Agricultural Research Station

Guide, CARSG, 2002). Chitedze Agricultural Research Station, established in 1948, is the main research centre
within this network. The station is mandated to conduct research and development activities on field crops such
as maize, groundnuts and other pulses, pest and disease control, farming systems, crop protection and crop
storage. The strategic research agenda is to develop appropriate demand- driven agricultural technologies for use
by smallholder farmers to increase food production against a background of increasing human population,
degradation of the natural resource base, declining land holding sizes, accelerating deforestation and increasing
poverty among the rural and urban poor (CARSG, 2002). of International Research institutions and donors
Funding for research and development of crops from government own-generated resources has been declining.
As a consequence, external resources mostly fund the bulk of research undertaken in the country including that
in Government research stations. For example, Chitedze scientists receive support from the following external
sources for the following research activities (CARSG, 2002):

   (i)      Maize - the Rockfeller Foundation;
   (ii)     Beans - the Overseas Development Administration (ODA);
   (iii)    Groundnuts - International Crops Research Institute for Semi-Arid Tropics, ICRISAT;
   (iv)     Gene Bank - the Southern Africa Development Corporation, SADC, Plant Genetic Resources
   (v)      Plant protection - ODA and German Technical Corporation, GTZ;
   (vi)     Soils - International Maize and Wheat Improvement Centre, CIMMYT;
   (vii)    Seed Services - ODA and Pannar Seed (Malawi Limited)
   (viii)   Roots and Tubers - Southern Africa Root Crops Research Network, SARRNET, Action Aid, United
            Nations Children and Education Fund, UNICEF, and European Union, EU; and
   (ix)     Seed Services - ODA (through Action Aid).

Below we present few international research institutions and their roles in agricultural research. It should be
noted that the objectives of the various research activities are not to search for an alternative to tobacco. As
already mentioned, research agenda for this purpose is not well- developed.

International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) ICRISAT has an office at Chitedze
Research Station in Malawi. Research is concentrated on groundnut (Arachis hypgae L) since it is an important
food and cash crop in Southern and Eastern Africa. ICRISAT has been assisting national programs in the region
since the inception of Groundnut Improvement Program in 1976 at Patancheru, India by providing seed of
improved germplasm for utilization in their breeding programs and in human resource development through
short and long-term in-service training. This partnership between ICRISAT and the National Agricultural
Research Systems was further strengthened when ICRISAT launched a Regional Groundnut Improvement
Program in Malawi in 1982. The primary objective of this program was to provide a continuous supply of high
quality seed resistant to diseases especially groundnut rosette and early lead spot. Up until 1995, the project team
was actively involved in germplasm introduction and enhancement, supply of breeding populations to the
National Agriculture Research Systems, development of components of integrated management of diseases, and
training of research scientists and technicians. However, since 1996 the major focus of the project has been
technology exchange between ICRISAT and the National Agriculture Research Systems instead of technology
development (Chitedze Agriculture Research Station Guide, 2002).

The Southern African Root Crops Research Network (SARRNET)
SARRNET is a network for the Southern Africa Development Community (SADC) that is coordinated from
Malawi. The network operates under the International Institute of Tropical Agriculture (IITA) and the
International Potato Centre (CIP) programmes. The main purpose of this network is to increase the production
and utilization of cassava and sweet potato by smallholders to improve household food security by developing
cassava and sweet potato varieties with wide ecological adaptation, the adoption of improved production,
processing and ecologically sustainable plant protection technologies and utilizing these crops in crop

The Malawi-German Plant Protection Project (MGPPP)

MGPPP was initiated in June 1990 and is expected to phase out this year (2002). The main purpose of the project
is to improve smallholder farmers' knowledge in plant protection activities using participatory research and
extension, on-farm trials, biological control, organizational development, and Integrated Pest Management,
IPM, curriculum development. The projects focuses on LGB, tomato and cabbages.

3.3.2 Crop Diversification of National Institutions on crop diversification
Government, through the Ministry of Agriculture's Department of Agriculture Research and Technical Services
(DARTS) and statutory corporations has been promoting diversification in the country (Jumbe, et al, 1999).
DARTS developed strategies to promote grain, legume, and root crop production to complement maize as a
source of food. Alternative cash crops have also been promoted to complement tobacco as a foreign exchange
earner as described below.

