eBusiness Weekly
Enacy Mapakame
Biggest seed producer in the country — Seed Co Limited — says the continuing widening gap between the official and illegal parallel market exchange rate weighed on its operations during the half year period to September 30, 2021.
The group plunged into a loss for the period of $1,9 billion from a profit position of $3,1 billion in the same period last year.
Group chief executive officer, Morgan Nzwere, said in a performance update that gross margins dropped because of a huge increase in the cost of raw seed driven by the depreciating local currency.
There have been calls industry wide for monetary authorities to reign in on the glaring gap between the official and parallel exchange rates, now currently pegged at $108 and $220 respectively.
For Seed Co, the official interbank rate determines the group’s selling price while its costs are mostly determined by the parallel rate.
“The significant disparity between the official exchange rate which is the benchmark of Seed Co’s selling prices and the parallel exchange rate which is the benchmark of most of the group’s operating costs, including the cost of raw seed from growers, which have put significant stress on margins and business model viability.
“This mismatch is now further compounded by the increase in finance costs following the policy rate hike from 40 percent to 60 percent by the Reserve Bank of Zimbabwe announced on 28 October 2021,” said Nzwere.
The period under review was characterised by a harsh operating environment where effects of the Covid-19 pandemic, hyperinflationary pressures, liquidity challenges and acute foreign currency shortages in addition to the widening disparity between the auction and alternative market exchange rates had a negative impact on business operations.
For the half year period, Seed Co’s revenue jumped 43 percent to $2,1 billion compared to the same period in the prior year.
Nzwere attributed the growth to strong demand for winter cereals and early maize seed sales during the period, although the operating environment remained challenging.
“Despite the foregoing adverse conditions, the economy is still earmarked to grow by at least 5 percent in 2021 buttressed by the agricultural sector which bodes well for the group’s operations,” he said.
Maize seed sales volumes rose 46 percent compared to same period in the prior year.
An operating profit of $207 million was achieved during the period under review, representing a 66 percent decline from $610 million recorded in the comparable period.
For the half year period, operating expenses rose on the back of inflationary pressures and resumption of some activities, which had been suspended last year due to Covid-19 containment measures.
Net finance costs surged owing to the high interest rate environment further compounded by the rising debt levels.
Non-current assets went up mainly because of the capital expenditure incurred to complete the installation of the artificial seed dryer which was commissioned in September 2021.
Said Nzwere: “Furthermore, the investment in the foreign associate increased due to foreign currency gains on translation.”
Accounts receivables mainly arose from winter cereals sales most of which were settled after the reporting date.
Nzwere said the business will target to do summer sales on a cash basis to preserve value.
Borrowings increased due to delayed receipts from debtors and the increase in seed purchase costs and the group is aiming to use inflows from the main summer selling season to substantially reduce borrowings by year end.
According to Seed Co, the group’s field seed stock quantities delivered by growers were negatively affected by unfavourable weather at the tail end of the production season while most vegetable seed’s supply chain was disrupted by Covid-19 related logistical constraints.
However, Nzwere said despite these challenges, the group has sufficient stock to satisfy projected demand.
On research and development, the group is intensifying efforts to develop a solution to fall army worm tolerant germplasm in addition to other efforts for more seed varieties.
Said Nzwere: “Progress is being made on breeding of new sugar and soya bean varieties. The molecular laboratory is now being fully utilised in assisting in breeding efforts.”
