Malawi - Development of the agricultural sector

Report No. 3459-MAI Malawi The Development of the Agricultural Sector May 8, 1981 Eastern Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients onty in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Kwacha (K) Exchange Rate Kwacha 1 = US$ US$1 = Kwacha Average 1973 1.2206 0.8193 Average 1974 1.1888 0.8412 Average 1975 1.1577 0.8638 Average 1976 1.0953 0.9130 Average 1977 1.1075 0.9029 Average 1978 1.1851 0.8438 Average 1979 1.2241 0.8169 ABBREVIATIONS ADD - Agricultural Development Division ADMARC - Agricultural Development and Marketing Corp. ARD - Agricultureal Research Department DA - Development Areas EPA - Ecological Planning Units INDEBANK - Industrial Development Bank KFCTA - Kasungu Flue-Cured Tobacco Authority KRDP - Karonga Rural Development Program LRDP - Lakeshore Rural Development Program MANR - Ministry of Agriculture and Natural Resources MU - Management Units NRDP - National Rural Development Program NSCM - National Seed Company of Malawi NSO - National Statistics Office NSSA - National Sample Survey of Agriculture STA - Smallholder Tea Authority SUCOMA - Sugar Corporation of Malawi SVADP - Shire Valley Agricultural Development Program FISCAL YEAR April 1 - March 30  FOR OFFICIAL USE ONLY PREFACE 1. This report is one of a series of six special reports that have been produced as the result of the 1979 Basic Economic Mission.l/ The major purposes of the Basic Econom4c Mission were to review the performance of the Malawian economy since independence (1964) and to assess the future prospects for growth over the next decade or more, identifying the major constraints to development and making recommendations for their relief. The focus of the basic economic mission was upon macroeconomic performance (the national accounts, balance of payments, budget and public enterprises and employment), the development of agriculture and manufacturing; and the provision of government resources for the development of human capital and for meeting basic needs. 2. Despite the country's extremely low level of development at independence, the Malawi Government opted for an outward-looking strategy of rapid growth, based on encouragement of private enterprises, use of the market mechanism, favorable treatment of foreign capital, low levels of protection and wage restraint. The public sector investment program has emphasized the direct support of the commodity producing-sectors through the provision of agricultural services, internal and external transport links and power. The development of the social sectors (education, health, dtc.) received relatively less attention until recent years. 3. These policies have been successful and the Malawian econcmy has recorded an impressive list of accomplishments since independence. Real GDP has grown at about six percent per annum and growth in all sectors (except subsistence agriculture) has been rapid. Wage employment has grown almost as rapidly as modern sector output, suggesting a relatively labor-intensive pattern of development. Export volumes, at least those of the agricultural estate sector, have increased significantly. Domestic investment has grown from about 9 percent of GDP at independence to an average of 25 percent in recent years, while domestic savings have increased from virtually nil to 17 percent of GDP. The Malawian economy has also attracted large increases in foreign capital for private/public enterprise investments and for government projects. In addition, the domestic rate of inflation has been relatively low. 1/ The six reports are: The Development of the Agricultural Sector The Development of Manufacturing The Fiscal Performance of the Public Sector Employment Aspects of Economic Development The Development of Human Capital Basic Needs This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ii 4. Despite this record of accomplishnents, there is now concern about the prospects for future growth owing to: - the slow growth of smallholder output and exports; - the relatively poorer prospects for traditional estate ex1orts; - the projected decline in the external terms of trade (relaxt:ve to those of the 1970s); - the continued rapid growth of.population and labor force (and the rapid decline of unutilized cultivable land), - the deterioration in budgetary and public enterprise perfcniance; and - the continued shortage of skilLed manpower. 5. The basic economic report explores the possibilities for imprDving the output, trade, and employment performance of agriculture and industry through changes in price-tax-tariff policies, improvements in sectoral. institutions, and improved government services. It analyzes the possibilities for improved resource management through better government revenue performance, increased allocations for recurrent operations to raise the payoffs to past govermient investments and measures to improve the efficiency and profitability of public enterprises; it also analyzes the effects on future budgetary balance of changes in the growth and composition of government investment expenditure or in the amounts and terms of foreign financing. In addition, it assesses the nature and magnitude of Malawi's manpower constraint, estimates the returns to investments in secondary education, examines the costs of exLpanding social services for meeting basic needs and, in the face of likely goverrLment budgetary constraints, explores the possibilities for meeting some of tmEse costs.through higher user charges. 6. The basic economic report places the themes outlineet in the pcErceding paragraph in a macroeconomic framework for an analysis of the future ecor.omic development possibilities in Malawi. We expect that the draft basic ecor.omic report will be discussed with Government in July 1981 and that circulaticn of the final version will shortly follow. The members of the basic econonic mission were: William A. McCleary (Mission Chief) Gilbert Brown (Basic Needs) Peter Hansien (Public Finance) Kazuko Hashimoto (General Economist, Agriculture) Stephen Eeyneman (Education) Richard LaCroix (Consultant, Agro-industry) Ben Lehbert (Industrial Econoimist) Katherine Sierra (Employment) Robert Wesselman (Consultant, Agricultural Extension) Dennis Wood (Consultant, Agro-industry) Shirin Velji (Research Assistant)  - iii - MALAWI THE DEVELOPMENT OF THE AGRICULTURAL SECTOR Table of Contents Page No. Preface ........................................................ i Summary and Conclusions ......................................... vi I. BACKGROUND ...................................................... 1 Physical Characteristics, Population and Land Use .................................................. 1 Role of Agriculture in the Economy .............................. 2 II. OBJECTIVES, STRATEGY AND INSTITUTIONS FOR AGRICULTURAL DEVELOPMENT ......................................... 3 Objectives and Strategy ......................................... 3 Government Services for Agricultural Development .... ............ 5 III. STRUCTURE AND PERFORMANCE OF AGRICULTURAL SECTOR .... ............ 7 Estates ......................................................... 7 Smallholders .................................................... 12 Crop Authorities ................................................ 16 IV. CROPS--PERFORMANCE, PROFITABILITY AND POTENTIAL ................. 17 Flue-Cured and Burley Tobacco (Estate Tobacco) .................. 17 Tea . ............................................................ 24 Sugar ........................................................... 26 Smallholder Crops ............................................... 34 Maize ........................................................... 37 Dark Fire-Cured,Air- or Sun-Cured and Oriental Tobacco .............................................. 38 Groundnuts ...................................................... 39 Cotton .......................................................... 41 Rice . ............................................................ 42 V. EMERGING ISSUES ................................................. 44 Food Self-Sufficiency and Land Scarcity ......................... 44 Performance of Smallholder Subsector ............................ 49 Agricultural Pricing ............................................ 50 Estate Diversification .......................................... 61 Other Constraints ............................................... 62 This report was prepared by Ms. Kazuko Hashimoto, Economist, Country Programs I, Division B, Eastern Africa Regional Office (coordinating author), with Mr. William Jones, Agricultural Economist, Central Agriculture Division, East Africa Regional Office, and consultants, Messrs. David Dorsey (Financial Analyst), William Edwards (Agronomist) and Robert Wesselman (Extension Specialist).  Table of Contents, cont-d - iv*- Page No. VI. FUTURE PROSPECTS ..................... 