Commission wants new model for tobacco pricing

LIVINGSTONE MARUFU

The Competition and Tariff Commission (CTC) wants the tobacco industry regulator to dump the Price Matrix currently being used to determine minimum contract prices and come up with a new model that ensures farmers get fair prices from contractors, Business Times can report.

The Price Matrix is provided by the Tobacco Industry and Marketing Board (TIMB).

CTC said TIMB should promulgate regulations compelling all tobacco merchants to purchase a certain percentage of their requirements from auction floors as part of efforts to enhance competition.

Merchants stand accused of manipulating the golden leaf pricing at the floors thereby fleecing desperate farmers of millions of dollars.

CTC wants 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.

“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.”

The Commission said decentralisation of tobacco marketing in 2021, reinforced by travel restrictions, 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.

“It follows that it might have been a deliberate long-term strategy by tobacco merchants to eliminate the auction-marketing model, where competition is relatively intense as merchants compete based on market forces. This was through enticing farmers to switch to contract farming by offering high contract prices relative to the auction price,” CTC said.

CTC feared the manipulation of prices was part of tobacco merchants’ grand plan to render the auction system ineffective, given that 2021 concentration ratios were higher on the auction than under contract.

TIMB chief executive officer, Meanwell Gudu told Business Times that the anomaly of contract prices being lower than auction was characterised by high rejection rate at the auction floors.

“The fact that the rejection rate is higher on the auction floor means more tobacco will go to the contract but at a lower margin. The auction floors are strict with grades selection and the bale presentation therefore more bales are being rejected,” Gudu said.

“You can also see that the difference between the auction prices and contract prices are almost similar to the difference in average prices.”

He said onshore funding will correct the anomalies with the local funding framework on course.

The tobacco prices under the contract farming model are subjected to two factors which include the negotiations between the contractor and the farmer.

The other is the price matrix set by TIMB.

However, tobacco auction average price is currently at US$2.80 per kilogramme against US$2.71 per kg for the contract.

Business Times can report that tobacco buyers are also deliberately rejecting the bales from the self-financing farmers citing poor grading systems and baling techniques, resulting in some contractors convincing the desperate farmers to sell their golden leaf for pittance.

However, CTC raised the red flag over the forced switch from auction to contract marketing model by merchants using their bargaining power.

In this case tobacco merchants affect prices, marketing, procurement, hiring practices, or induce reactions among other firms that lead to market-wide changes in these variables as the tobacco is in the hands of the seller who cannot be perfectly substituted by another seller, the buyer becomes dependent on the seller.

The small scale tobacco growers are generally left with the only option of accepting or rejecting the contract making them vulnerable to receiving excessively priced inputs from contractors and lower prices for their produce.

The lack of bargaining power among small scale farmers is one of the factors that expose them to unfair contracts.  

This provided the environment for contractors to exercise their market power as farmers could not sell at the auction.

Official data obtained from TIMB shows that 95% of tobacco produced was marketed under contract and 5% under auction.

Experts said this does not make economic sense for the price of 95% of tobacco produced in the country to be dependent on the price of 5% of the produce.

According to TIMB, the rejected bales rose 31.18% to 72,029 bales during the 2021 tobacco marketing season from 54,907 bales in the same period last year.

The rejection rate at the auction stood at 14% against 2.63% reported for contract, a situation which tobacco merchants capitalised to divert auction farmers to contract, 

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