For example, Government set up the Tree Nut, coffee, Sugar and Tea smallholder authorities to promote the
smallholder production of macadamia, coffee, sugar and tea, respectively. Likewise, ADMARC, another
parastatal has been drawing government resources, including STABEX funding, to support vegetable production
for exports. ADMARC is also promoting the production of cotton seed. Another parastatal, Malawi Export
Promotion Council (MPEC) with technical support of the Ministry of Agriculture and Livestock, and financial
support the United Conference on Trade and Development (UNCTAD) supported farmers to grow vegetables for
exports. Again, it was The Malawi Investment Promotion Agency (MIPA) that launched the Horticultural
Promotion Strategy.

The Malawi Association of Spices and Herbs (MASH) in conjunction with Nali Limited are promoting the
production of chillies for processing. Nali Limited is a private company that bottles and sells pepper. While
Cheetah Limited and Press Agriculture are promoting the production of paprika the National Seed Company of
Malawi (NSCM) is supporting the production of seed multiplication of various crops. Lever Brothers (a branch
of Unilever) used to promote the production of sunflower for oil pressing but currently this support has been
phased out (op. cit). of international organisations on crop diversification
The starter pack programme is a program under which free seed is distributed to smallholder farm families for
planting at the beginning of an agriculture season. This program is heavily financed by donors and was designed
to promote crop diversification. The major donors for the starter pack initiative include the European Union,
World Bank and the Department for International Development of the United Kingdom. The pack contains a
number of crops, which, if adopted, would ensure some crop diversification. Apart from hybrid seed varieties,
the program is also distributing seeds of other crops such as groundnuts, soybeans, phaseolus beans, sorghum,
cassava and rice. Initially the seed was distributed to all smallholder families. At present the seed pack is only
distributed to those smallholder families that are relatively disadvantaged economically as identified by the local
leaders in areas throughout the country. According to Jumbe et al (1999) and Mann, 1998, the basis of the starter
pack was initially put forward in a paper on best bet technologies through Rockefeller's Soil Fertility Network
for Southern Africa. The starter pack was conceptualized as a long-term development program for testing
demonstration of the best technologies developed by Malawi's Maize Productivity Task Force (MPTF). The
starter pack program was thus conceived to ensure long-term food security by fostering both food and cash crop
diversification rather than just a short-term safety net initiative (Jumbe et al, 1999).

3.4    Policy Implications and Research Questions on Alternatives to
As may have been noted from what has been discussed above, policy and research have not focussed on the
development and promotion of crops that can substitute tobacco in terms of both value and adaptability.
Apparently, Government energies are spent on promoting supplements to tobacco and not necessarily
substitutes, reflecting a resignation that there is very little that can be done in the short and medium term.

Demand and supply conditions for tobacco, despite the declining returns to farmers, seem to still make tobacco
the best bet for the country.

It is recognised that tobacco has developed support structures in export diversification (in research, production
and marketing). No other crop enjoys such support. It is also known that this support structure has been
developed over a long period. It is important to establish whether such is critical if substitutes are to be developed
and promoted. Taking a cue from the list of constraints presented above, market structure seems to be a critical
constraint to crop diversification. A study would assist the country to start developing similar structures for
potential substitutes.

In this regard, further research is necessary:
       1.        What market structure, policies and support systems should be developed to promote potential
               alternative crops? What kind of information system should be put in place to support linkage
               between the farmer and the market? How would this system be accessible to farmers with
               different size land holding? How will the information be relevant to the specific needs of each
               group of farmers?

       2.        What are the already documented findings from the current experiments on tobacco substitutes
               and their impact on the farm economy? What is the relationship between the current labour
               market and the country's readiness to work on an alternative cash crop?

       3.        How are gender issues being addressed, if at all, in the current systems of crop production?
               How does this influence household livelihood, crop production, and national levels of poverty?
               How can gender-sensitive policies and systems be developed to help reduce dependency on

4 Summary of Policy Issues and Research Questions
This section summarises the issues raised in this paper. First will be the summary of the findings followed by a
summary of the research questions.

4.1 Summary of findings
1 Agriculture is the mainstay of Malawi and Tobacco is the most profitable crop for both estate and
smallholdings farmers. The Malawi economy heavily depends on tobacco for employment and foreign exchange
from its exportation. In fact, apart from maize, tobacco is the only other crop to significantly shape the status of
the economy.

2        Tobacco, as a crop, has received considerable support from Government over the years. The crop is
supported by well-developed infrastructure including an Act of Parliament that provides for a controlling
statutory corporation, among other provisions. Tobacco also boasts of a responsive internal and external market.
The crop receives a fair share of funding and technical assistance from both the public and private institutions.

