Zimbabwe, Malawi Halt Tobacco Auctions, Spur Earnings Fears

Source from:  By MacDonald Dzirutwe HARARE (Reuters) 04/07/2005

Annual tobacco auctions in Zimbabwe got off to a shaky start on Tuesday with trade suspended due to low prices, casting a cloud over the outlook for the country's biggest export earner. In Malawi, the region's biggest tobacco producer, auctions which began last week were also halted on Tuesday, as prices well below 2004 levels drove farmers off the trading floor. "Prices remain an issue and therefore we have decided to suspend all sales of tobacco until the issue is resolved," Malawi's Tobacco Control Commission general manager Godfrey Chapola said. Talks with agriculture officials would take place on Wednesday, he added. Malawi, one of the world's poorest countries, produces around 165 million kgs of tobacco a year and the crop accounts for about 60 percent of its export earnings. But high inflation has pushed tobacco production costs well beyond lower international prices in Malawi and Zimbabwe, putting pressure on governments to step in with subsidises or engineer weaker exchange rates, farmers said. In Zimbabwe Tobacco Association (ZTA) chief executive Rodney Ambrose told Reuters the body would discuss a fair price with the government, the growers and merchants and hoped there would be a resolution by Wednesday, when trade would resume. "We are seeking ... a fair price but we are also looking for the government to come in with a support price or a higher exchange rate so that farmers can have a better return for the crop," he said. At present it costs 20,000 Zimbabwe dollars to produce a kilo of local tobacco, while at current U.S. dollar prices the return is 3,060 Zimbabwe dollars per kilo. Part of the problem is that inflation in the country is running at more than 100 percent, while the currency is trading at about twice its official rate on an illegal parallel market. Inflation in Malawi is lower but also in double digits. At sales which opened last week, burley tobacco sold for between 40 cents and $1.30 per kg, a drop from last season's opening prices of between 80 cents and $1.60 per kg. Zimbabwe's Tobacco Industry and Marketing Board (TIMB) expects tobacco sales to climb to 85 million kgs this year, up from the 69 million kgs that were sold in 2004 and reversing a five-year decline in output. But analysts said higher sales would do little to ease biting foreign currency shortages, a result of Zimbabwe's economic crisis which critics blame on mismanagement by President Robert Mugabe's government. Tobacco production in Zimbabwe has plunged from 236 million kgs in 2000, with some analysts blaming land reforms which have displaced white farmers who used to produce most of the crop. The ZTA, which represents the remaining 500 large-scale white growers, said crop quality had dipped this year due to drought and late planting. ZTA members produced 50 million kgs of this year's crop while small-hold farmers accounted for the rest, Ambrose said. There is mounting concern in both countries over the impact on already-scant foreign exchange inflows. "We are hoping that the situation is temporary because this might disrupt the market and affect an already bad situation,"," Malawi Treasury Secretary Milton Kutengule told Reuters. Last month Malawi's central bank warned that its forex reserves had dropped below the minimum 3 months of import cover to about 1.8 months. In Zimbabwe, foreign currency earnings fell 35 percent to $130.2 million in 2004 from $201 million in 2003 as a result of low leaf prices and output -- although prices were higher than so far in 2005. The country is already struggling to service foreign currency debts with international lenders who have halted balance of payment support. Enditem