eBusiness Weekly
Tobacco marketing starts in 18 days on March 8 when the auction floors open, although the deliveries to contractors, who handle 95 percent of the crop, start a day later.
The very good rains seen this season have pushed estimates of the crop as high as 260 million kg, although more conservative estimates reduce that somewhat, but still expect the largest ever crop to be sold for the highest-ever total price. The good conditions also give promise of a quality boost, along with the ever-growing experience of most farmers.
So overall tobacco will be very important both to the farmers and merchant houses, as well as to Zimbabwe as a whole. While the value of the crop continues to grow each year, tobacco makes up an ever falling percentage of exports as total mining exports grow far faster, but tobacco remains the most important agricultural export by far, and even if its percentage of export earnings is now below 15 percent it is still a crucial input to the overall balance of payments.
Last season there were a number of problems with some contractors, which the Tobacco Industry Marketing Board, TIMB, has been trying to sort out. A standard minimum package of inputs was put together, to avoid the problem that some contractors expected some farmers to do a lot more self-financing than they could afford.
But the TIMB is going to have to be more active as marketing starts to make sure all contracts and all rules and regulations are enforced, fully. Some contractors have, in the past, delayed payments or part of the payments after farmers deliver. Contracts normally have the payment terms set out as precisely as the input and growing terms, and the TIMB must enforce these, if necessary taking action against delinquent contractors.
At the same time the menace of side marketing has to be eliminated. This is not a major problem in tobacco farming, largely because everyone in the industry is licensed by the TIMB and all details are in the TIMB database. But it apparently exists and the TIMB and other authorities need to be actively on the alert.
Anyone outside the system buying tobacco they have not contracted for still has to sell that tobacco, and that would normally require a contractor or merchant to fiddle their books to show that more tobacco was delivered than was actually delivered. There is also the possibility of a major licensed farmer fiddling their books to show higher yields than were obtained, the balance being side-marketed tobacco bought cheaply and sold in the auctions for a large profit.
There must be other ways of cheating and these can be countered, with good inspections and good auditing of records. Side marketing involves two people, the seller, who is farmer selling outside the contract, and the buyer, and any action must go after both. The TIMB has suggested it will be arranging roadblocks and have its own inspectors at these.
Since the farmer has to be licensed, and has to have a valid delivery booking at a given auction floor or contractor, needed to ensure the amount delivered each day matches the capacity of the receivers so we do not see 1000 trucks parked overnight outside a delivery point, everything is in or should be in the TIMB database, and punching a few keys on a tablet should confirm the honest delivery within a couple of minutes.
The tobacco industry underwent a revolution after land reform, moving from a couple of thousand major growers to many tens of thousands of growers ranging from the smallest-scale grower planting less than 1ha all the way through a range of small-scale and medium-scale growers to a small number of large-scale growers. The concept of a self-financed and self-regulated industry was retained, although the Government does hover in the background to make sure that works.
There is no constituency arising that wants the TIMB abolished and some sort of free-for-all allowed in its place, but the TIMB has to justify its existence by insisting on the highest standards all round. It appears to have become a little flabby in recent years, although started exerting itself again last year, and now must do its job of enforcing contracts on both sides, and refereeing disputes in the fairest possible way.
There are several advances the tobacco industry now needs to address, particularly in financing. The fact that just 5 percent or less of tobacco is sold on the auction floors is worrisome. While auctions no longer dominate the markets, or even make a major contribution, they do set the pricing even when not all grades and types are on auction. So enough tobacco has to go to auction for fair market prices to be set; the present quantity can allow a couple of merchants with deepish pockets to fix prices.
So there is the need for more farmers to be self-financing. This would obviously have to be the larger growers, since they need to borrow at least some of their finance and banks need to keep their administrative costs as a small percentage of their total loan book.
Banks have retreated from farm finance, especially since land reform, and have closed a lot of small-town branches. Those used to provide banks with people on the spot who could go out a look the farms of those who borrowed money, not just before the season started but also ensuring tobacco was planted, tobacco was growing, tobacco was being cured and tobacco existed for delivery.
The other area where we need a lot more local finance is for the merchants and contractors. They tend now to borrow much of their finance off-shore. Merchants need finance since they are supposed to pay the farmers promptly, preferably on the day of delivery, and buy most of the crop within a fairly narrow two-month window. Yet they are selling during the whole year.
In older days a significant merchant banking sector grew up in Zimbabwe to cope with the problems of crop financing, especially tobacco. When we had, in effect, just three commercial banks although there were another two one-branch representative offices, there were around half a dozen merchant banks, much of whose money was used to finance agriculture and cover that gap between buying the crop and selling the crop.
Most of the money needed these days for traditional merchant banking has to be in foreign currency, and has to be around for longer, from the planting phase to the final delivery to the last end-user in some foreign land.
But there is a large source of foreign currency controlled in Zimbabwe and doing almost nothing, the longer term deposits within nostro accounts of net exporters, money that is not being used for imports or dividend payments or paying other bills.
Tobacco merchant banking appears to be a low-risk investment opening for a chunk of that cash, both in direct loans to suitable farmers and in the far larger sums required to back the merchants and contractors.
The first obvious group of farmers are those with access to irrigation, so removing climate and weather risk. Farmers with irrigation tend to plant earlier, but as the rains start falling switch from full irrigation to supplementary irrigation. In a good season even a farmer with irrigation probably uses rainfall for more than half their watering. But the point is that farmer’s output can be calculated very precisely, and so the risk is minimal.
But even at the merchant levels risks are low. Drought and dry spells can reduced crop yields, but the sort of areas that grow tobacco rarely suffer total drought, and even in bad years the yields, while down, are still reasonable as last year showed.
At the moment US inflation has risen, coming up close to 8 percent, yet those keeping their retained export earnings in a nostro account receive zero interest and have to just watch that inflation erode what they have locked away. So a low risk investment, for an almost pure export crop, Zimbabwean just smoking a few percent of what they grow, seems to be calling for the banking sector to put together a suitable package to borrow some of the nostro money and replace the off-shore banks now putting up the funding. This would benefit everyone and keep the money in Zimbabwe.
We have already seen the advantages of keeping money nearer the tobacco farmers as a result of the Covid-19 decentralisation. Small, and dying, towns like Karoi, Centenary, Banket and the like are now booming as farmers spend more money locally, and our commercial and industrial sectors rush to open branches in these towns. Market forces are rather good at linking people with money with people who have something worthwhile to sell.
Other businesses also boom, from builders putting in new or replacement barns, building better houses and coping with small-town expansion, to those who make at least the basic furniture and the like down the road from the farmers.
What we now need to do it complete the circle with the financing returning to Zimbabwe using Zimbabwean investment money so we get the total benefit.
