Tobacco farmers in ZWL$5.4bn exchange loss

LIVINGSTONE MARUFU

Zimbabwe’s tobacco growers have suffered a huge loss of value amounting to at least ZWL$5.4bn in exchange losses due the mismatch between the auction and the retooling rate, Business Times can report.

The plunge, farmers said, has been caused by the monetary policy, which compels farmers to get 60% of their payments in foreign currency.

The balance is paid in local currency at the prevailing auction rate, which has been hovering around ZWL$84.6: US$1. 

Official figures obtained from TIMB on Monday this week show that tobacco farmers have so far sold tobacco worth US$292.4m.

Out of that farmers got a total of US$116.96m in Zimbabwe dollar equivalent using the official rate.

This means that in local currency, farmers got ZWL$9.8bn using the auction rate of ZWL$84.5: US$1from a potential ZWL$15.2bn using the parallel market rate, which they call the retooling rate, meaning they have lost ZWL$5.4bn.

Local companies have been battling to access adequate forex from the official market to import critical raw materials.  The shortage of forex on the official market has forced many to turn to the parallel market, to cover for the short falls, where they are forced to pay higher premiums.

The parallel market rate, which the farmers refer to as the ‘retooling rate’, has been hovering between ZWL$120 and ZWL$130 against the US dollar.

This has been making it difficult for farmers to retool.

Farmers want a retooling rate, which is the parallel market rate currently at ZWL$130: US$1. This rate was agreed to by farmers and the Tobacco Industry Marketing Board (TIMB). Submissions were made to the Reserve Bank of Zimbabwe (RBZ) but the central bank is yet to agree to the suggestion.

Farmers want a retention rate of between 80% and 100%. They also want their local currency portion to be pegged at what they call retooling rate, which is the parallel market.

“The retooling rates are generally not pegged on foreign currency auction rates leading to high cost of production as farmers would have lost a great deal of value through  the use of the official exchange rate.

“The challenge facing the tobacco industry is the reduction of viability of tobacco growers because of the high-cost structure of producing tobacco,” TIMB CEO, Meanwell Gudu told Business Times this week.

Gudu said it was critical to end the viability challenges faced by the tobacco farmers largely due to low retention levels. 

Exacerbating the situation, tobacco merchants have been manipulating the tobacco pricing system.

They have violated the Tobacco Marketing Act which states that contract prices should be at par or higher than auction floor prices at all times, which is not the case this selling season.

This is an attempt by the tobacco syndicate to collude on prices and make maximum profit at the expense of the grower.

Zimbabwe Commercial Farmers Union president Shadreck Makombe said foreign currency retention threshold should be reviewed upwards to allow farmers to retool.

“Given the potential of the tobacco industry to reach around US$5bn per year, the forex retention levels should be reviewed to empower farmers and weaken the tobacco merchants’ influence on tobacco.

“With the higher forex retention levels, farmers are able to self-finance themselves without taking loans or being involved in contract farming,” Makombe told Business Times.

Tobacco has been one of the leading foreign currency earners for the foreign currency-starved economy.

Most farmers who have been over-relying on borrowing said they can no longer carry the debts, which are spiralling out of control.

This implies that the pressures on tobacco farmers are significant.

About 90% of growers are now 100% US$ borrowed from their contractor, implying no new US$ comes into the country until US$ loans are repaid.