Tobacco merchants and contractors have established a cartel which is conniving on tobacco prices on the market and the manipulated system has allowed them to dictate prices, it emerged this week.
The tobacco marketing season kicked off yesterday.
According to an investigation by Business Times, the cartel with the help of powerful politicians, has established a significant presence on the domestic market and are colluding to keep the prices of the golden leaf low.
Well-placed sources in the sector said some buyers recently met the Minister of Finance and Economic Development, Mthuli Ncube and the Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya.
It is understood that the cartel, which has direct control or influence in the sector, gave conditions to the fiscal and monetary authorities including maintaining the foreign currency retention levels at 60%.
The cartel threatened to hold on to their green back or take their cash to other countries in the event that the government does not accede to their demands, sources said.
Merchants have mobilised bout US$600m to purchase tobacco.
The farmers who have suffered massive losses in the past few seasons, however, wanted the central bank to review upwards the threshold to 80%, something which they said would boost production.
But, the RBZ has stood its ground.
This has left tobacco farmers languishing in debt with most of them now living on the margins.
“The monetary authorities know exactly that low forex retention threshold is destroying the tobacco sector but they don’t want to review it because they know that a lot of powerful people are benefiting from it and the 40% balance which is liquidated to local currency at the official rate which does not allow farmer retooling,” said one source.
“We can’t blame Mangudya in that game as he is just a pawn in the bigger game. Instead some powerful politicians in the government just bark some instructions to the governor to make such pronouncements [60:40] so that they can enrich themselves at the expense of the tobacco farmers. We understand that towards the end of February merchants met top officials in government.”
Mangudya wrote a letter to farmers informing them of the decision to peg the retention level at 60% for the 2021 tobacco marketing season.
He however, sidelined the regulator, the Tobacco Industry and Marketing Board (TIMB).
TIMB chief executive officer, Andrew Matibiri, told Business Times this week that the RBZ did not officially communicate the retention levels to the regulator.
Matibiri said the monetary authorities should incorporate all stakeholders so that they can factor in all submissions and come up with an accommodative position.
“We are the ones who face farmers directly hence we should be in the know of how things are going on,” Matibiri said.
“People should not blame us on the retention issues as things are communicated through the Reserve Bank and the Finance and Economic Development ministry that come up with some guidelines to be followed. We are just told what has been gazetted.”
Zimbabwe Tobacco Association chief executive officer, Rodney Ambrose, said tobacco growers have engaged the central bank on forex retention on several occasions but to no avail.
“Year in year out, we have engaged the RBZ governor, Mangudya, for a review of the forex retention levels to sustainable levels but all negotiations and persuasions have not brought results,” Ambrose said.
Now, the tobacco farmers are in a fix.
It is understood that local tobacco farmers will get a paltry US$150m from the expected US$600m this season which kicked off yesterday amid revelations that rising United States denominated debt burden owed to contractors and merchants is choking the sector.
Of the US$150m, farmers are going to get US$90m in United States dollars and US$60m in the local currency at the official rate through a 60:40 ratio. This means farmers would lose about ZWL$2.2bn through forex exchange losses.
Impeccable sources told Business Times that subdued tobacco performances were a result of the unfriendly forex retention policies that strangled the debt-ridden farmers.
To exacerbate the situation, the contractors and merchants, who have extended lines of credit, started to deduct their dues at the auction floors yesterday. The situation could see some tobacco farmers taking home negative balances as some debts are carried forward.
Farmers’ output, they said, have not been creating sufficient returns to repay the loans in full and at least take home something significant.
Most farmers, who have been over relying on borrowing, said they can no longer carry the debts, which are spiralling out of control.
The dire situation has threatened farmers’ viability, a situation that has pushed most tobacco farmers to the edge.
Farmers say the debt levels are now unsustainable with some having ballooned to critical levels.
Zimbabwe’s tobacco farmers have threatened to dump growing the golden leaf due to viability challenges. This will threaten one of the country’s top foreign currency earners.
RBZ promised that farmers will get US$1,000 per day.
Instead, Matibiri said RBZ should consider giving cash to farmers so that they can buy inputs.
“RBZ should start cash payments to tobacco farmers so that they can easily get their physical US dollars and Zimbabwean dollars and with cash at farmers’ disposal they can easily purchase inputs,” he said.
Matibiri wants tobacco growers to be treated the same way as the gold miners who get cash on the spot.
It is understood that at least 40 buyers/contractors have been approved by the TIMB for this season.
A significant number are middlemen buyers/contractors for the larger companies, who remove value from the tobacco bought from farmers.
With low retention levels down, side marketing is likely going to affect this year’s selling season as most farmers will divert their crop to avoid the retention issues, experts say.