63 Estate Diversification .64 Smallholder Crop Strategy .65 Research .70 Extension .70 Soil Conservation .70 Irrigation .71 Storage and Timely Delivery of Seasonal Inputs .71 Pricing .71 LIST OF TABLES 1. Land Use 2. Utilization of Arable Land 3. Production from Agricultural Estates, 1968-77 4. Contribution of Agricultural Estates to Export Earnings 5. Employment in Commercial Agriculture 6. Purchases by ADMARC of Crops from Customary Land, 1947-78 7. Indi,zes of Aggregate Domestic Purchases by ADMARC 8. Principal Exports from Customary Land, 1969-77 9. Malawi Tobacco Statistics--Flue-Cured Production and Average Price, 1956-78 10. Malawi Tobacco Statistics--Burley Production and Average Price, 1956--78 11. Profitability of Large Tobacco Estates in Malawi 12. Sensitivity Analysis of Tobacco Estates" Return on Shareholders' Equity in 1977 13. Projected Increases in Flue-Cured and Burley Tobacco Production 14. Made--Tea Production 15. Returns of Capital Emloyed and Net Assets in Malawi Tea Industry, 1973-76 16. Sensitivity Analysis of Return on Shareholder Equity of Tea Estates 17. Estimated Future Made-Tea Production and Increases in Yields 18. Sugar Production, Domestic Consumption and Export, 1975-78 19. SUCOMA Profitability 20. Sensitivity Analysis of SUCOMA Profitability 21. Projected Increases in Sugar Production 22. Sugar Prices--Actual and Projected 23. Comparative Gross Margins (Farmgate), 1977 Prices 24. Relationship between Gross Margins and Growth of Marketed Output 25. ADMARC Purchases and Exports of Groundntits 26. ADMARC Purchases of Cotton Seed and Lint Exports 27. Comparison of ADMARC Rice Producer :Price with Export Parity Prices in Selected Areas, 1977 28. Projected Populaition and Labor Force, 1980-90 29. Projected Land Uisage 30. Projected Maize Supply and Demand. for 1980-90  Table of Contents, cont'd v 31. Average Yields Required for Self-Sufficiency 32. Comparison of ADMARC Purchase Prices of Maize and Groundnuts with Average Prices of Exports Realized 33. Computation of Export Parity Prices for Maize at Selected Local Markets, 1977 34. ADMARC's Subsidies to Maize Growers, 1977 35. ADMARC's Subsidies to Maize Consumers in the Absence of Local Production 36. A Comparison of Import Parity Price of Maize at Different Local Markets, 1977 37. Computation of Export Parity Prices for Chalimbana Groundnuts at Selected Local Markets, 1977 38. ADMARC's Taxation of Groundnut Growers 39. Computation of Farmgate Price of Fertilizer (Sulphate of Ammonia), 1977 Current Prices 40. ADMARC'S Fertilizer Subsidies by District 41. Comparative Gross Margin for Maize in Selected Areas Using Export Parity Prices of Maize and Import Parity Prices of Fertilizers, 1977 42. Revised Comparative Gross Margins (Farmgate), 1977 Prices 43. Revised Computation of Export Parity Prices for Maize at Selected Local Markets using Different International Price Assumptions Expressed in Constant 1977 Prices 44. Comparative Gross Margin for Selected Crops in Karonga using Local Market Export Parity Prices of Crops and Import Parity Prices of Fertilizers, 1977 APPENDICES   - vi - MALAWI THE DEVELOPMENT OF THE AGRICULTURAL SECTOR Summary and Conclusions i. Agriculture is the most important sector of the Malawian economy as it employed 85 percent of the population and contributed 43 percent of GDP (1978). Between 1971 and 1978 the real annual growth rate of the agricultural sector was 3.5 percent. In 1978 agriculture accounted for MK 140 million or 89 percent of export earnings; these were derived mainly from tobacco (63 percent of agricultural exports), tea (20 percent), sugar (8 percent), ground- nuts (3 percent) and other crops (6 percent). ii. The Government's aims in agriculture since independence have been to maintain self-sufficiency in food staples, expand agricultural exports signifi- cantly and improve rural incomes. iii. Malawi's agricultural production derives from two subsectors, smallholder agriculture and estate agriculture. The smallholder subsector accounts for over 85 percent of all agricultural production, meets the country's demand for food staples (maize, beans, groundnuts, sweet potatoes and rice), and provides some export surplus. However, the bulk of the country's agricul- tural exports come from the estate subsector which has functioned as a principal earner of foreign exchange and an engine of growth for Malawi's development. The estate subsector contributes 15 percent of total agricultural production but accounts for nearly 70 percent of all agricultural exports. Estate production is mainly centered on flue-cured tobacco, burley tobacco, tea and sugar. iv. Evaluating the past performance of the smallholder subsector has proved difficult because of the shaky data base regarding yields and production. However, it is estimated that output from this subsector has been increasing at about 3 percent per annum in real terms in recent years. This performance is less than satisfactory considering the sizable public investments in smallholder agriculture since the late sixties. While this sub-optimal performance can be attributed in part to the limited coverage of past agricultural projects, low agricultural prices have also adversely affected smallholder marketed output. The Agricultural Development and Marketing Corporation (ADMARC) is charged with the responsibility of marketing smallholder crops, and has a monopoly on the purchase of all cotton and tobacco grown by smallholders. Producer prices are uniform throughout the country and are fixed by ADMARC in consultation with the Government. ADMARC's input prices are also uniform throughout the country. Much of the slow growth in smallholder marketed output of certain crops can be attributed to insufficiently remunerative producer prices set by ADMARC. The present system of uniform crop and input prices involves cross- subsidization of producers in geographically inaccessible areas by producers in accessible regions on the amount of the internal transportation cost. The effect of Malawi's prevailing relative price structure has also been to subsidize certain smallholder crops (e.g., rice and maize) and to tax others (e.g., cotton and groundnuts). This has resulted in the stagnation of  - vi:i - cotton and the decline of groundnut purchases by ADMARC. While it may be justified by considerations of self-sufficiency in food staples, the in:idence of taxation or subsidies inherent in the present structure may not be ttie most appropriate in terms of producer incentives. The Government established in early 1978 a special interministerial committee to review agricultural 1)rices, but to date the committee has done little in the way of monitcring the incentive aspect of producer prices. v. The estate subsector is very efficient and has been growing a:" about 17 percent in real terms since 1968. However, it is currently heavily iflcncen- trated on two commodities: approximately 80 percent of all exports from the estate subsector are tea and tobacco (the latter accounts for approxima-ely 50 percent). Under the circumstances, it would be unwise to furt:her increaEe reliance on these crops; i.e., while tobacco and tea will undoubtedly remain the two most important crops, the estates need to expand production of other crops. The future real growth rate of the estate subsector is projected to decelerate to four or five percent per annum. Consequently, ilt cannot be expected to generate the same growth of employment and foreign exchange ELs it did in the past. If the estate subsector is to maintain its role as the country's principle foreign exchange earner, it must diversify into other crops. vi. The greatest constraint to agricultural growth in Malawi is a limitation on the supply of arable land. In the past decade, increased food requirements for the! country's growing population have been met and marKetable surplus realized through expansion in cultivated areas. However, only 38 percent of the total land area is considered suitable for cultivation under the present technological limitations. Since 36 percent is a:Lready under- culti- vation, the available land is nearly fully utilized and the possibilities for further expansion to meet food requirements consequently limited. It is expected that smallholders will run out of arable land by 1982 even if the Gover nuent holds the estate acreage constant at the 1978 level (13 percent of arable larld). The depletion of arable land would certainly force smallholders to extend their cultivation into non-arable areas or to shorten the fallow perioc.. Hence, the average yields would fall without additional investments in land. vii. Malawi's agricultural development could also be constrained in the future by the high cost of external transport, shortages of fuelwood alid lack of skilled labor. Because of its posiition as a landlocked country, Malawi has always had relatively high external transport costs. These costs are likely to escalate in the ifuture given the high probability of further increase,; in the real price of fuels. In recent years, the Malawian economy has been adversely affected by severe transport disruption, delays, damage and theft in transit through Mozambican ports and trade routes because of the politicll and economic situtation in that country. Expansion of fire-cured and ilue-cured tobacco is constrained by the shortage of fuelwood required in their prloductior processes. Malawi's consumption of wood is much greater than its produc:ion of wood, and as the "mining" of traditional forests continues, the price of wood wi:Ll increase. The rising price of wood will make growing fire- (;nd flue-cured tobacco--three-fourths of Malawian tobacco production--less aLtrac- tive in the future. This could mean the loss of an important source o:: foreign exchange. The lack of skilled labor acts as a constraint to tl,e future success of t'he National Rural Development Program (NRDP) and to the grort'i  - viii - of the estate subsector. Malawi's civil service is heavily dependent on expatriates to fill high-level technical or specialist posts, and the numbers of educated and trained personnel are inadequate for staffing intermediate posts for which it is not feasible to rely on expatriate labor. This threatens to slow down the pace