EDITORIAL COMMENT : Time for finance sector  to move back into tobacco

Tobacco is Zimbabwe’s major agricultural export and the driver of household wealth creation across a belt of rural land through the three Mashonaland provinces and northern Manicaland, with land reform successes showing that the combined output of tens of thousands of smallscale growers exceeding the output of the former plantation owners.

The Tobacco Industry Marketing Board regulates the new style industry that has grown up in the last almost quarter century very effectively, an industry that now relies on contract farming for almost 95 percent of the crop, but with TIMB ensuring that contracts are both fair and enforced on both sides, merchant contractors obliged to pay promptly and farmers obliged to deliver to their contracting merchant.

The auction floors help set the pricing through their open market, although with not much more than 5 percent of the crop, their role is limited, and only possible because of the sheer size of the crop, meaning that 5 percent is a reasonable volume.

Among the major global tobacco producers, Zimbabwe is unique with a small population and almost all the crop going for export, which is one reason why it is one of the top producers for global trade.

Other major producers have a large home market to buffer their exports.

But the export-driven model has meant that Zimbabwe can access external funding for the necessary capitalisation of each year’s crop, the money that the contractors need to lend the farmers, the fertiliser and seed and other inputs and then buy the crop, with that borrowing repaid when the crop is exported.

This was critical when the new contract system was used to quickly recover the industry on the major changeovers caused by land reform, and then grow the industry to new heights and new records.

The contract system became dominant during the era of hyperinflation, when a lot of capital was wiped out, and then grew during the era of dollarisation when very little new capital was created. So the foreign borrowing was necessary.

But the downside is that while the farmers and the merchants are flourishing, Zimbabwe as a nation only wins about 12 percent of the total value of the crop, the rest going on the interest and other finance charges paid to the lenders, some of whom are also involved as merchants and contractors.

So while the industry, the farmers and the country do win, they could win more.

If we go back in time, to the days when 2 000 plantation growers produced almost all the crop, and it was all sold at auction, a system set up and demanded by those growers, we find a far higher percentage of local financing, and during the UDI era total local financing.

This is one reason why Zimbabwe created and sustained a very strong merchant banking sector, there being more merchant banks than commercial banks.

The banking sector in its entirety coped with the need to shift very large sums of money through the stages of the industry, lending to the farmers to grow and cure the crop, although many farmers had some of their own money to at least get seedbeds started, and then as the crop was delivered and sold funding the merchant houses, often through rapid movement of money as farmers repaid loans through stop orders on their sales and that cash then going to the merchants to pay for later deliveries.

The merchants repaid after they processed and exported the crop, just in time for the banking sector to start relending to the farmers again. The main point was that the interest and other finance charges stayed in the country, and farmers and merchants were building up their own capital base.

We need to get back to this to obtain full value, and doing so would also see a growing percentage of tobacco growers able to partially or fully fund, with loan assistance, their crops and so build up the percentage of tobacco sold by auction, although contract farming will remain very crucial. We need to have both.

With the iron grip of the regulator making sure that cowboy growers and buyers cannot cheat, risks are sharply reduced, and the present very severe drought, the worse for some decades, showing that even climate risk is very modest.

While this year’s crop is down, it is not down by very much. Tobacco, grown in the right areas, is remarkably drought resistant.

So the main goal must be to build up the pool of local finance available. At a recent conference merchants agreed that some local finance was available, averaging 17 percent interest, while foreign lenders wanted an average of 7 percent, and some basically charged zero percent through advance payments, although that probably means they paid a bit less for the crop, so the finance charge was hidden, rather than non-existent.

At the same conference, Permanent Secretary for Lands, Agriculture, Fisheries, Water and Rural Development Professor Obert Jiri noted that local capital was building up through the banks and the pension funds and other sources, but that the mechanisms for seeing a chunk of this swishing through the industry were deficient.

It appears that there are opportunities for a proper financing system, with a very low risk 7 or so percent real return, to operate and that should be attractive.

So a return to a modified version of the old bank and merchant bank lending regime is possible, sometimes direct to farmers with good track records, and the TIMB has those statistics of what farmers grow and deliver each year, sometimes indirect via merchants, and again the TIMB can provide the track records, which are needed in any case as the lending moves from farmers to merchants buying at auction.

The solutions appear to be obvious. The financing links need to be restored. It might take time to rebuild a locally financed industry, but we can start this year.

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