We need to plan for the tobacco crop carefully

24 Jun, 2022 - 00:06 0 Views
We need to plan for the tobacco crop carefully

eBusiness Weekly

The dramatic rise in the cost of farming inputs, partly the result of the global economy recovering from the downturn generated by Covid-19 and more significantly by the conflict in Ukraine considering that Russia and its neighbours are major suppliers of fertiliser and fertiliser components, needs to be addressed.

While rising costs of producing the stuff we eat and consume in Zimbabwe can be sorted out, since the Government sets the floor prices and GMB and Cottco cotton prices, so higher production costs can be translated into higher producer prices and, unfortunately, higher consumer prices, tobacco is a special case.

Almost all Zimbabwean tobacco is exported, since if we smoke one percent of what we grow we are puffing hard.

And if anyone has any idea what the world tobacco prices will be like in nine months time, since most of the global export crop comes from Southern Hemisphere producers, they have a very good crystal ball.
Fertiliser availability is not likely to be dramatically affected in the majority of the world, since all official and unofficial sanctions against Russia are purely western. While production and exports from Ukraine itself are likely to be seriously affected, Russia and Belarus are not affected by any conflict.

But if there are global fertiliser shortages then you do not have to believe in conspiracy theories to guess that at least some in the anti-smoking and anti-tobacco lobbies will be suggesting that available fertiliser should be used for food crops, and that would be the case even in Brazil and the USA where they make their own fertiliser.

One potential problem for Russia and Belarus could be transport for bulk products, since a swathe of Black Sea ports and part of the Black Sea itself are affected, and these ports, being ice free throughout the year, are an important route in and out of Russia for trade. But the eastern Black sea ports are still fully functional, even in the Russian winter.

But prices are rising along with the prices of petroleum products, since natural gas is the major source of raw materials for ammonia production and complex transport routes will also add to costs.

It is likely that as global prices rise the private fuel and fertiliser manufacturers in the USA and Brazil, two other major tobacco growers, will keep pace. So all major tobacco growers, those who pump their own oil and make their own fertilisers and those who do not, will be faced with roughly the same percentage rise in input costs. This means that tobacco prices are likely to keep pace with rises in global rises in input costs.

One particular problem for Zimbabwe is that much of the capital for each tobacco season is offshore. So a lot depends on whether the main contractors and main buyers on the auction can access enough.
Of particular concern to Zimbabwean farmers are the contractors since they finance almost all the crop and they need to access enough to cope with the new requirements.

As the Zimbabwe Tobacco Association ha made clear, if the amount committed to contract farmers is kept constant then the hectarage planted will fall significantly. The only way to plant the same number of hectares is to spend more, and that is going to be critical.

Fortunately a lot of factors reduce the risks.

The Zimbabwean tobacco industry is well managed and well regulated. Cheating is minimal, the farmers can produce even in dubious seasons because they know what they are doing and close on half the final export earnings come from the processing, the make-up of specific type orders, the insurance and transport, and these are less at the mercy of global forces than the actual farming.

But this still leaves the growers and their viability, and this goes beyond the financing they need for their crop.

There are other expenses involved beyond he inputs, such as machinery maintenance and replacement, transport and labour, and all of those are also rising with global inflation, even if you have US dollars in your nostro account to cope with Zimbabwean inflation, and the rise in the percentage growers were paid in US dollars makes that decision critical now.

It was vital if we are to keep growers in the industry.

The Zimbabwe Tobacco Association are bringing in other factors, principally the four percent transaction tax when growers access their nostro accounts. But this needs more than just complaints since it is unlikely the Ministry of Finance and Economic Development is going to fuss much about people having to pay tax. No one wants to pay tax.

The increase is two percent, and while holders of foreign currency accounts might feel it is unfair to charge them more than holders of local currency accounts, it is unlikely to be a major factor in their viability, nothing like the 20 percent plus rise in costs of petroleum products for example.

But if the Zimbabwe Tobacco Association calculates, and it needs calculations, put farmers on the edge then they need to share those calculations and the sums need to make sense, not just be vague estimates. It would also be useful of the association could bring in the Confederation of Zimbabwe Industries and the Chamber of Mines to share any calculations they may have done.

In one sense those farmers who rely on inputs, directly or through guarantee, from the Government are in better shape, or at least not living in so much uncertainty, since the Government has made it clear that the national policy is to have producer prices that generate a fair profit for the average farmer.

At least they know they can get inputs and at least they know that so long as they can grow the grain or cotton they can make a profit.

During UDI tobacco farmers were in the same boat. Tobacco sanctions were harsh and the loss of the largest market then, the British market was a major blow.

Quite correctly the global community reckoned that without tobacco exports the settler regime was finished, and the sheer scale of the crop meant that exports could not be relabelled as coming from South Africa and Portugal as was done with a swathe of other products.

So the regime took over the crop. Output was cut, through a quota system until the rising tide of the liberation war forced enough settler farmers off the land, but nothing like what was expected by those imposing the sanctions.

The Government basically bought the entire crop, at a price that kept farmers viable, and then organised secret sales and barter deals.
There must have been a significant input from the tax payers, certainly to stockpile unsold tobacco, but again not as much as was expected.

The regime was helped by its adoption of Soviet type currency controls. All foreign currency was held by the State, with a spell in jail for anyone else trying to hang on to a bit, and each import had to be individually approved.

This meant the exchange rate, a fake figure if ever there was one, could be set by decree. Having the brick wall between local and foreign currencies made that possible. It helped short-term growth but wiped out long term growth.

But it could be possible to at least use the price guarantee part of that atrocious system if the worse came to the worse and global tobacco prices did not rise as much as global inputs costs.

This would be called an export subsidy obviously but even the possibility that it could be put in place might calm down those who finance the crop, by reducing the risks.

The whole global fertiliser crisis in costs, and perhaps availability, also adds more urgency to the pressure already being exerted by President Mnangagwa and his industrial ministers.

If we were self-sufficient in fertiliser then obviously we would at least know fairly precisely what they production costs were, and after putting in the necessary mark up for capital costs and expansion, we would be able to do some more accurate financial calculations, and that would apply for all crops.

We might not need to make decisions yet on what we do if disaster strikes the industry, but we possibly need to start having the planning put in place on the options, and the potential cost of each option, so that we know what we can do if our largest single export is hit.

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