Tobacco substitutability and its effect on producer revenue and foreign exchange earnings under smallholder agriculture in Malawi

Abstract

This paper analyses the effect of tobacco substitution on the welfare of smallholder farmers in Malawi and provides policy options within the agricultural sector for diversifying the Malawi tobacco-based economy. An ex ante biophysical economic modelling approach was used to analyse changes in consumer welfare, producer revenue and foreign exchange (forex) earnings under assumptions of continued and curtailed tobacco production in Malawi. When tobacco was curtailed, sugarcane and groundnuts offered the best substitutes, contributing over 60% to both producer revenue and forex earnings. The curtailing of tobacco, however, led to a consumer welfare loss of 3%, producer revenue loss of 44% and forex earnings loss of 73%. Forex earnings losses were averted, however, by increasing export markets of certain crops, e.g. sugarcane by a factor of 0.9. In view of tobacco market instabilities and mounting pressure to curtail tobacco production on the global level, these study findings may guide policy decisions on optimal tobacco diversification options for Malawi.