of the development program. viii. In the past decade the Government has been directing sizable portions of public investments into the smallholder subsector. The estate subsector-- which is viewed as the principal source of the country's foreign exchange and a generator of wage employment--has been left largely in the hands of the private sector and Government has limited its role to providing a favorable investment climate. Beginning in 1968/69, integrated rural development programs were established in four specific areas. These four comprehensive programs are concentrated in the more densely populated areas and presently affect one million persons or 20 percent of Malawi's population. In the mid-1970s, it was realized that such intensive and costly capital investments as occurred under the major projects could not be replicated in the rest of the country within a reasonably short time. A rethinking of the strategy resulted in the concept of the NRDP which seeks to provide agricultural services to a larger segment of the population. The NRDP aims to extend and consolidate various development programs over the entire country within 20 years. It is designed to increase the level of smallholder production through the provision of agricultural inputs and farm services. Under the NRDP, cultivation of new land is discouraged and emphasis is placed on improving the productivity of already cultivated areas. ix. Malawi's agricultural development strategy, as embodied in the NRDP, is sound and well focussed. However, the successful implementation of the NRDP requires the improvement of certain government services. The shortage of personnel in the extension services, particularly at the field level, poses a very serious constraint to rapidly expanding development activities. Since the launching of the NRDP in 1977/78, the Ministry of Agriculture and Natural Resources (MANR) has recognized the need to strengthen its extension services and has restructured its organization at the field level. Nonetheless, these efforts continue to be hampered by the limited number of trained exten- sion workers. To ensure the success of the NRDP, the Government should undertake an inventory of its available skilled labor and rephase the develop- ment program accordingly. To meet the growing demand for smallholder credit under NRDP, MANR is giving considerable attention to the reorganization of smallholder credit operations in Malawi. In addition, the link between research and extension has so far been weak. Greater efforts should be made to interpret and transform research findings into simple packages which extension workers can recommend to farmers. MANR should also ensure that the time lag between the completion of research projects and publication of results is reduced. x. If food self-sufficiency is to be maintained, maize yields will have to increase substantially. If smallholders can be persuaded to shift from traditional varieties to hybrids, the profitability of growing maize relative to other crops would improve substantially and maize self-sufficiency would be assured. What is more, the switch to hybrids will enable Malawi to push maize production beyond self-sufficiency to exports if the prevailing internal price is sufficiently high to make this viable, or else to release additional arable land for production of other exportable cash crops.  ix - xi. In order for farmers to attain the yield potential of cotton i:ni groundnuts, producer prices would have to be raised to the point where l he returns to groundnuts and cotton compare favorably with the returns to ompetinE crops. Since the production of fire-cured tobacco will be constrained i.n the future by the shortage of fuelwood, farmers should expand the production of sun- and air-dried tobacco. Smallholders should be allowed to grow bur:>ey tobacco, which is both high quality and high yielding and requires no fnel for curing. Government policy should focus on yield improvement in rainfed rice. However, the productjion of rice should not be allowed to increase beyond :he level required for self-sufficiency since rice production for exports is nlot economically viable. Efforts should be made to seek alternative cash crops for farmers in the north. xii. The continued functioning of the estate subsector as the enginie of growth and a principal source of Malawi"s foreign exchange earnings depends critically on its abi-lity to diversify iits production. There is little prospect for tea acreage expansion due to the lack of suitable land in itt3 required environment., Given the high cost of establishing new estates, increases in output would have to stem from yield improvements. On the demand side, the declining trend in the international price of tea suggest severes limitations to the expansion of tea exports. No immediate expansion of sugar production capacity beyond the two estates is currently contemplated; however, given the favorable world outlook for suigar during the 1980s, the possibility of further investments in sugar should be explored. Expansion of burley and flue-curetd tobacco production is constrained by lack of managerial expertise, tightening of credit, increased labor costs, and shortages of fuelwood. The Government should hence seek out new crops for estate production. One such crop withL particularly promising prospects is macadamia nuts. Another l ucra- tive source of foreign exchange earnings might be the production of Arabica coffee. Still another possibiilty is that of growing tea seed by tea estates for oil extraction. Tea seed oil commands a high price on the world market, but much research is required before it can be produced on a commercial scale. Tobacco e!states could diversify to livestock production. Milk productica could be quite profitable for those estates within reasonable reach of large towns. xiii. As regards the future roles of' estates and smallholders, agricil: tural production in Malawi will continue to derive from the two subsectors coexi_sting and playing essentially complementary roles. The smallholder subsector w--ll continue to assume the task of feeding the country's growing population. In addition, it should be expanding export production of cash crops because :'it would be feasible to maintain self-sufficiency with less resources as farmers adopt improved technology under the NRDP. The estate subsector will have the primary responsibility for generating agricultural exports. Labor is expected to remain plentiful and the estates will continue to benefit f:rom the flee movement of seasonal labor between the two subsectors.  MALAWI THE DEVELOPMENT OF THE AGRICULTURAL SECTOR I. BACKGROUND Physical Characteristics, Population and Land Use 1.01 Malawi has a total area of 29.3 million acres of which 6.0 million acres is lake surface. The land area consists of three topograph- ically different regions: the northern mountainous region; the central plateau and the southern lowlands. Of the 23.3 million-acre total land area, 8 million acres (or 36 percent) are currently estimated to be under culti- vation. Forest reserves occupy nine percent of the total land area, while urban and infrastructure areas and national parks account for 11 percent each. The remaining 33 percent of the total land area is essentially non-arable and includes grazing and restricted drainage valley areas, permanent swamps and steep rugged country (see table 1). Eighty percent of the total land Table 1: LAND USE '000 Acres Percent Total Land Area 23,240 (100) Customary Land under Cultivation 7,105 (31) Estates 1,159 (5) Land Not Arable a/ 7,764 (33) National Parks 2,559 (11) Urban Areas and Infrastructure 2,559 (11) Forest Reserves 2,094 (9) a/ Includes grazing areas and restricted drainage valleys, permanent swamps, steep rugged country. Source: Ministry of Agriculture and National Resources. area is held under customary tenure and is termed "customary land." Freehold and leasehold land account for 5 percent while 15 percent is held as public land. 1.02 The population of Malawi was estimated at 5.6 million in 1977, and the annual population growth rate is estimated at about 2.9 percent per annum. The country s average population density, 153 per sq. m. of land, is one of the highest in Africa. Malawi is administratively divided into three regions--the northern, central and southern regions. About 38 percent of the total area can be classed as suitable for cultivation under the present technological limitations, and on a countrywide basis, the available arable land is already nearly fully utilized. However, there are considerable regional differences in the intensity of land use. In the northern region, only about 50 percent of arable land is under cultivation. On the other hand,  -- 2 - in the cientral and southern regions where all the arable land has been culti- vated, fallow periods have been shortened, and cultivation hasi been extuended to land less suitable for agriculture. Table 2: UTILIZATION OF ARABLE LAND a/ Northern Central Southern Region Region Region Malawi Total Acreage 6,638,080 8,787,460 7,814,500 23,240,04() Acreage Possible for Cultivation under Present Technological Limi- tations 2,223,866 3,783,134 2,869,980 8,876,98() Customary Land Actually Being Used for Agricultural Use 1,215,912 3,005,252 2,883,379 7,104,534 Acreage Under Estates 239,320 592,365 327,798 I,159,481 Balance of Arable Land b/ 657,441L -3,639 c/ -484,687 c/ 169,11l a/ As oE May 18, 1978. b/ Derived as follolws: arable land less five percent of arable land (assumed to be taken up by roads, dwellings and other such rural infra- structure), customary land under cultivation and acreage under estates. c/ In the central and southern regions, all the arable land has been eThausted and cultivation has been extended to less suitable land. This expliAls the negative balance, i.e., the difference between the "acreage posfi:ile for cultivation" and the acreage actually utilized by estates and suaLl- holders in these two regions. Source: Ministry of Agriculture and Natural Resources, Land Husbandry Division. 