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Initial Considerations for the Creation of an Inter-Regional Industrial Hemp Value Chain Between Malawi and South Africa

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Initial Considerations for the Creation of an Inter-Regional Industrial Hemp Value Chain Between Malawi and South Africa A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Lowitt, Sandy Working Paper Initial considerations for the creation of an inter- regional industrial hemp value chain between Malawi and South Africa WIDER Working Paper, No. 2020/23 Provided in Cooperation with: United Nations University (UNU), World Institute for Development Economics Research (WIDER) Suggested Citation: Lowitt, Sandy (2020) : Initial considerations for the creation of an inter- regional industrial hemp value chain between Malawi and South Africa, WIDER Working Paper, No. 2020/23, ISBN 978-92-9256-780-4, The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki, http://dx.doi.org/10.35188/UNU-WIDER/2020/780-4 This Version is available at: http://hdl.handle.net/10419/229247 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu WIDER Working Paper 2020/23 Initial considerations for the creation of an inter-regional industrial hemp value chain between Malawi and South Africa Sandy Lowitt* March 2020 Abstract: Interest in industrial hemp has revived in the past 20 years. Malawi is considering legalizing the cultivation of industrial hemp as an alternative cash crop to tobacco with great potential. This study considers the potential and challenges of creating an industrial hemp value chain between South Africa and Malawi, with Malawi concentrating on upstream cultivation and South Africa on downstream value-adding activity. The research supports a finding that industrial hemp offers strong opportunities as a niche market even if mainstream demand is slow to materialize or does not materialize at all. It also shows that undertaking such an inter-regional endeavour would be considerably more complicated than initially envisaged, given the agricultural structure and operation of the Malawian economy and its smallholder farmers. Keywords: contract buying, industrial hemp, novel crop establishment, regional value chain JEL classification: D1, D4, O13, Q13 Acknowledgements: This working paper is part of Workstream 6 on Regional Growth and Development within the project Southern Africa—Towards Inclusive Economic Development (SA-TIED), a three-year partnership between UNU-WIDER and the South African government aimed at improving understanding of regional value chains and supporting industrialization in the Southern African Development Community (SADC) region. It is the first of two papers produced by Trade & Industrial Policy Strategies (TIPS) in Year Two of the project. TIPS acknowledges UNU-WIDER and the South African Department of Trade and Industry for their support. * Trade & Industrial Policy Strategies (TIPS), Pretoria, South Africa, [email protected] This study has been prepared within the UNU-WIDER project on Southern Africa—Towards Inclusive Economic Development (SA-TIED). Copyright © UNU-WIDER 2020 Information and requests: [email protected] ISSN 1798-7237 ISBN 978-92-9256-780-4 https://doi.org/10.35188/UNU-WIDER/2020/780-4 Typescript prepared by Joseph Laredo. The United Nations University World Institute for Development Economics Research provides economic analysis and policy advice with the aim of promoting sustainable and equitable development. The Institute began operations in 1985 in Helsinki, Finland, as the first research and training centre of the United Nations University. Today it is a unique blend of think tank, research institute, and UN agency—providing a range of services from policy advice to governments as well as freely available original research. The Institute is funded through income from an endowment fund with additional contributions to its work programme from Finland, Sweden, and the United Kingdom as well as earmarked contributions for specific projects from a variety of donors. Katajanokanlaituri 6 B, 00160 Helsinki, Finland The views expressed in this paper are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors. 1 Introduction Over the past two decades the Malawian government, donors, and scholars have (with increasing urgency) advocated for the diversification of the Malawian agricultural sector in general and, in particular, diversification away from the pariah crop of burley leaf tobacco. Given an argued pedigree in sustainability, environmental friendliness, increasing and sustainable global demand, and similarities with tobacco cultivation, industrial hemp has been considered a potential substitute (and superior) cash crop for Malawian tobacco farmers. Given also that the Malawian economy is dominated by its agricultural sector (30 per cent of gross domestic product (GDP) and 90 per cent of employment) and that it has thin domestic markets and a small and declining manufacturing sector (10 per cent of GDP and 4.5 per cent of employment), the idea has been mooted that a mutually beneficial regional value chain in industrial hemp between South Africa and Malawi could be developed. Malawian researchers, agronomists, and politicians believe that the legalization of industrial hemp as an agricultural commodity is imminent in Malawi. It is therefore possible that Malawi could cultivate, harvest, and undertake primary processing of an industrial hemp crop using knowledge and infrastructure currently used in the tobacco industry. Further, it is believed that South Africa could undertake secondary value-added production of primary and intermediate industrial hemp exports from Malawi. This division of value chain activities appears rational as industrial hemp cultivation, harvesting, and primary processing is labour-intensive, and Malawi has an agricultural wage rate advantage over South Africa. Similarly, South Africa’s capital base, spare capacity in several value-adding opportunities from industrial hemp feedstock, higher labour productivity and skills profile, stronger domestic markets, and a more health- and environment-conscious consumer base, all back the idea of exploiting downstream industrial hemp production opportunities in South Africa. This joint potential opportunity is somewhat supported by current legislative agendas and existing laws. The commercial-scale cultivation of industrial hemp as an agricultural commodity in South Africa remains prohibited, whereas in Malawi a Bill to study the potential of industrial hemp as an alternative cash crop was drafted and passed in 2015. As a result, two licences were issued to undertake further studies. These studies were completed in 2018 and a summary of the findings submitted to the Cabinet. According to the Principal Secretary of the Ministry of Agriculture, Irrigation and Water Development, ‘the Ministry is ready with the results but they cannot be shared with the public yet’ (Nyale 2018). Insiders suggest that the results will be positive. While South Africa is unable to cultivate industrial hemp, there are no restrictions on importing industrial hemp fibres or seeds (as long as they are sterilized). Stalks and leaves can be imported as long as they are partially processed. Therefore, while creating a Malawian–South African industrial hemp value chain is not yet a reality, it appears likely that the opportunity will—at least in principle—be realized sometime soon. This study considers the potential of the industry for both countries and the conditions and arrangements that need to be put in place to leverage the potential of industrial hemp into tangible commercial opportunities in Malawi and South Africa. It will be shown that such an endeavour would be considerably more complicated than initially envisaged and that substantial additional research (especially market research) would be required. The present research does, however, support a finding that industrial hemp offers strong opportunities as a niche market even if mainstream demand is slow to materialize or does not materialize at all. Given the current tobacco industry structure and market operations in Malawi, and given the processing capacity in South 1 Africa, there are no serious constraining factors to developing this potential value chain (assuming of course that Malawi does legalize the cultivation of industrial hemp as expected). Sections 2 and 3 consider demand-side issues. Section 2 starts with an introduction to the industrial hemp plant and its physiology, both in its uses and in its differentiation from its narcotic cousin marijuana. Section 3 focuses
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