FIRST TOBACCO MARKET REPORT TO DATE - 11 MAY 2006

COMPILED BY

DR. G. M. CHAPOLA

GENERAL MANAGER

22 MAY 2006

INTRODUCTION

The tobacco marketing season started on 27^th March with an official opening at the Kanengo auction floors by His Excellency the State President Dr. Bingu wa Mutharika.

At the opening, His Excellency announced grade reserve prices to empower the grower to put a value on that which is produced.

Prevailing prices on the floors were not satisfactory and this led to several sales disruptions on all floors.  With no improvement on the prices all sales were suspended effective 15 May 2006.

Consultative meetings have been held and it is hoped sales will resume soon.

SALES

Table 1      TOBACCO SALES TO DATE (11 MAY 2006)

*  N/A     signifies that there was no contract burley in 2005.

It is observed from Table 1 that to date less tobacco has been sold than same time last year.  About 16% less tobacco has been sold this year.  This is to be expected because of the several sales disruptions and suspensions.

Of significant interest is the price in every tobacco type and marketing system.  Auction burley prices this year are 15.5% lower than same time last year.  It may be argued that with the introduction of grade reserve prices only lower qualities were bought.  That would not necessarily be true because it was largely the bottom leaf that was on offer for sale and these qualities by and large did not have reserve prices.  In terms of proportions, not much of the reserve priced qualities were on offer.  The fact is prices have gone down.  The now usual occurrence of contract prices being higher than auction prices is also evident in burley.  It is still being believed that this is again a way of forcing contract growing.

Prices for Virginia flue cured have also been reduced by 7.7% for auctioned flue and 8.4% for contract flue when compared to same time last year.  Although the auctioned flue average price is higher than the contract flue price, at the end of the day the contract flue prices will be higher.  Not much of auctioned flue has been sold so far.

As for revenue, it is 27.5% lower this year to date than last year.  This is as a result of the low prices and lower volumes sold.

Table 2   PRICE COMPARISON PER SELLING FLOOR TO DATE 

N/A   means sales have not started yet.

For auctioned burley, Limbe and Chinkhoma floors are averaging slightly higher prices than Lilongwe and Mzuzu.  Limbe surprisingly did not have a lot of wet tobacco thus the slightly higher price.  The Mzuzu lower prices could be attributed to a perceived wetness at the beginning of season.  Lilongwe lower prices are possibly because of perceived mixtures and some mouldy tobaccos.  However all these are compounded by the reserve prices not being attained and so what has been bought is basically the lower grades and good grades but at lower prices.

For contract burley across the floors there are better prices in Lilongwe and Limbe as compared to Mzuzu and Chinkhoma.  This phenomenon was predicted long before contract growing, especially in burley, was implemented.  The price differences are a function of the choice of grower.  Since the choice of who to contract is left to the contractor, naturally only good growers or growers of choice will be contracted.  That is what has happened for Lilongwe and Limbe.  The not so good growers will still be contracted to add colour and balance but this will be cosmetic.  In contract growing burley, unless everyone is accommodated equitably, the poor and not so good growers will be disenfranchised. 

Table 3  LEAF GROUP COMPOSITION OF BOUGHT BURLEY TO DATE 

It is very interesting to note that there are differences in what is being purchased under the two marketing systems.  Under auction, for example, 79% of what has been bought is the lugs group while under contract it is only 52% for lugs.  What this means is that under auctioning system the buyer has a choice of what to buy.  In this case the buyer chose to buy low quality low prices lugs.  Under contract the buyer is bound to buy everything offered.  However it is of interest that lugs from contract selling fetch higher prices than lugs on auction.  This is attributable to lack of strong competition under auction, calculated desire not to compete in order to buy the tobacco cheaply and the fact that buyers know growers have no recourse even when the price is not acceptable.  Under contract, because the prices are agreed before season, the buyer is bound to respect the contract.  The argument can be extended to leaf, cutters and thin leaf.  It is noticed that less of these groups was bought on auction than in contract.  Admittedly not much in terms of leaf and cutters may have been brought for sale at this time of the season but observation on the floor indicated that because leaf and cutters are high prices styles, they were not being bought because of refusal to pay the reserve prices.  The same line of thought is evident in the volumes of mouldy tobacco bought.  On auction 40% of the purchases were mouldy.  Let it be mentioned that mouldy and mixed tobacco can be in any of the leaf groups so the percentages are not additive.  What this high percentage means is that mouldy tobaccos were preferred because they were cheaper as they did not have reserve prices.  Secondly tobaccos that failed to attain the reserve prices were repeatedly cycled in the process during which time quality deteriorated and such tobaccos ended up being sold mouldy.

As for prices, it is the same trend and phenomenon of contract prices always being higher than prices on auction system.  Reasons for this have already been given.

PROJECTIONS

Table 4 PROJECTIONS TO END SEASON

With the already sold tobacco and considering the unsold tobacco, it is projected that the total revenue realized on the floor will be $178 million.  This means a 9.8% increase over last year’s revenue of $162 million.  This increase is attributed to slightly higher production of 158 million kilograms this year as compared to 145 million kilograms last year and also the sought for prices for this year.