1.03 Over the past decade increased food requirements for the exp4mnding population have been met for the most part through expansion in cultivat:ed area. This has meant that land more susceptible to erosion has been cult:Lvated and that fallow periods have been reduced in the central and southern rE!glons. Consequently, land conservation and maintenance of soil fertility through the introduction of improved techniques and inputs has become inceasingly imiportant. Role of Agriculture in the Economy 1.04 Agriculture is the most important sector of the Malawian ecornomiy as it employs over 85 percent of the population and contributes 43 perceni: of GDP (1978). The real annual growth of the agricultural sector between 1971 and 1978 was 3.5 percent. In 1978 agriculture accounted for K 140 million  - 3 - or 89 percent of export earnings; these were derived mainly from tobacco (63 percent of agricultural exports), tea (20 percent), sugar (8 percent), groundnuts (3 percent) and other crops (6 percent). 1.05 Malawi's agricultural production derives from two subsectors, smallholder agriculture and estate agriculture. The smallholder subsector accounts for over 85 percent of all agricultural production and meets the country's demand for food staples (maize, beans, groundnuts, sweet potatoes and rice) while providing agricultural raw materials for domestic industry (cotton and fire-cured tobacco) and some export surplus. The export surplus from this subsector accounted for 31 percent of all agricultural exports in 1977. Because a large segment of smallholders still live on the fringe of subsistence economy, it is difficult to measure the past growth of the subsector. It is estimated, however, that smallholder output has been increasing at about three percent per annum in real terms (somewhat higher than the rate of population growth) in recent years. On the other hand, the performance of the estate subsector has been spectacular, its output expanding at around 17 percent per annum in real terms since 1968. Overall, the estates contribute 15 percent of the total agricultural production in the country but account for nearly 70 percent of all agricultural exports. Estate production is mainly centered on flue-cured tobacco, burley tobacco, tea and sugar. 1.06 In 1977 the livestock population consisted of 744,000 cattle, 794,000 goats, 205,000 pigs and 86,000 sheep. The growth of the cattle herd, which contains over 2,000 grade dairy animals is estimated at five percent per annum. Most cattle are found in the less densely populated central and northern regions. They are raised by smallholders by traditional methods and considered by farmers as a source of wealth rather than as commodities for sale. Conse- quently, overstocking is becoming noticeable in some areas and seasonal shortages of meat have occurred in rural areas. In Malawi, goats are an important source of meat as are the pigs. Most of the organized pig and poultry production is in the hands of large commercial producers who keep the urban markets fully supplied. Malawi imports most of its dairy requirement. II. OBJECTIVES, STRATEGY AND INSTITUTIONS FOR AGRICULTURAL DEVELOPMENT Objectives and Strategy 2.01 The Government's aims in agriculture have been to maintain self- sufficiency in food staples, expand agricultural exports significantly and improve rural incomes. Given the limitation on high quality land available for new cultivation, and the increasingly high cost of reclamation on marginal lands or lands exhausted by continuous cultivation, the main emphasis of current agricultural policy is on a sustained rise in productivity. 2.02 As stated earlier, some 85 percent of Malawi's population is engaged in agriculture, and they consist mostly of smallholders. Since a sustained increase in smallholder productivity is essential for keeping the country supplied with basic staples, the Government has been directing sizable portions of public investments of the past decade into the smallholder  -4- subsector through a series of rural development projects (see para. 2.0'3 below). On the other hand, the estate subsector which is viewed as a principal source of the country's foreign exchange earnings and a generator of wage employment, has been left largely in the hands of the private sector, ard the Government has limited its role to providing a favorable investment climaate. The taxes have been moderate and the leases on estate lands fairly easy to obtain. But the single most important factor in the phenomenal success Df estate agriculture has been the Government's wage policy. (Thls has been true for Malawi's modern sector as a whole.) A deliberate low-wage policy has contributed to the competitiveness of Malawi's exports from this subsectr by allowing the estates to lower the unit costs of production for each of the crops. 2.03 The past public investments in smallholder agriculture has taken two different approaches. The more general approach has concentrated on a gradual improvement of extension, land husbandry and farmer training services throughout the country; these efforts have been supported by small, low-cost rural development projects and by special activities and programs such as ox training, dairy improvement, and tea development (usually funded by the UK or by UNDP). The second approach has been based on the introduction, since 1968/69, of considerably more expensive anc management intensive integrated development programs in four specific areas. These are: the Lilongwe Land Development Program (LLDP), Shire Valley Agricultural Development Projects (SVADP), Karonga Rural Development Projects (KRDP) all of which were IDA-aided and Lakeshore Rural Development Project (LRDP), formerly funded by the Federal Republic of Germany (1968-74) and now assisted by the European Development Fund (EDF). All of the above programs are character-ized by the provision of infrastructure (roads, markets, water and health facilities, etc.), land improvement and conservation measures, improved extension and:[ other services, and provision of credit facilities. (Please refer to Apl:endix 1, paras. 1.01-1.17, for a more detailed description of those projects aivd their impact.) These four comprehensive programs--which are concentratec. in the more densely populated areas--cover areas with one million persons, (:r 20 percent of Malawi's population. Despite this emphasis over the last ten years, the increases in smallholder marketed output have not been large, and sales of some crops e.g., cotton and groundnuts have been disappointing :s2e para. 3.07 below). 2.04 In the mid--1970s, it was realized that such intensive and cosl:l1 capital inivestments as occurred under thes major projects could not be re1:licated in the rest of the cotntry within a reasonably short time. A rethinking cf the strategy took place, and the result was the concept of the National Rural. Development Program (NRDP). The idea was to provide agricultural serviccs more extensively to a larger segment of the population by concentrating resources on the more immediately producitive areas. The NRDP aims to exl:eid and consolidate various development programs over the entire country witbi'l 20 years but necessarily under less-intensive staffing and infrastructurt -han the past integrated rural development projects. It is specifically desijned to increase the level of smallholder production through the provision of agricultural inputs and farm services; particular attention is *being pai(d 'o increasing the efficiency and scope of exctension, input supply, marketing and credit services. Under the NRDP, cultivation of new land is discouraged and emphasis placed on improved productivity from already cultivated areas.  - 5 - Attention is also given to soil conservation, watershed management and afforestation. 2.05 The Ministry of Agriculture and Natural Resources has the responsi- bility for implementing the NRDP, the first phase of which was appraised between 1977 and 1978, and to serve the needs of the program, the Ministry headquarters and field organizations have been restructured. The country is divided into eight management units (MU), each of which administers one agricultural development division (ADD). On average, each ADD is divided into five development areas (DAs). The DAs, each of which covers some 25,000 farm families, make up the basic units of development. Government Services for Agricultural Development The Ministry of Agriculture and Natural Resources 2.06 The Ministry of Agriculture and Natural Resources' (MANR) major activity is the provision of services to the agricultural sector. There are two deputy secretaries one of whom is responsible for the implementation of the agricultural programs which operate through three departments: Agricultural Development, Animal Health and Industry,and Agricultural Research. The other deputy secretary is responsible for Fisheries, Water Resources, National Parks, Geological Survey, Forestry and Planning. Crop Marketing and Input Distribution 2.07 The MANR also exercises general supervision over the activities of the Agricultural Development and Marketing Corporation (ADMARC). Established in April 1969, ADMARC is charged with the task of purchasing all cotton and tobacco grown on customary land or public land that it considers marketable and has the right to purchase all produce from customary land. To this end, ADMARC maintains 52 main storage depots/markets supplemented by over 700 produce-buying "bush" markets throughout the country. Prices paid to farmers at ADMARC markets are announced each year before the start of the planting season. The producer prices are uniform throughout the country and are fixed by ADMARC in consultation with the Government. 