Research for international tobacco control

FINAL REPORT University of Malawi (Agricultural Policy Research Unit/ Centre for Social Research) A Snapshot of Tobacco Cultivation and Crop Diversification in Malawi Submitted to Research for International Tobacco Control P.O. Box 8500, Ottawa, Ontario K1G3H9 Canada By Charles Mataya, PhD Sidon Konyani Maxton Tsoka August 23, 2002  Acknowledgement 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 (ARET) 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 team. 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 Introduction 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 poverty. 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 situation. 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. 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. 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: 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 progressed. 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 workers 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 tobacco.. An estimated 38,150 people were also employed in activities associated with the tobacco industry. Dynamics of Tobacco Production in Malawi 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 89 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).. 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 buyers 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 land., 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. Table 3. Burley, Flue-Cured and Western (Fire and Smoke Cured) Tobacco Production, 1988-2001. Year Burley Tobacco (million mt) Flue-Cured Tobacco (million mt) Western Tobacco (million mt) Total (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 0.36 DRC - Domestic Resource Cost Ratio, a measure of the contribution of value added to the domestic resource. See detailed discussion in Section 3. for smallholder burley tobacco (Jaffe, 1997). 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. 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. 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: to represent the interests of the tobacco industry in respect of buying, processing and exporting; to co-ordinate and act upon the views of all its members; to co-operate with Government in all matters relating to tobacco production, selling over the auction floors and exporting; 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; to help coordinate activity to counter the efforts of tobacco control lobbyists. 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 quotas Please refer to Section 2.3.1 of this report for more information on TCC's role in determining quotas., 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 resources. 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. 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. 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 club 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. 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 land 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.) 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. 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 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 environment. 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: the land on which the applicant intends to grow tobacco, or the climatic conditions in the area, are not suitable; 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; the applicant has inadequate or unsatisfactory curing space and facilities at his/her disposal; the applicant has been previously convicted of failing to uproot tobacco; 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. 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 proceeds. 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 deal See Price WaterHouse Coopers. 2000. The Tobacco Industry in Malawi: An Economic Analysis. 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 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. Policy Implications and Research Questions SPECIFIC OBJECTIVE 3 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: 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. 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? 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? 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? What is the estimated cost and complexity of the research and development that is required for a switch from tobacco growing to take place? Crop Diversification and Alternatives to Tobacco 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. 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. 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 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 incorporated. 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. 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. 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 activities. 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 Goods Custom Duty COMESA % Custom Duty MFN Countries % Surtax Rate % 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. Weak 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. Unequal Distribution in Research, Technology Development and Transfer 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. Poor 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 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. Labour 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. Capital 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. 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. Tariffs 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. Non-Tariff 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. Competition 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. Environmental 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 investment. 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. 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. 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). Role 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). Role 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): Maize - the Rockfeller Foundation; Beans - the Overseas Development Administration (ODA); Groundnuts - International Crops Research Institute for Semi-Arid Tropics, ICRISAT; Gene Bank - the Southern Africa Development Corporation, SADC, Plant Genetic Resources Centre; Plant protection - ODA and German Technical Corporation, GTZ; Soils - International Maize and Wheat Improvement Centre, CIMMYT; Seed Services - ODA and Pannar Seed (Malawi Limited) Roots and Tubers - Southern Africa Root Crops Research Network, SARRNET, Action Aid, United Nations Children and Education Fund, UNICEF, and European Union, EU; and 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 diversification. 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. Crop Diversification Role 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). Role 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). Policy Implications and Research Questions on Alternatives to Tobacco 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: 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? 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? 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 tobacco? 