LIVINGSTONE MARUFU
The new pricing system which was supposed to guide the 2022 tobacco marketing season could be delayed on lethargy by the regulatory body, Business Times can report.
The development comes after calls by the Competition and Tariff Commission(CTC) for the dumping of the current pricing system that depends on auction to determine the contract prices.
The system came under fire last year when the CTC said the old pricing regime led to price distortions and prejudice of farmers as tobacco merchants would restrict the auction system to determine the whole tobacco selling system.
From last year, the Tobacco Industry and Marketing Board (TIMB) started coming up with a new pricing system that promotes competition and benefits the farmers.
However, with less than two weeks before the season kicks off, the board is yet to come up with a new system with critics alleging that some chefs could be benefitting from the tobacco merchants’ well-coordinated pricing system.
But TIMB chief executive officer Meanwell Gudu remains optimistic about the new pricing system.
“TIMB is currently working on the recommendations from CTC with regard to pricing. The pricing model will be reviewed to come up with a more realistic pricing matrix that suits the current status quo,” Gudu said.
He said the board saw it prudent to change the pricing model as the auction system which accounts for 5% of the total sales should not determine the price ranges for the contract system which accounts for the majority of tobacco.
“Following a review of competition in the tobacco marketing sector study undertaken by the Competition and Tariff Commission in 2016 and a presentation made to industry stakeholders on the same subject, recommendations were presented to come up with a new pricing matrix,” Gudu said.
“For now we can safely say that the new pricing matrix is work in progress which is promising to address the concerns that have been raised over the years with regards to price distortion and manipulation.”
TIMB through an appointed consultant will now engage all stakeholders to develop possible alternative pricing models of tobacco on contract sales.
But the Commission is not impressed by the delay.
“When we met in December and early this year we thought the new pricing matrix was going to be in place before the tobacco marketing season kicks off but to our surprise we are almost into the season with the new system nowhere to be seen or presented.
“TIMB promised to come up with a proposal in the coming weeks but if we enter the season with the same problems, the same challenges that affected the farmers last season will prevail,” a source close to the developments 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.
Resultantly, 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 was interpreted as the lack of commitment by the government to grow the tobacco sector.
The country’s tobacco has grossed US$582m with tobacco merchants taking around US$495m through the repayment of loans and prejudice.
The system in place states that contract buyers stand guided by the previous day minimum auction floor grade pricing matrix index.
The average price offered at the contract floors has been slightly lower than at the auction floors.
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, CTC said, adding that this provided the environment for contractors to exercise their market power as farmers could not sell at the auction.
CTC instructed TIMB to 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 offering a counter checking mechanism on the contract systems.