2.08 In addition to crop marketing, ADMARC is also responsible for distributing essential agricultural inputs to farmers on customary land. These inputs include improved seeds, fertilizers, pesticides, and spraying equipment and spares. Seed Production 2.09 Seed production is the responsibility of the newly established National Seed Company of Malawi (NSCM). It manages seed multiplication schemes for all crops other than cotton which is undertaken by the Makoke Research Station. After growing, cleaning, processing and bagging, the bulk of the seed is handed over to ADMARC for distribution.  -6- Agricultural Extension 2.10 Until 1977, agricultural extension services had been run on a dualistic structure. Each of the major integrated rural development prt:j?ct areas had its own extension services managed from the project headquarte :s. However, farmers outs:ide the project areas who constituted about 85 perc( nL of the rural population wqere served by an embryonic national extension serv:!cE which was seriously handicapped by budget and personnel constraints. Wilh the launching of the National Rural Development Program in 1977/78, the I'A.R recognized the need to strengthen its extension services and has restruct:ured its organization at the field level. The Ministry instituted a geographical unit approach to rural development based on ecological principals that are consistent with admin-istrative boundaries and size vis-a-vis area and population density. These geographical units--called the ecological planning areas (EPAs) are as uniform in terms of physical resource as possible. One hundred and eighty of them cover the whole country. They are, in turn, grouped together for administrative purposes into development areas (see para. 2. 05 above) of which there will be about 40 in all by the time NRDP covers the_ entire country. 2.11 An important feature of agricultural extension in Malawi is iLts emphasis on the group approach, which has been fostered by the practice c f providing seasonal credit only to groups.1/ The extension worker helps t-ha farmers apply for credit, and then proceeds to teach the recommended practices largely by demonstrations for the entire group. This group demonstration is followed up with visits to as many of the individual plots as possible by the extension worker to make sure that his adlvice is being acted on. Currently, there is one extension worker (technical assistant) to 1,400 to 2,400 faImers, the ratio depending oin the location. The technical assistant is supported by supervisory staff and specialist staff (technical and professional officer3) at the divisional and regional levels. The shortage of personnel in the extension service, particularly at the field level, poses a very serious constraint: to rapidly expanding development activities under the NRDP. Farmer Training 2.12 To provide more intensive training to farmers, the eXtension service maintains two types of farmer training centers throughout the cotun :ry. The day training center consists of a classroom attached to an EPA field office where one-day sessions are held for groups of 25 to 40 farmers on current topics which are either suggested by the field staff or requestec by the village committees. Residential traiLning centers, totalling 16 for t1he country as a whole, are used for one-week and two-week courses on subjects largely determined by project staff. The day centers have recorded about. 70,000 student days per year and the residential centers some 85,000 studeiLt days per year. 1/ The only exception to this practice is the Lilongwe Land Development Program's individual seasonal credit.  -7- Agricultural Research 2.13 Agricultural research is carried out by the Agricultural Research Department (ARD) of MANR, the faculty of agriculture of the University of Malawi and the Tea Research Foundation (an independent organization focusing on tea research). The University at Bunda College of Agriculture carries out its own research or does so on behalf of MANR. The ARD is a full-time research department with national responsibilities covering all crops and livestock. Administratively, agricultural research is organized on the basis of research stations which, in turn, are subdivided into substations and district sites. Scientifically, research is organized under research projects based on crops or disciplines. The link between research and extension has so far been weak. Greater efforts should be made to interpret and transform research findings into simple packages which extension workers can recommend to the farmers. MANR should also ensure that the time lag between the completion of research projects and publication of results is reduced. Agricultural Credit 2.14 Currently, there is no single agricultural credit institution in Malawi that caters to the whole agricultural sector. Credit facilities to the smallholder subsector are provided by: (a) the ongoing agricultural projects; (b) the settlement credit schemes run by the technical services department of MANR; (c) the Crop Development Authorities (Smallholder Tea, Smallholder Coffee, and Kasungu Flue Cured Tobacco Authorities); and (d) the Government Loans Board. Both seasonal and medium-term loans are available and with the sole exception of LLDP, all these credit entities administer seasonal loans through farmer's groups to minimize the adminis- trative costs. The administration of smallholder credit is characterized by strict supervision and discipline, and by its close working relationship with extension staff, an input distribution agency, i.e., ADMARC. The estate subsector gets financing from the two commercial banks (see para. 3.06 below). III. STRUCTURE AND PERFORMANCE OF AGRICULTURAL SECTOR Estates 1/ 3.01 The agricultural estate subsector currently occupies about 13 percent of total cultivated land and is principally responsible for growing 1/ In Malawi, a farm is defined as an agricultural estate if its cultivation takes place on freehold or leasehold land and the grower markets his crops directly on the auction floor or through private contract. With the excep- tion of expatriate-owned tea estates which date back to colonial days and which are established on freeholds, all agricultural estates cultivate their crops and land alienated from customary tenure through leases.  - 8 - tea, flue-cured and burley tobacco and sugar whose production is restrictel to this subsector. As of March 1979, the number of estates totalled 1,107. )f these, 524 were flue-cured tobacco, 556 burley tobacco, 26 tea and one was a sugar estate. These estates together contributed 15 percent of atgriculturil production and some 70 percent of agricultural exports in 1978. The output: from this subsector expanded in real terms at the annual compound. growth rilte of 17 percent between 1968 and 1977 (see table 3). The value of exports flcm agriculturaL estates had increased from K 13.0 million in 1967 tc, K 97.0 million in L978 (see talble 4).  Table 3 : PRODUCTION FROM AGRICULTURAL ESTATES, 1968-77 (short tons) Output Growth 1/ Burley Tobacco Flue-Cured Tobacco Tea Sugar Index for All Crops 1968 = 100 1968 3,336 3,030 18,279 - 100.0 1969 3,816 3,055 18,575 - 103.1 1970 6,255 5,154 18,842 - 124.3 1971 6,245 7,065 21,247 - 143.8 1972 6,220 9,533 22,647 - 162.3 1973 6,664 11,013 23,700 - 175.9 1974 5,922 11,599 26,839 71,519 284.3 1975 8,815 16,423 27,499 92,807 351.8 1976 7,275 17,824 31,581 100,906 380.3 1977 11,211 21,589 32,886 103,040 422.8 1/ This index has been calculated using I = ( po 100 where qo and po represent the quantity ( qopo ) and unit price for the comparator year (1968 for tobacco and tea,1974 for sugar) and qt the quantity for succeeding years.  Table 4: CONTRIBUTION OF AGRICULTURAL ESTATES TO EXPORT EARNINGS (K Million) 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977* 1978* Export of Estate Crops 13.0 14.6 16.2 19.7 22.9 25.7 35.5 50.9 65.2 86.8 104.9 97.0 T1Irobacco 3.3 4.6 6.2 8.2 10.4 13.2 18.2 24.2 31.0 36.9 47.9 55.9 Tea 9.0 9.7 9.5 10.9 11.9 12.0 13.8 17.2 21.7 26.4 41.6 29.2 Sugar 0.2 - 0.2 0.2 0.3 0.4 3.3 9.2 12.3 23.2 14.9 11.4 Others 0.5 0.3 0.3 0.4 0.3 0.1 0.2 0.3 0.2 0.3 0.5 0.5 Total Agricultural Exports 32.0 32.3 34.3 37.6 46.6 52.0 63.5 82.8 97.4 132.9 160.5 140.2 Total Domestic Exports 33.1 33.8 36.6 40.6 49.6 55.1 68.8 89.6 106.3 141.0 172.0 150.3 Estate ExDorts as % of Agricultural Exports 40.6 45.2 47.2 52.4 49.1 49.4 55.9 61.5 66.9 65.3 65.4 69.2 Estate Exports as % of Total Domestic Exports 39.3 43.2 44.3 48.5 46.2 46.6 51.6 56.8 61.3 61.6 61.0 64.3 * Estimates. Source: Table 9.03, Statistical knnex.  - 11 - Table 5: EMPLOYMENT IN COMMERCIAL AGRICULTURE ('000 persons) Other Private Commercial Year Tea Estates Tobacco Estates Agriculture Total 1969 30.1 8.1 4.5 42.6 1970 30.7 13.1 4.8 48.6 1971 32.6 15.9 5.2 53.7 1972 32.5 20.2 6.8 59.5 1973 35.2 24.6 11.5 71.4 1974 35.2 22.5 17.1 74.8 1975 36.8 20.5 28.8 86.1 1976 36.7 30.6 28.5 95.8 1977 39.6 71.7 21.5 132.8 1978 39.0 87.5 21.8 148.3 Source: NSO, Reported Employment and Earnings Annual Report, various years and official sources. 