Reaping fruits of contract farming

By Inside Malawi Magazine

Tobacco farmer Charles Kabudula-Banda from Dowa has been growing the country’s gold leaf for some time now. However, never before did he derive so much happiness and satisfaction from being a tobacco grower than he does now.

Kabudula-Banda is one of the tobacco growers benefitting from a contract farming scheme facilitated by Japan Tobacco International (JTI) Malawi operations.

Before becoming a JTI-facilitated grower, he sold his leaf without contract through the traditional auction floors. As a seller on the auction, the buyer of his tobacco was a distant entity, far removed from him and scarcely accessible.

With so many intermediaries to deal with along the production chain, Kabudula-Banda said he felt reduced to a mere spectator in what was supposed to be his own game.

The auction challenge

Kabudula-Banda recalls that when he was trading through the auction floors there were different layers of people and structures he dealt with before his leaf could finally sell at the auction floors.

Often times, his pay could not compensate for his costs. His green leaf was prone to theft, degradation, contamination and delays. When the bales did finally arrive at the floors in Kanengo, Lilongwe there was no guarantee that all of them could sell easily.

“Tobacco farming without contract was like a curse, and over the years, it has been causing heart breaks, recalls Kabudula-Banda. This is a fair share of pain suffered by Kabudula Banda is shared by thousands of other smallholder growers in Malawi.

Historically, the Malawi tobacco industry has predominantly operated under auction system]. Disadvantages of tobacco auction to growers include the fact that the system largely distances them from various critical processes. It is not until the leaf reaches the auction floors that farmers may interact with the buyers and the auction officials in the repatriation of proceeds.

Clearly, a void exists as there is minimal interaction between the grower and buyer in the space that the leaf is planted to the point of harvesting.

Bad prices

Between 1991 and 2007, tobacco prices recorded a sustained decline in prices of all types of the leaf at the auction, according to a report titled Tobacco Revenue Management: Malawi case Study produced by the International Institute for Sustainable Development (IISD).

During that period prices fell from around $3 per kilogramme (kg) to under a dollar, according to the report.

From the growers’ point of view, the auction system has several shortcomings which include high rate of tobacco rejection, low and unstable prices and high cost of transportation of the commodity.

In 2009, a World Bank Policy research paper cited this “protracted transportation process” as one of the factors constraining economic growth in Malawi. It said tobacco transporters do not only charge transport fees, but also lump up the bill with “the road side warehousing service that the truck provides”.

Those directing the queue have ample opportunities for rent-seeking and bales left at depots are prone to theft or being switched, it said.

“As a result, the shadow price of avoiding the auction queues is high. Producers will often sell tobacco at a huge discount to intermediate buyers who take their place in the auction process,” said the World Bank.

Although intermediate buying (IB) was outlawed in Malawi, pockets of it can still be found and require firmer regulation and monitoring to deal with. It could be argued that an auction system provides fertile ground for a form of ‘bootlegging’ in tobacco.

Sun shines with IPS

The challenges that the auction system has been subjecting growers to could soon ease once Malawi fully embraces a new production and marketing system, Integrated Production System (IPS).

Approved by former president Joyce Banda’s administration in May 2012, IPS is touted to have the potential to reduce the amount of direct leaf sales through the auction by more than 80 percent.

With IPS, growers deal directly with buyers and this automatically cuts out the intermediary.

Said Kabudula-Banda: “Under IPS and JTI’s facilitation, I have the bargaining power and know who I’m dealing with every season. In the past, tobacco buyers at the auction were people we did not know.”

Felix Thole, who heads the marketing and business development function at the Tobacco Association of Malawi (Tama), agrees: “IPS provides market certainty; pricing is more consistent and usually above that sold on auction because of better leaf presentation and quality; the grower or the grower association representative is able to negotiate for better price unlike on the parallel auction system.”

Tama is one of the major tobacco growers’ representative bodies in Malawi and a member of the International Tobacco Growers Association (ITGA).

Outstanding: Amended Tobacco Act

However, for IPS to firmly take effect the Malawi Parliament must approve amendments to the Tobacco Act. In recent years, this piece of legislation has been subject to rigorous and intensive review as stakeholders debated its suitability.

According to the Tobacco Control Commission (TCC), the regulator of the industry, the amendments were presented to government which must table them in the august house for legislators to debate and approve them.

Both growers and buyers believe that the two acts governing the tobacco industry are outdated, and urgently require amendments to align with global shifts in the leaf industry.

“Legislation gives investors confidence. The current scenario is only working on the goodwill of politicians and risks being overturned at will. Such scenarios are a financial risk to an investor,” says LimbaniKakhome, director of corporate affairs and communications at JTI in Kanengo

JTI’s approach

Since 2009 JTI Leaf Malawi has been running a facilitated scheme (FS) which provides growers a guaranteed market for their leaf. FS is designed to offer a strategic fit in Malawi’s newly introduced Integrated Production System (IPS) of tobacco.

The system provides for direct facilitation in the production and marketing of tobacco between growers and processors.

JTI’s FS is designed to create long-term sustainability of the industry by facilitating growers’ access to low-interest rate financing, extension services, food security and reforestation, child labour prevention and incentives.

These benefits are not available to growers who sell on auction.

As some of the direct buyers under IPS are processors, they provide farmers with quality and quantity specifications ensuring that what they put in is what comes out in their tobacco products.

Traceability from seed-to-cigarette, an international industry requirement, is also embedded.

Ronald Ngwira, leaf production director at Alliance One International, says operating in a policy vacuum is dangerous for any business with large investments in agronomy and production.

He says his firm is “extremely interested” in IPS because the system offers an opportunity to do business the right way.

“If IPS is not implemented, Malawi loses out in market share as majority of companies that buy bulk [around 80 percent] of the Malawi crop will potentially move elsewhere. The grower too loses on access to finance, inputs and extension,” he says.

Reaping the benefits

Despite delays by Parliament to pass the amended tobacco law, JTI-facilitated growers such as Kabudula-Banda are already making a profit from their efforts.

In the 2012/13 selling season, he had sold over 87 bales, which he says translated to a decent profit margin.

“All my bales have been going through without rejection. To be able to produce that much tobacco this year, JTI linked me to a bank that financial institution provides  loans for inputs and I pay it off every year,,” he says.