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. 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. 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. 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 tobacco. 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. 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. 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: 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. 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? 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? What is the required input to improve the role of public and private institutions in small-scale and large-scale crop diversification and experimentation? What is the moist appropriate source of funding for such developments? And for which particular activity?  References Abalu, G., F. Mucavere, D. Ng'ong'ola, J. Van Rooyen, J. F. Kirsten, J. Van Zyl, O. S Saasa, T. Simbi, G. Sithole and N. Vink (1996). Comparative Analysis of Structural Adjustment Programs in Southern Africa. Technical Paper No 23. USAID Agricultural Research and Extension Trust Brochure, 1998. Donovan, P. E and J. R. M. Chigaru (1996). Impact of the Uruguay Round on Selected African Countries. Malawi Country Study. UNCTAD/Netherlands Cooperation Jaffe, S. (1997). Malawi Agriculture: Recent Structural Transformation and Future Prospects. East and Southern Africa Agricultural Division, World Bank. Jansen, D and I. Hayes (1994). Agricultural Diversification Part I: Methodological Framework and Indicative Results; and Part II: Analysis of Diversification Options and Constraints. Jumbe, C. B. L, H. Tchale and F. Ngaiyambe (1999). Crop Diversification in Malawi, Summary of Major Findings and Recommendations; Kachule, R.N. and T.O. Nakhumwa (1998) Promotion of Horticulture: National Horticulture Development Strategy for Malawi. Agricultural Policy Research Unit, Bunda College of Agriculture. Keyser, J.C. (1997). Malawi Agricultural Comparative Advantage, World Bank, Washington D.C. LUSO Consult (1995) Promotion of Horticulture, Malawi. Report submitted to the Technical Cooperation: Republic of Malawi - Federal Republic of Germany, Hamburg. Mataya, C. and S. Materechera (1995): Financial Analysis of Zipatso Association. Report Submitted to USAID SHARED Project, Lilongwe Mataya. C. Chulu and E. Chilima (1998): Structural Adjustment Effects on Rural and Urban Households. Report Prepared for the Poverty Monitoring System, Council for Economic Development, Lilongwe, Malawi. Mandeule, L. J., R. Gwaza, Salama and W. Gondwe) (1998). Pre-Feasibility study report for a Pilot Project for Horticultural Export Development for Malawi. Horticultural Export Development Club Mandeule, L.B. J. Mtosa and E. Tchongwe (1998). Mechanisms for Privatisation of Treadle Pumps. Malawi Investment Promotion Agency, Lilongwe. Malawi Government: Economic Report 1997, Budget Document No.4. Ministry of Economic Planning and Development. Malawi Government: Economic Report 1998. Budget Document No 4. National Economic Council. Malawi Government. Laws of Malawi, Chapter 65. Matthews, Alison and Colin Wilshaw (1992). The Malawi Tobacco Handbook (Fodya). Ministry of Agriculture and Irrigation (1991) The Malawi Tobacco Directory Ministry of Agriculture and Irrigation. (2002). Chitedze Agricultural Research Station: Station Guide. Ministry of Agriculture and Irrigation (1993). Guide to Agriculture. Ministry of Agriculture and Irrigation (1995). The Agricultural and Livestock Development Strategy and Action Plan. Ministry of Agriculture and Irrigation (2002). Agricultural Sector Priority Constraints, Policies and Strategies Framework for Malawi; Malawi Sector Investment Programme Ministry of Economic Planning and Development, Treasury and Reserve Bank of Malawi: (1996). Principle Domestic Exports, 1993 - 1996. Murugani, A. P. "Production Outlook for Chillies". Indian Spices, 35 no 2 (14-16) Nakhumwa, T. O. (1995): Methodology for Comparative Advantage in Malawian Agriculture. M.Sc Thesis in Agricultural Economics, Faculty of Agriculture, University of Malawi. Nakhumwa T.O., D.H. Ng'ong'ola, I.J. Minde, V. Lungu and H. Mapemba (1997) Co-operative Economic Advantage in Agricultural Trade and Production (Malawi) UNISWA/REDSO Co-operative Agreement Project No:623-0407.23-A-00-4092-00. Swaziland 1997. National Research Council of Malawi (1998). National Livestock Development Master Plan. Draft Final Report. National Research Council of Malawi, Agricultural Sciences Committee (1999). Malawi Agricultural and Natural Resources Research Master Plan; RESAL (Malawi-Mozambique) (1999). Malawi-Structure of Fertilizer and Transport Costs. EU, Lilongwe. Rehman, T., and C. Romero (1993). The Application of the MCDM Paradigm to the Management of Agricultural Systems: Some Basic Considerations. Agricultural Systems 41: (3) 239- 255. Salama, R..D., A. C. Mndalasini and J. Gray: (1993). Agricultural Export Policy Study. Stamp, M. (1994): Malawi Industrial Sector Opportunities Study. Report Prepared for the Ministry of Commerce and Industry, Lilongwe. Tobacco Association of Malawi (1996). Historical Record of Burley and Flue - Cured Tobacco Production, 1986- 1996. Tobacco Association of Malawi Bronchure. Safeguarding Malawi's Future. UNCTAD/WTO (1998). International Trade Forum. Geneva. United Nations Conference on Trade and Development (UNCTAD) (1998): International Market Access Information, Horticulture Sector. World Bank (1996) Strengthening Malawi's Cotton Subsector . World Bank (1997) Accelerating Malawi's Growth: Long-term Prospects and Transitional Problems.  Appendices Appendix 1 - List of organisations where documents are obtained 1 .Tobacco Control Commission (TCC) Tobacco Exporters Association of Malawi (TEAM) Auction Holdings Limited (AHL) Agricultural Research and Extension Trust (ARET) Ministry of Agriculture and Irrigation (MoAI) Ministry of Trade Malawi Sector Investment Programme (MASIP) Malawi Investment Programme Agency (MIPA) Chitedze Research Station Agriculture Policy Research Unit Appendix 2 - Proposed list of participants in dissemination seminar Liao, A., Production Manager (Dimon Company) Dr. Chapola, G., General Manager, (Tobacco Control Commission,TCC) Mr. Mbale, General Manager, (Tobacco Exporters Association of Malawi, TEAM) Mr. Masipa, Statistician, (Tobacco Exporters Association of Malawi, TEAM) Dr. Chilembwe, General Manager, (Agriculture Research and Extension Trust, ARET) Mr. Mtukuso, Director, Agricultural Research and Extension Services, (Ministry of Agriculture and Irrigation, MoAI) Mr. Chikhosi, Deputy Director, Agricultural Services, (Ministry of Agriculture and Irrigation, MoAI) 9. Mr. Kachiza. (Ministry of Trade and Industry) Mr Saunders. (STANCOM Company) Mr Nebert Nyirenda, Director of Planning, (Malawi Investment Promotion Agency, MIPA) Mr Ian Kumwenda, Project Co-ordinator, (MASIP) Mr. Stevenson (Limbe Leaf Company) Mr. Chirambo, General Manager, (Tobacco Association of Malawi, TAMA) Dr. Thyangathyanga (Tobacco Association of Malawi, TAMA) Mr. Nsonthi (Auction Holdings Limited, AHL) PAGE \* MERGEFORMAT 2 PAGE \* MERGEFORMAT 1 PAGE \* MERGEFORMAT 4 PAGE \* MERGEFORMAT 5 PAGE \* MERGEFORMAT 5 PAGE \* MERGEFORMAT 16 PAGE \* MERGEFORMAT 17 PAGE \* MERGEFORMAT 24 PAGE \* MERGEFORMAT 23 PAGE \* MERGEFORMAT 28 PAGE \* MERGEFORMAT 29 PAGE \* MERGEFORMAT 24