3.02 The employment in the agricultural estate sector has similarly expanded from 42,600 in 1969 to 148,300 in 1978 and in the process absorbed a great bulk of the returning migrant labor from South Africa. This translates into an average annual growth rate of 15 percent per annum (see table 5). All of the the tea estates, the larger tobacco estates, and the sugar estate are run by professional and experienced managers while the smaller and newer tobacco estates are generally run by Malawians with less managerial experience. With the exception of burley tobacco estates which operate on a tenant system, all agricultural estates maintain a small core of permanent field labor and hire additional labor as needed during the peak seasons. The burley tobacco estates on the other hand are farmed by tenants who are allocated two acre plots and sell their produce to the estate owner at a guaranteed price. In 1978, there were 11,918 tenants working on Malawi's burley estates. 3.03 No consistent set of data exists on wages paid to unskilled estate labor but there is ample evidence to suggest that estate wages are considerably higher than the statutory minimum of 25 tambala per day. The Tea Association reports that on average the field labor wage rate including cash benefits was 48.1 t/day in 1976. (The figures were not available for 1977-78.) The average monthly cash earnings for tobacco workers in 1978 was 43 t/day. Labor is paid on an incentive basis at the sugar estate; in 1979, total compensation including meals and other benefits was reported at K 1 per day.  - 12 - 3.04 All estate tobacco in Malawi is sold over the auction floors in Lilongwe and Limbe under the supervision of the Tobacco Control Commission, a government statutory body. Tea is generally sold in one of three ways: through the London auctions, the local auctions at Limbe and by private forward contracts. Two-thirds of Malawian sugar is exported by the estat:e 1/ through private contracts and the rest sold on the domestic market. ThB Government regulates both the wholesale and retail price of sugar withia the country. To obtain any increase in its sales price, the estate wou lc have to apply to the Ministry of Trade, Industry and Tourism for a prica review. 3.05 There tends to be only a few suppliers for each of the imported inputs needed by the estates. Optichem Ltd, a local monopoly supplier, generally supplies all fertilizers and trace elements to the tobacco and tea estates, while t'he sugar estates procure the bulk of their fertilizers from a firm in South Africa. Diesel fuel suppliers include Cal Tech, Mobil and Total. Shell is the main supplier of insecticides. 3.06 Virtually all institutional lending to tobacco estates comes from Malawi's two commercial banks. The extension of credit, both for seasonal and capital 'Loans, has increased dramatically in the last few years. Until J'une 1975, total commercial bank loans and advances to the tobacco industry stayed at about K 5 million. By December 1976, total credit extended had increased to K 23 million and reached K 73.1 million by March 1979. This sudden expansion in commercial bank lesnding to tobacco estates was accompanied by a steady decline iin the repayment record of the estates. In the 1977/78 season, considered a bad season because of poor weather, 87 percent of the estal:es were unable to repay their seasonal overdrafts and only one estate was able to make any significant reduction in its indebtedness on its capital loan Lccount. Commercial bank financing plays a very small role in the tea industry with advances and loans to the tea estates varying between K 0.5 million and K 2.9 million since 1975. The sugar estates have obtained some capital loans from INDEBANK but for the most part have met their financing needs with inte:lnally generated funds. The deteriorating repayment record of tobacco estates has prompted the two commercial banks to establish a management facility to take over the management of those estates that were losing money. Smallholders 3.07 The principal crops grown on customary land by smallholders al:e maize, tobacco, cotton, groundnuts, rice, pulses and cassava. Except f(;r some irrigated rice in the north, all cultivation takes place under rairfed conditions. Farming methods are extremaely labor intensive with the ma;joeity of farmers working with simple hand tools such as hoes, knives or axes. The use of work oxen and ox carts is still quite rare. Practically all t'ie 1/ In addition to SUfCOMA, which was established in the late 1960s, the Dwana Estate began operation in mid--1979. Both estates have the sare board of director s and are managed by Lonrho, Limited.  - 13 - cotton, rice and tobacco crops produced by the smallholders are marketed through ADMARC (see para. 2.07 above). The smallholders can dispose of their surplus of the remaining crops and other general produce through sales to and barter with other farmers, and sales to private traders at the farmgate, at local village markets, at district council markets and at markets in urban centers. ADMARC also acts as a residual buyer of crops such as maize, groundnuts and cassava. It then resells these crops in urban centers as well as in villages to farmers who, owing to lack of storage space, run out of food supplies towards the end of their planting season. ADMARC's purchases of principal crops from customary land for 1947 to 1978 are shown in tables 6 and 7. The indices in table 7 are based on five-year moving averages of quantities purchased by ADMARC as shown in table 6. Despite the very substantial investments in marketing facilities and related infrastructure that took place under the major integrated rural development projects since the late sixties (see para. 2.04 above), with the exception of rice, there has not been any pronounced increase in the volume of crops sold to ADMARC over the past ten years.  -14- Table 6: PURCHASES BY ADMARC OF CROPS FROMI CUSTOMARY LAND 1947 - 713 (Thousands of short ton) - Year Tobacco Groundnuts Mlaize Seed/Cotton Rice(Paddy) Puls~s 1947 na na 8.4 na na 1.4 1948 na .. 7.6 na na 1.8 1949 7.8 .. i.3 1.4 0.8 1950 11.3 .. 10.4 5.7 1.7 1.6 1951 12.0 0.3 26.2 2.4 1.7 1.6 1952 6.1 4.8 47.1 7.7 . 3.0 4.3 1953 12.2 5.7 40.9 9.7 4.3 3.5 1954 10.0 7.3 52.9 7.2 3.2 2.4 1955 6.1 10.3 44.7 8.6 7.2 6.3 1956 11.2 9.8 33.7 3.2 4.2 7.9 1957 11.1 13.9 5.8 4.3 3.6 7.3 1958 13.2 12.8 12.8 5.5 4.1 6.0 1959 14.2 , 12.8 12.0 10.0 6.3 3.8 1960 10.1 20.7 16.6 12.5 7.1 6.3 1961 7.9 25.9 15.8 11.9 9.8 7.1 1962 11.2 36.2 0.5 19.0 5.1 7.0 1963 16.8 27.6 13.1 10.6 5.1 18.0 1964 9.2 19.5 30.8 14.9 ?.9 16.7 1965 20.3 25.2 24.5 22.7 5.6 30.1 3966 16.0 46.5 62.7 14.6 4.5 20.3 1967 17.5 47.6 100.0 13.1 5.1 23.3 1968 9.7 25.1 92.2 12.8 2.3 3.8 1969 6.4 40.9 58.2 20.2 9.3 18.1 1970 13.1 29.5 88.9 25.2 10.3 8.0 1971 16.0 40.7 40.9 24.6 19.1 19.3 1972 19.5 43.3 70A1 24.4 21.9 17.7 1973 16.6 33.0 69.5 17.8 19.0 7.5 1974 12.8 31.7 72.2 23.6 23.5 8.7 1975 13.5 36.2 32.2 19.6 16.2 6.5 1976 16.0 35.9 71.4 19.8 27.0 20.5 1977 25.5 20.3 99.0 24.9 26.3 9.6 1978 26.2 12.3 .132.6 26.7 34.0 11.5 Source: Compendium of Agricultural Statistics 1977, NSO; ADMARC na: not available negligible  - 15 - Table 7: INDICES OF AGGREGATE DOMESTIC PURCHASES BY ADMARC Maize Tobacco Groundnuts Cotton Rice 1967 100.0 100.0 100.0 100.0 100.0 1968 119.1 89.7 102.3 103.0 117.5 1969 112.6 89.7 99.2 115.0 172.0 1970 103.8 92.6 96.9 128.5 234.8 1971 97.0 102.4 101.1 134.5 297.8 1972 101.2 111.6 96.2 138 6 3<f.0 1973 84.4 112.2 99.8 131.7 372.0 1974 93.4 112.2 97.2 126.2 401.5 1975 102.0 120.7 80.5 126.7 417.9 1976 120.7 134.5 69.3 137.3 473.9 1977 126.2 146.9 70.9 138.7 470.5 1978 145.8 159.5 64.2 144.0 512.6 1979 159.1 174.5 54.4 152.5 515.5 Source: Table 6. 3.08 ADMARC also handles export of cash crops from the smallholder subsector. The principal exports from customary land are shown in table 8 below. The increases in the volume of exports have paralleled increases in ADMARC purchases, i.e., rice is the only crop that has shown sizable increases over time. Prices obtained for exports are determined largely by the world market situation at the time of the transaction or contract. However, price gains (or losses) are not passed onto farmers except in the case of tobacco where a secondary (bonus) payment is made by ADMARC in accordance with the export gains realized each year.  - 16 - Table 8: PRINCIPAL EXPORTS FROM CUSTOMARY LAND, 19659-77 (short tons '000) Cotton Tobacco a/ Groundnuts Lint Rice Maize 1969 6.4 37.8 n.a. 9.0 52.0 1970 11.6 24.8 9.1 10.0 nil 1971 15.9 32.2 5.3 19.0 5.1 1972 19.5 39.4 5.2 22.0 40.5 1973 16.0 30.2 2.7 19.0 39.9 1974 12.8 22.8 2.7 23.0 34.1 1975 13.5 28.5 2.1 16.0 nil 1976 16.0 28.8 2.1 27.0 nil 1977 25.5 16.8 2.2 27.0 nil a! Dark-Eired, sun- and air-cured and Orienital tobaccos. Source: MANR and ADMARC. 