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June 20, 2019

Bleak Future For Zimbabwe's Tobacco Farming Sector

by Mthandadzo Nyoni

The future of tobacco farming in Zimbabwe is bleak due to viability challenges, and farmers are calling for an emergency meeting with the regulatory body and government to solve the issues affecting them.

Tobacco, which is Zimbabwe’s second-biggest foreign currency earner after mining, is currently under siege as producers are not given full value for their golden leaf.

Farmers who invested foreign currency to produce the best crop are their counting losses after the Reserve Bank of Zimbabwe (RBZ) told them that they were only allowed to retain 50% of their earnings in forex, with the rest paid in a rapidly depreciating local currency..

Farmers needed to retain 100% of their proceeds in order to be able to improve productivity, but the central bank spurned them.

To make matters worse, the Tobacco Industry Marketing Board (TIMB) recently hiked floor-clearing charges, weighing and auction fees, further eating into the earnings of farmers already hard-pressed by depressed prices this season.

In its June 13 report, the Zimbabwe Tobacco Association (ZTA) said the 2018/19 marketing season had been the most challenging ever for many farmers and early indications were that tobacco production and USD earnings from tobacco would decline this season, unless there was urgent intervention to save the industry that directly employs close to half a million people with two million dependants downstream.

“Many farmers have been unable to clear their US dollar debts and will exit the once attractive industry. Tobacco will, more worryingly, also become a lesser of an important key foreign currency earner, social and employment contributor to the economy,” the report reads in part.

ZTA said high selling charges both on auction and contract floors were a major concern to all farmers as it impacted on viability.

Selling charges vary from US$7,50 to US$9 per bale, settled at the prevailing day’s rate of exchange.

“Just recently, auction floor charges were raised by over 60%, yet farmers’ real returns are on a decline. Farmers already incur other high marketing charges and levies,” the report reads.

On 50% forex retention, ZTA said as the entitlement was based on a farmer first clearing his US$ loans, and in a season with depressed US$ prices against high US$ seasonal borrowings, very few farmers have been in a position to benefit from the retention to date.

“Farmers also need to have generated sufficient RTGS$ (local currency) income from their sales to buy back their entitlement, which again has further reduced the number of farmers benefiting. The process of crediting farmers’ tobacco FCAs with their entitlements is slow,” it said.

“Many farmers are therefore trying to retool, using RTGS$ revenues generated at official exchange rates, at inputs being priced at close to parallel rates, which is an almost impossible task to accomplish.”

“There are minimal surpluses being generated and coupled with the high inflation environment, farmers will have little income once completing their tobacco sales to sustain themselves,” ZTA said.

Last year, tobacco farmers delivered 252 million kg, an all-time record, raking in US$892 million.

Zimbabwe Commercial Farmers’ Union director Jeremiah Tevera said farmers were counting their loses and some could scale down their production or pull out from tobacco farming altogether.

“Tobacco farmers are losing out. Quite a number would be making a decision whether to go for it next season or not. All production has been compromised by this environment,” he said.

ZTA said prices on the auction floors had remained fairly static throughout the season at US$1,65/kg, although a price ceiling of US$4,99/kg has been maintained on the floor there has been very little tobacco that has attained this pricing as compared to previous years.

In recent days, ZTA said there had been an improvement in prices, though daily volumes were declining. On contract floors, after a significant weakening of prices to well under US$2 per kg, there has been a welcome improvement, with daily averages above US$2 per kg, as higher quality leaf grades of commercial tobacco come onto the market and firmer prices are being paid for some lower leaf styles.

However, with close to 70% of the national crop sold, this recent improvement in prices has come too late.

As at June 12 2019, ZTA said 171,2 million kilogrammes at an average price of $1,87/kg had been sold after 57 days of trade, a decrease of 11,1 % in volume and a significant 36% decrease in seasonal average price.

Seasonal auction price was down 41%, while seasonal contract price was down 36% when compared to 2018. Auction volumes remained on a decline, accounting for just 13% of the total volume sold to date.

Daily volumes during the month increased significantly with close to 80 million kg sold in the month of May 2019. Daily deliveries in the month of June have dropped on certain days as a large number of small-scale farmers start completing their sales.

It is estimated that by the end of June, close to 190 million kg should have been sold and with farmers estimated to complete sales in mid-August, the national crop size could reach plus or minus 230 million kg.

Tobacco export earnings have been growing over the years from $772,6 million in 2014, rising to $855 million in 2015.

In 2017, tobacco accounted for a quarter of Zimbabwe’s $3,8 billion export earnings. It is also one of the largest employers in the country, where formal employment is scarce, but workers in the sector are classified as working poor.

TIMB is projecting tobacco output of over 260 million kg from 252 million kg obtained last year.

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