Tobacco auction floors hit record price File Pic

Martin Kadzere

Zimbabwe’s auction floors saw tobacco prices surge past the previous highest level of US$4,99 per kilogramme yesterday, suggesting strong demand for the “free-funded” crop.

Tobacco prices on auction floors surged past the psychological ceiling, with a buyer bidding US$5,05 per kg, a record price in over 10 years. 

The jump comes primarily from “freed funded” tobacco, grown by individual farmers and accounts for about 7 percent of the total crop.

The remainder is funded under contract schemes, sponsored mainly by foreign-owned.

Last year, farmers produced 296 kilogrammes of tobacco, the highest yield in the country’s history.

This year, production is expected to fall to roughly 265 million kg as the El Niño weather phenomenon has caused drought in most farming regions in the country.

While auction prices have surged 26 percent year-over-year, prices offered by the contractors have only increased by 13 percent, according to statistics from the Tobacco Industry and Marketing Board, which regulates the industry. The price surge on the auction floors has reignited calls to increase local financing for tobacco growing.

Some industry experts suggest that the high demand and strong auction prices possibly indicate contract farming is not the most effective model for price discovery.

“The continued reliance on contract farming after two decades suggests there might be deeper issues with the model itself,” Harare-based development economist Tobias Musara said in an interview. 

“Ideally, a few seasons of participation should equip the farmers for self-sufficiency. This dependence on contract financing needs to be addressed to ensure long-term benefits for our local farmers.”

Contracting farming began around 2004, just a few years after the Government parcelled out land to black indigenous people during the land reform programme.

The contract financing model emerged to address the gap created by banks’ reluctance to fund newly resettled farmers due to a lack of collateral. However, critics now argue that the contract farming model traps farmers in a cycle of debt.

The cycle perpetuates because farmers struggle to repay loans for overpriced inputs and potentially manipulated prices for their tobacco. Industry insiders believe these issues are at the root of the debt problem. Additionally, subcontracted companies take a cut of the farmers’ harvest, further reducing their profits.

Large firms subcontract local firms, known as “surrogates,” to finance farmers.

The system can also trap subcontracted tobacco merchants in debt. Poor recovery rates on inputs they provide to farmers, often due to issues with side marketing by the farmers, can lead to financial strain for these smaller companies.

Harare-based analyst Carlos Tadya compared the contract farming model to “modern slavery.”

He argued the system, due to vertical integration, concentrates control of the entire tobacco supply chain, from the farmer to the final sale– in the hands of large merchants.

Some industry players are advocating moving from offshore funding towards local financing models to ensure Zimbabwe retains a greater share of the value generated by tobacco exports.

Despite being touted as the country’s second-largest single foreign currency earner after gold, tobacco exports are failing to deliver their full potential due to contract farming financing model that sees a significant portion of export revenue stay offshore.

Industry experts estimate that Zimbabwe only retains around 12 percent of the net earnings from exports due to reliance on offshore funding to finance production.

 The bulk of export revenue goes towards repaying the loans, leaving limited financial benefit for the economy.

Until last year, tobacco production was financed entirely through offshore funding before the Reserve Bank of Zimbabwe scrapped the provision requiring the “golden leaf” to be funded and purchased using offshore funding. This aligns with the country’s Tobacco Value Chain Transformation seeking to raise local funding from roughly 7 to 70 percent.

Some stakeholders proposed unlocking funding for the tobacco industry by allowing local farmers to pledge properties as collateral and by seeking Government guarantees.

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