3.09 Fertilizer,, seed, insecticide and other agricultural inputs are supplied to farmers by ADMARC (see para. 2.07). In the project areas wli2h contain some 25 percent of farm families, farmers have access to seasoncil and medium-term crediLt. Outside the project areas, the inputs are paid for in cash. An identical system of agricu:Ltural extension is followed in bot:h project and non-project areas, the only difference being the much lower intensity of effort in non-project areas owing to financial and staffing; constrain,ts (see para. 2.10). Crop Authorities 3.10 The production of good quality flue-cured tobacco for export requires exacting standards of field operations which, in turn, necessitate consilerable organization and discipline on the part of growers. To integrate a group of smallholders into flue-cured tobacco production, the smallholder flue-cured scheme was started at Kasungu in 1968 under the supervision of the Kasun U Flue-Cured Tobacco Authority (KFCTA). Smallholders now produce 760 shor: tons of flue-cured tobacco. The KFCTA sells directly to the auction flcor so the farmers get the full auction price net only of small charges for transport to Lilongwe and handling. Moreover, the KFCTA manage!s growers closely, organizing settlement and paying settlement allowance, supervisting operations and extending credit. Consequently, yields equal those of be:ter estates. 3.11 Tea is essentially an estate crop but about 3,700 smallholders grow tea, almost all of them under the supervision of the Smallholder Tei  - 17 - Authority (STA). The STA supervises planting and operations of growers, provides credit, pays them establishment allowance makes their tea at its own factory or arranges for processing in estate factories and markets it. Coffee is a minor crop. A few hundred smallholders presently grow coffee on about 1,300 acres in northern Malawi. Production has been declining steadily over the past two decades owing to low producer prices and a host of institutional problems, but is being revived now under the supervision of the newly-formed Smallholder Coffee Authority. (For detailed discussion of crop authorities, please refer to paras. 3.25-3.27, 3.67-3.74 of Appendix 1.) IV. CROPS--PERFORMANCE, PROFITABILITY AND POTENTIAL Flue-Cured and Burley Tobacco (Estate Tobacco) 4.01 Tobacco estates can be divided into three groups. The first group comprises the two giant Press Holding subsidiaries--General Farming, Ltd. which grew 9,022 acres of flue-cured tobacco in 1978 and Press Farming, Ltd., which grew 7,907 acres of burley tobacco in the same year. Both have access to the best managerial talent available and to financing from INDEBANK and the two commercial banks. The second category consists of older well-estab- lished tobacco estates owned by Malawians and expatriates having professional expertise or hired professional management. The third category is made up of newer and smaller estates (generally 100 acres or less) run by relatively inexperienced farmers who obtain leases on customary land, get all their financing from commercial banks and manage their own farms. Regardless of size, flue-cured tobacco estates operate with hired labor while burley tobacco estates generally work on a tenant system (see para. 3.02). 4.02 Tables 9 and 10 give the changes in acreage, output, yields and realized average prices for flue-cured and burley tobaccos over the last 20 years. Acreage under tobacco estates stagnated in the fifties and sixties but began to expand rapidly in the early seventies. This expansion of estate tobacco land coupled with gradual improvements in yields resulted in a 20.5 percent annual growth rate for flue-cured tobacco and an 8.1 percent annual growth rate for burley tobacco between 1970 and 1978.  - 18 - Table 9: MALAWI TOBACCO STATISTICS - FLUE-CURED PRODUCTION AND AVERAGE PRICE * 1956 to 1978 Production Value Average Year lbs. K Tambala/lb. Acreage Yield/Acre 1956 4,089,954 785,516 19.20 8,200 499 1957 2,989,301 678,746 22.70 5,900 507 1958 2,177,827 410,232 18.83 4,900 444 1959 2,227,368 528,890 23.74 3,400 655 1960 2,934,326 806,386 27.48 3,300 889 1961 2,317,633 549,290 23.70 3,637 637 1962 2,604,781 713,500 27.39 3,179 819 1963 2,666,614 737,324 27.65 3,206 832 1964 2,709,193 618,218 22.82 2,900 934 1965 2,715,640 737,326 27.15 2,846 954 1966 2,704,365 852,940 31.53 2,943 919 1967 4,040,383 1,746,554 43.22 3,972 1,017 1968 6,060,679 2,177,518 35.92 5;5:36 1,095 1969 6,109,959 2,409,828 39.44 6,950 871 1970 10,308,160 3,912,550 37.95 9,773 1,055 1.971 14,129,314 5,816,444 41.17 14,338 985 1972 19,066,630 7,710,909 40.44 17,592 X,085 1973 22,025,039 12,913,601 58.63 19,494 >.,130 1974 23,195,125 15,666,926 67.54 23,451 989 1973 CROP _/ 2,979 641 20.61 - - 1975 32,846,436 19,331,872 58.86 26,386 I1,244 1976 35,648,538 23,907,065 67.06 32,010 I.,114 1977 43,177,444 33,717,103 78.09 37,851 l.,141 1978 45,967,015 35,708,520 77.68 43,3C5 1,1061 1/ 1973 crop sold in 1974. S ource: Tobacco Control Commission, 1979.  - 19 - Table 10: MALAWI TOBACCO STATISTICS - BURLEY PRODUCTION AND AVERAGE PRICE, 1956 TO 1978 Production Value Average Year lbs. K Tambala/lb. Acreage Yield/Acre 19z6 2,271,718 433,230 19.07 5,700 399 1957 2,168,556 633,400 29.20 5,200 417 1958 3,200,582 609,222 19.03 7,500 427 1959 2,743,855 509.128 18.55 5,500 499 1960 2,920,830 796,528 27.27 5,900 495 1961 3,553,997 724,788 20.39 8,400 423 1962 3,937,446 1,068,102 27.12 7,641 515 1963 4,469,771 1,108,026 24.78 8,307 538 1964 4,698,711 934,464 19.88 10,900 431 1965 5,765,890 1,125,782 19.52 8,764 658 1966 5,335,159 1,087,238 20.37 7,800 684 1967 5,874,333 916,922 15.60 9,101 645 1968 6,672,956 1,675,498 25.10 7,610 877 1969 7,631,898 2,819,906 36.94 10,074 758 1970 12,510,238 3,551,168 28.38 13,899 900 1971 12,489,809 2,981,453 23.87 18,105 690 1972 12,022,546 3,029,461 25.20 16,135 745 '1971 CROP 1/ 418,033 86,372 20.66 - - 1973 12,513,958 4,589,695 36.68 16,239 771 1972 CRoP 2/ 813,177 200,846 24.70 - - 1974 11,764,930 5,841,342 49.65 16,829 699 1973 CROP 3/ 78,791 5,467 6.94 - - 1975 17,629,963 7,462,384 42.33 17,660 998 1974 CRoP 4 453 134 29.58 - - 1976 14,549,268 6,821,058 46.88 21,588 674 1977 22,421,529 13,969,693 62.30 21,403 1,048 1975 CROP S/ 1,050 428 40.74 - - 1978 23,332,318 12,247,870 52.49 26,135 893 1/ 1971 crop sold in 1972'. 2/ 1972 crop sold in 1973. 31 1973 crop sold in 1974. 4/ 1974 crop sold in 1975. 51 1975 crop sold in 1977. Source: Tobacco Control Commission, 1979.  - 20 - 4.03 The advantages of appropriate soi:L and climate and cheap labor (see para. 2.02) enable Malawi to be highly competitive in producing top qua ity tobacco for the world market. The key factors in realizing this potent:.al are first, good management and second, availability of credit. 4.04 With respect to the two giant Press Holding subsidiaries, General Farming had a return on shareholder equity of 5.8 percent and Press Fariliag 39.9 percent in 1978. The 1978 figure for General Farming is exceptionQ.lly low since its average return for the previous three years was 31.1 percint. Previous years' returns were not available for Press Farming. Then there is a second category of medium-sized but well-established estates run by expitriates or Malawians with hired professional expertise. A National Statistics Cf.Eice (NSO) survey shows that 55 such estates with annual sales in excess of K 100,000 in 1975 had an average return on shareholders equity of 24 percent. For 50 such estates in 1974, the return was 30 percent. Detailed financial data on one of the estates in the NSO sample (which we call Estate A) showed returns on equity of 23.4 percent, 19.6 percent and 30.2 percent in 1975, 1976 and 1977, respectively. No aggregate financial data was available for the smaller estates of generally a hundred acres or less. While some of these estates are quite successful, many others incur large losses, particularly in the first few years of establishment. The overall picture of 1tobacco estate efficiency is that the estates can be and usually are highly preofitable if a good manager is put in charge and the initial capital obtained at reason- able rates. The financial data for larger tobacco estates is shown in table 11.  Table 11: PROFITABILITY OF LARGE TOBACCO ESTATES IN MALAWI Total Total hlet Profit Share- Return on Net Return- Tobacco Tobacco After holders Share- Fixed on Acres Sales Taxes Equity lholders Assets Net Fixed Estate Planted (K'000) (K '000) (K'OOC) Equ I ty(W (K&000) Assets(%) 4/ General Farming, Ltd. (Flue-Cured) - 1978 9,022 8,103 271 4,419 5.8 8,888 3.5 - 1977 7,930 8,110 1,130 4,648 29.6 7,847 18.3 - 1976 6,380 5,951 910 3,814 40.7 6,171 14.8 - 1975 4,710Q 3,890 478 2,234 23.1 3,400 19.4 - 1974 3,200 2,739 662 2,066 UI/A 2,465 N/A Press Farming, Ltd. (Burley) - 1978 7,909 3,840 319 820 39.9 1/ 1,931 16.5 1/ - 1977 8,021 5,401 1,150 801 1/ N/A N/A N/A - 1976 N/A 2,590 219 Nt/A N/A N/A N/A - 1975 N/A 2,779 398 N!/A N/A N/t N/A Burley Estate A - 1977 2,156 3,043 853 3,724 30.2 339 266.6 - 1976 2,037 1,673 485 2,828 19.6 320 146.3 - 1975 3,104 2,004 449 2,478 23.4 1/ 332 129.3 1/ 55 estates - 1975 2/ N/A N/A 2,525 1/ 10,512 24.0 5/ 10,079 25.1 5/ 50 est.ates - 1974 2/ N/A N/A 2,627 1/ 8,743 30.0 5/ 7964 33.0 5/ 1/ Estimated. 2/ Flue and Burley estates with overK 100,000 sales as reported to the National Statistical Office. 3/ Calculated on Shareholders Equity for the prior year, i.e., General Farming 1978 per cent of 5.8 is 1978 Net Profit over 1977 Shareholders Equity- 4/ Calculated on Net Fixed Assets for the prior year. 5/ Both snumerator and denominator are for the same year. N/A: Not available. Note: Net fixed assets for the Burley Estate A are 50% depreciated. It is not otherwise known why returns on net fixed assets are so large. Source: Company Records and NSO.  - 22 - 4.05 To determine how changes in yields, prices of tobacco, prices o:: imported inputs or field wage rates would affect the profitability of Malawian tobacco estates, we carried out a sensitivity analysis of the estates' rel:urn of shareholders' equi.ty by changing these variables. In table 12, return on shareholdlers' equity in 1977 for General Farming and Estate A was reassessed on the basis of five changes in income and expenses: (a) 20 percent incre~ase in yield per acre; (b) 20 percent increase in sales price; (c) 20 percerit decrease in sales pri'ces; (d) 100 percent increase in field la'bor wages, ind (e) 50 percent increase in the pr'ce of imported inputs. Table 12: SE;NSITIVITY ANALYSIS OF TOBACCO ESTATES' RETURN ON SHAREHOLDERS' EQUITY IN 1977 General Farming Estate A (flue cured') (burley) Actual Return on Shareholders Equity 1/(%) 29.6 30.2 (i) With 20% Increase in Yield/Acre 45.4 38.9 (ii) With 20% Increase in Sales Price 53.0 43.0 (iii) With 20% Decrease in Sales Price 0.6 19.1 (iv) With 100% Increase in Field Labor Wages 2/ 18.3 29.7 (v) W:Lth 50% Incresase in Price of Imported Inputs 13.5 29.9 _/ Table 11 above. 2/ Minlmum wage rate net of fringe benefits. Source: Mission estimates based on eistate records. For both firms, changes in the sales prices have a very significant imptict on the returns. For General Farming, a 100 percent increase in wages hXIs less effect on profitabil:Lty than a 50 percent increase in fertilizer and otljer inputs. This is accounted for by the fact that the firm makes substant:'a:L use of fertilizer and other chemicals and that a large portion of emplo:;eB benefits is received in kind. An increase in wages makes little impact oa the burley tobacco estatie because it uses t,enant: growers and buys their prodlu:t at a fixed price. Thus its direct wage expense is low. 4.06 Fuelwood is in increasingly s'hort supply in Malawi, presentinji a problem for the production of flue-cured tobacco. Under the prevailing technology, it is estimated that a sustained yield from two to four acri.s of  - 23 - timber are needed for every acre of flue-cured tobacco. Most large estates have reforestation programs included in their investment plans but smaller estates which now rely on the available bush timber would soon have to start planting their own woodlot. 4.07 The production of flue-cured tobacco and burley tobacco is proj- ected to increase from 23,000 short tons and 11,700 short tons in 1978 to 38,400 short tons and 18,100 short tons in 1990, respectively (see table 13). The acreage assumptions are based on the Tobacco Control Commission-s proj- ections of future investments by estates. It is expected that the overall expansion of acreage would level off as the growing scarcity of land, credit and managerial talent weed out more inefficient growers. The flue-cured tobacco acreage will stop growing sooner (1983) than the burley tobacco (1987) because flue-cured tobacco production requires additional land for fuel wood. The expansion that is envisaged will come from larger and better established estates more able to tide over the tight credit situation with their own internally-generated funds. The yield growth assumption of 1.7 percent per annum for both tobaccos is conservative considering that the flue-cured and burley tobacco yields have grown at the annual compound growth rate of 2.5 and 3.6 percent respectively between 1960 and 1977. Table 13: PROJECTED INCREASES IN FLUE-CURED AND BURLEY TOBACCO PRODUCTION =------- Flue-Cured -------- ---------- Burley ---------- Acreage Yield Production Acreage Yield Production (lb/acre) (short ton '000) (lb/acre) (short ton -000) 1978 43,305 1,061 23.0 26,135 893 11.7 (actual) 1979 46,173 1,107 25.6 28,500 906 12.9 1980 49,040 1,152 28.2 30,000 919 13.8 1981 52,693 1,158 30.5 30,411 936 14.2 1982 56,346 1,164 32.8 30,828 954 14.7 1983 60,000 1,169 35.1 31,250 972 15.2 1984 60,000 1,175 35.3 31,678 991 15.7 1985 60,000 1,180 35.4 32,112 1,010 15.7 1986 60,000 1,199 36.0 32,552 1,027 16.7 1987 60,000 1,219 36.6 33,000 1,045 17.2 1990 60,000 1,280 38.4 33,000 1,098 18.1 Source: Mission estimates based on information provided by the Tobacco Control Commission.  - 24 - Tea 4.08 Malawi was the first country in Africa to grow tea on a commer- cial scale. Since the pioneering days of the early 1900s, the industry has grown to 26 well-established estates in 1979, all but three owned by lJK firms. As of 1976, the latest year for which tea industry data is available, these 26 estates grew 98 percent of the green-leaf tea in Malawi and processed 100 percent of green-leaf tea produced in Malawi. The remaining 2 percEnul: is produced by the Malawi Smallholder Tea Authority which was established in 1964 (see para. 3.10). The primary strengths of the tea industry are a cheap and plentiful supply of labor, its established position in overseas markets and Malawi's political stability. The principal weaknesses are the difficulties of transportation to ports and the long-term declining trend in the real prices of tea in the world market. 4.09 All the tea in Malawi is grown in the Mulanje and Thyolo areas because oE the higher and more evenly distributed rainfall and high altitudes there. Table 14 below shows mature tea acreage and made-tea production over the past ten years. During this period, there has been a steady in- crease in productivity. According to the tea association, Malawi now has one of the highest yields in the world, and yields could reach as high as 2,700 lbs.,/acre largely by switching to "coarser plucking." In the tea industry, "fine pluck:ing" is defined as plucking two leaves and a bud. There is now a tendency to move towards a coarser standard of three and a half and more. The effect on quality of reducing the plucking standard is more than compensated for by the increase in output. Table 14: MADE-TEA PRODUCTION Mature Area Production Yield Yield Index Season (hectares) (lb. '000) (lb./acre) (1964=100) 1957 21,665 20,460 944 93 1967 31,010 34,016 1,097 108 1968 32,865 36,557 1,112 109 1969 33,920 37,149 1,095 108 1970 34,675 37,684 10,868 107 1971 35,380 42,493 1,201 118 1972 36,023 45,294 1,257 124 1973 36,838 47,399 1,287 127 1974 37,433 53,678 1,434 141 1975 38,253 54,998 1,438 141 1976 38,940 63,162 1,622 160 Source: The Tea Association.  - 25 - 4.10 The industry made a modest average after-tax return of 13 percent on capital employed (shareholders' equity plus long-term debts, if any) from 1973 to 1976 but returns have varied greatly within the industry. Return- after taxes on fixed assets averaged 13.3 percent over this same period. Table 15 shows the profitability of the tea industry from 1973 to 1976. 4.11 The Malawi Tea Association points out that the total industry profit figures can be considered inflated because the tea estates have been established since colonial times. The book value of capital employed is, therefore, much lower than present day costs of establishing a similar Table 15: RETURNS ON CAPITAL EMPLOYED AND NET ASSETS IN MALAWI TEA INDUSTRY, 1973-1976 1973 1974 1975 1976 Profits After Taxes (K '000) 1,684 3,232 3,897 3,818 Capital Employed (K '000) 23,227 24,980 26,697 30,875 Profits After Taxes to Prior Year Capital Employed (x)1/ 8.1 13.9 15.6 14.3 Net Fixed Assets (k '000) 22,464 24,213 26,233 28,747 Profits After Taxes to Prior Year Net Fixed Assets (%) 8.1 14.4 16.1 14.6 Dividends to Capital (%) Employed 1.3 8.4 9.4 7.6 1/ Includes Shareholders' Equity and Long-Term Debt. The latter is believed to be minimal. Source: The Tea Association.  - 26 - estate from scratch and bringing its acreage to maturity. In 1976 book value of capital employed in the industry was K 30.9 million. Reevaluated at present day costs (end of 1976 season) this figure is estimated by thle tea association to be K 86.7 million. Industry profits after taxation divided by this present day capital employed figure would average 4.4 per- cent from 1973-1976. Therefore, the tea industry is not sufficiently prl'oit- able for establishing new estates because of the greatly increased cost of- preparing the land, planting the trees and bringing them to maturity. 4.12 A sensitivity analysis for the tea industry as a whole and the: i-our tea estates that returned the questionnaire distributed by the Bank mission is given in table 16. Return on shareholders equity was reassessed on the basis of the same five changes in revenue and expenses as applied to the tobacco industry (see para. 4.11 above). This analysis shows that for the years given there is a great deal of capacity in the tea industry to absorb adverse events and still remain profitable. Tea estates A, B, C, and D show higher returns on shareholders' equity than the industry as a whole large]y because the initial equity required for estate development was made in co:.onial times when costs were much lower. In 1975 and 1976, the industry averaged 15.0 percent return on capital employed. Even with a 20 percent decrease in sale prices or 100 percent increase in field labor wage rate, returns fall to no lower than about 5 percent for the industry as a whole. 4.13 The tea association projects an annual compound growth rate of six percent per year in total output produced and four percent per year in yields through 1990 as shown in table 17 below. The yield projections by the association appear possible given that in the past yields grew at about 3 percent per annum and given the potential for raising yields from the present level of 1,600 to 2,700 lbs. per acre. However, the newly planted area is expected to expand only minimally owing to a shortage of suitable tea land and the high cost of establishment. Sugar 4.14 Until 1970, Malawi was a net importer of sugar. Following suciess- ful sugarcane trials in 1966-67 in the Shire Valley, SUCOMA (Sugar Cor- poration of Malawi) was established on 23,329 acres with a sugarcane proluc- tion potential of over 890,000 short tons of sugarcane, yielding 104,000 short tons of sugar and some 37,000 short tons of molasses. In April, 1