A long walk out of the woods

The Tobacco Industry and Marketing Board (TIMB) has woken from its deep slumber: the regulator will dump the current pricing system which depends on auction system to determine the contract price.

TIMB chief executive officer, Meanwell Gudu, said the new pricing matrix, which is work in progress, will address the concerns that have been raised over the years with regards to price distortions and price manipulation.

Gudu said the review of the pricing system is a recommendation from a study undertaken by the Competition and Tariff Commission (CTC) in 2016.

It has taken five years for the authorities to effect the recommendations. Year in, year out, tobacco farmers have been getting the short end of the stick from contractors and merchants with some going home with negative balances after the contractor had deducted their dues.

The challenges facing the golden leaf farmers emanate from their failure to access funding from banks leaving them at the mercy of contractors.

This has raised questions on the efficacy of the dual marketing system which was adopted at the turn of the millennium to resuscitate tobacco production after output had tumbled on the onset of the fast-track land reform programme.

Before the programme, tobacco farmers used the land as collateral to access funding from the banks.  Banks are reluctant to accept the 99-year leases as collateral.

This absence of local funding has seen merchants and contractors stepping in to fund the golden leaf.

The merchants and contractors have expanded their tentacles in the tobacco sector and official data shows that 95% of tobacco produced was marketed under contract and 5% under auction.

At the auction, the farmer has an option to withhold his or her tobacco if unsatisfied with the price being offered. This is unlike the contract floors where the farmer has to take the price given.

In June, the CTC urged TIMB to counter check mechanisms on the contract systems.

“One possible explanation for having higher average auction prices relative to contract prices might be due to failure by merchants to adhere to the Price Matrix as well as the exercise of market power by merchants in both 2020 and 2021,” CTC said.

It said the Covid-19 related travel restrictions contributed to low deliveries on the auction, diverting more tobacco to contract farming as the majority of farmers could not travel to Harare for the auction. This entailed that contracting merchants received some of the independently produced tobacco, which ideally should be sold via the auction.

This provided the environment for contractors to exercise their market power as farmers could not sell at the auction, CTC said. The government knows the problems bedevilling the tobacco industry but is taking long to act. Recently, the ministry of Agriculture said it would launch the Tobacco Value Chain Transformation Plan, which was expected to spell out how the administration would fund the troubled sector.

Experts say local farmers require local funding of about US$200m. As the government delays in launching the facility, contracting merchants have hit the ground running and have given farmers inputs. It is still a long walk out of the woods for tobacco farmers.

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