Zim dumps tobacco pricing system
LIVINGSTONE MARUFU
The Tobacco Industry and Marketing Board (TIMB) has dumped the pricing model in which the auction price determines those on the contract floors amid pressure from the Competition and Tariff Commission.
The move comes amid concerns by analysts the auction system was prejudicing tobacco farmers as merchants were accused of manipulating the system. Under the existing system, the lowest contract average price should be at the same level or above those prevailing at the auction floors. This has not been the case amid fears of collusion between the two floors to rip off farmers.
Business Times can report that TIMB has now engaged a consultant to come up with a new pricing system.
TIMB chief executive officer, Meanwell Gudu, said the board saw it prudent to change the tobacco pricing model as the auction system which accounts for 5% of the total sales should not determine the price range 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 assume 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 distortions and price manipulations.”
He said TIMB will now engage all stakeholders to develop possible alternative pricing models of tobacco on contract sales through an appointed consultant.
Business Times can report that stakeholders have already received the communication to that effect and have been encouraged to start to think of possible models that can be used for pricing tobacco on contract sales.
Gudu admitted that the tobacco merchants could be taking around 85% of the tobacco farmers’ earnings and the country could not be benefiting much 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 have raised a lot of doubt.
As of Monday this week, tobacco had grossed US$582.9m with tobacco merchants taking around US$495m through the repayment of loans and prejudice.
Gudu said this is about to change only if the new pricing model is implemented.
The system that has been in place is that contract buyers stand guided by the previous day minimum auction floor grade pricing matrix index.
Hence the average price offered at the contract floors has been slightly lower than at the auction floors.
“The new system being processed if implemented successfully will ensure that same quality tobacco attains similar prices whether under auction or contract. This will create transparency in the selling of tobacco in either of the systems and ensure that the farmers are satisfied after selling their tobacco,” Gudu said.
In a recent report, the Competition and Tariff Commission said TIMB must discard the use of the price matrix currently in place, used to determine minimum contract prices, and introduce a new model that ensures farmers get fair prices from contractors.
The commission said TIMB 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 offering a counter checking mechanism 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 in 2020; as well as the exercise of market power by merchants in both 2020 and 2021,” part of the report reads.
The commission said decentralisation of tobacco marketing in 2021, due to travel restrictions, entailed that contracting merchants received some of the independently produced tobacco, which ideally should be sold via the auction and this provided the environment for contractors to exercise their market power as farmers could not sell at the auction.
The report said the collusion of prices by tobacco merchants created the environment for merchants to render the auction ineffective.
The crisis in the tobacco sector has been worsened by the absence of funding by local banks leaving farmers to rely on contractors.
Local banks’ reluctance emanates from government’s failure to issue transferable ownership to black farmers settled on former white-owned land.
The reluctance by banks to lend has seen tobacco merchants coming up with contract growing schemes.
But, farmers are saying the tobacco merchants are impoverishing them as they charge high interest rates on loans.
Tobacco is the fourth largest foreign currency earner behind platinum, diaspora remittances, and gold.