3        Studies on diversification conclude that there are crops and products Malawi can go for to assist in the
diversification drive. An array of crops and products are mentioned. In some cases, these studies go as far using
DRC and other criterion to show the competitiveness of the other crops. Most studies are in agreement that for
the other crops to take off, critical constraints should be removed. The long list of these constraints underline the
fact that the country requires, above all, a lot of political and technical commitment to diversify away from

4        Despite a lot of talk about diversification, other crops and products receive considerably little attention.
There is some air of resignation because it is alleged and sometimes proved that there are no real alternatives in
the short-to-medium term. However, there is little or no preparation for the long-term. The result has been an
under-developed infrastructure for other crops relative to tobacco. The ultimate result is that tobacco is the only

viable option for a large number of farmers, even more thought to be the crop as the few advantages some crops
and products have over tobacco erode away due to the little support they receive.

5        The studies so far conducted on alternatives to tobacco have not gone deep enough to a breakdown the
tobacco value chain. A value chain analysis would assist pinpoint the exact value accrued to farmers. Such
information would assist in the comparison with other crops and how they accrue value to farmers. Further, the
analysis so far has been static. The world being dynamic, there is need to employ other approaches that take into
consideration the changing circumstances.

4.2    Summary of research questions
There two research area/questions. These come from the findings above. The questions on tobacco are meant to
assist in understanding tobacco production and marketing operates in order to draw lessons for alternative crops.
These include:

    1. The impact of the liberalisation of tobacco production and marketing. This policy change was meant to
       benefit small farmers. Almost a decade later, there are questions whether indeed the small farmers have
       improved their lot. Who benefits from tobacco production and marketing? Answering this requires a
       value chain analysis. How much does the farmer get? How much does the buyer/exporter of the crop
       get? What is the nature of governance surrounding this process? Closely related to this policy research
       area is an assessment of the input market; including the input credit market.

    2. The role of support structures/systems in promoting or not promoting alternatives crops. Apparently, the
       returns to investment for tobacco have been declining; judging from declining average floor prices and
       increasing average input prices. Despite this, there is seemingly no crop that is strongly coming in as a
       substitute or supplement to tobacco, even if it is slowly. Why is this the case? Is it the market structure,
       policies, support structures or quality of links between researchers, extension workers and farmers
       influencing this process?

    3. How will gender sensitive policies be developed in order to promote the role of women in non-tobacco
       farming, and crop experimentation? What form should these policies and programs should be in?

    4. What is the required input to improve the role of public and private institutions in small-scale and
       large-scale crop diversification and experimentation?

    5. What is the moist appropriate source of funding for such developments? And for which particular

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Appendix 1 - List of organisations where documents are obtained

1 .Tobacco Control Commission (TCC)

2. Tobacco Exporters Association of Malawi (TEAM)

3. Auction Holdings Limited (AHL)

4. Agricultural Research and Extension Trust (ARET)

5. Ministry of Agriculture and Irrigation (MoAI)

6. Ministry of Trade

7. Malawi Sector Investment Programme (MASIP)

8. Malawi Investment Programme Agency (MIPA)

9. Chitedze Research Station

10. Agriculture Policy Research Unit

Appendix 2 - Proposed list of participants in dissemination seminar

1.         Liao, A., Production Manager (Dimon Company)
2.         Dr. Chapola, G., General Manager, (Tobacco Control Commission,TCC)
3.             Mr.       Mbale, General Manager, (Tobacco Exporters Association of Malawi, TEAM)

4.           Mr. Masipa, Statistician, (Tobacco Exporters Association of Malawi, TEAM)

5.         Dr. Chilembwe, General Manager, (Agriculture Research and Extension Trust, ARET)

6.           Mr. Mtukuso, Director, Agricultural Research and Extension Services, (Ministry of Agriculture and
Irrigation, MoAI)

7.           Mr. Chikhosi, Deputy Director, Agricultural Services, (Ministry of Agriculture and Irrigation,

9. Mr. Kachiza. (Ministry of Trade and Industry)
10. Mr Saunders. (STANCOM Company)

11. Mr Nebert Nyirenda, Director of Planning, (Malawi Investment Promotion Agency, MIPA)

12. Mr Ian Kumwenda, Project Co-ordinator, (MASIP)

13. Mr. Stevenson (Limbe Leaf Company)

14. Mr. Chirambo, General Manager, (Tobacco Association of Malawi, TAMA)

15. Dr. Thyangathyanga (Tobacco Association of Malawi, TAMA)

16. Mr. Nsonthi (Auction Holdings Limited, AHL)


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