LIVINGSTONE MARUFU
The Tobacco Industry and Marketing Board (TIMB) has implemented a new grade pricing system that will promote competition and guard against price distortions and manipulation, Business Times can report.
The development comes at the time the Competition and Tariff Commission (CTC) was exerting pressure on TIMB to change its pricing regime to promote fair competition in the tobacco industry.
“In the past the price on the auction would form the basis for the minimum price. But now, we have come up with a grade pricing matrix which is the weighted average price of auction and contract and we look at what is higher and in this case its auction and that is what we are using to determine minimum contract prices,” TIMB chief executive officer Meanwell Gudu told Business Times.
Currently, the season’s average price is US$2.93/ kilogramme with auction at US$3.15 per kg against contract price of US$2.91/kg.
“As I speak now the price on the auction is higher than that on contract and there is a correlation between average price and rejection rate. The rate is as high as 12% at the auction floors and the rejection rate is around 1%.
“What happens is that at the auction the tobacco is normally badly handled and the buyer will reject it while at the contract the farmer will be given an option based on cost benefit analysis whether the farmer would want to take tobacco back to the farm or the tobacco will be sold at a discounted price so the farmer would go for the latter.
“The higher the rejection rate at the auction floor the higher the price and the lower the rejection rate the lower the price,” he said.
He said both contract and auction prices from the previous day are now used to determine the price for auction for that particular day.
Following a review of competition in the tobacco marketing sector study undertaken by the CTC in 2016 and a presentation made to industry stakeholders on the same subject, recommendations were presented to come up with a new pricing matrix.
TIMB appointed a consultant to develop this pricing model.
“If the board has started implementing the new pricing matrix it is good for the farmers and competition but they haven’t updated on that and we are still in the dark,” a CTC source said.
Gudu admitted that the tobacco merchants could be taking around 85% of the tobacco farmers’ earnings and the country could only benefit 15% from its tobacco.
TIMB has been pushing for local funding to increase farmers’ benefits and the country’s earnings.
However, the delays in launching the US$60m revolving fund raise a lot of dust on the government’s seriousness on tobacco local funding.
Zimbabwe’s tobacco has grossed US$582m with tobacco merchants taking around US$495m through the repayment of loans and prejudice.
Last year, CTC said merchants have too much power on farmers as they negotiate the price to their advantage thereby prejudicing the growers in the process.
“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,” CTC said.
The seller can exercise economic power by threatening to withhold the good and in this case, contract prices are determined through negotiations between the contractor and the farmer.
“But tobacco is a product that a farmer cannot withhold for a long period in order to exercise economic power as tobacco is a perishable commodity and requires huge investments in storage facilities to maintain a particular standard of quality, hence farmers fall prey to greedy merchants as the former have no capacity to negotiate with multinational contractors.
“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,” CTC said.
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.
CTC instructed TIMB to discard the use of the price matrix being used to determine minimum contract prices and introduce a new model that ensures farmers get fair prices from contractors.
“The board must promulgate regulations compelling all merchants to purchase a certain percentage of their requirements from auction floors as this will enhance competition leading to increased prices at the floors as well as offering a counter checking mechanism on the contract systems,” CTC said.
CTC said the collusion of prices by tobacco merchants created the environment for merchants to render the auction ineffective, given that 2021 concentration ratios were higher on the auction unlike under contract, but with higher producer prices above the contract, shows that there was more competition under the auction marketing model.
