Future of tobacco auction floors uncertain

THE future of the tobacco auction floor system is facing serious threats due to lack of concessionary funding, declining output and decentralisation of the marketing system, industry players say.

By Bernard Mpofu

Tobacco auction floor system is facing serious threats due to lack of concessionary funding
Tobacco auction floor system is facing serious threats due to lack of concessionary funding

Last year, the country’s tobacco industry regulator, Tobacco Industry Marketing Board (TIMB), said it would maintain the current dual marketing system, despite an uproar over wide price disparities between contract prices and auction sales that have been hit by lack of funding.

Tobacco companies who spoke to businessdigest this week in the capital said the opening of two contract floors in Mvurwi and Karoi could increase side-marketing of the golden leaf, posing viability problems to the current system.

“The opening of the floors faced some resistance from some merchants and auction floors alike who felt that this arrangement would affect the viability of the sector,” a player, who requested anonymity, said.

“The granting of a contract floor licence to Mashonaland Tobacco Company could spur side-marketing which is not healthy for the industry especially in a season where yields are expected to be low,” another executive said.

TIMB CE Andrew Matibiri however blamed the liquidity crunch for affecting operations of small scale farmers. Banks are reluctant to lend to most farmers who currently do not have bankable collateral.

“We still believe that the future of the auction floor is still there despite the liquidity challenges in this economy,” Matibiri said.

Official figures show that contract farming accounted for nearly 80% of the cash crop sold last year.

The TIMB introduced the dual marketing system as a stop gap measure to boost output when production dropped in the aftermath, of the chaotic land redistribution programme, which government undertook at the turn of the millennium.

The current system has in recent years led to protests by small-scale farmers over the huge price gap between the tobacco sold through the auction system and that for contract farmers. Pricing of tobacco for contract farmers is currently based on a grade-price index using the Tobacco Industry and Marketing Board classification system. The prices should cover production costs and include a profit margin for the grower.

In the event that the agreed price is lower than the price paid for the same crop at the auction floors, the grower shall be paid the higher price prevailing at the auction floors at the time.

Last year, the central bank announced that tobacco finance accommodation for merchants, who fail to access offshore finance shall be limited to a maximum of US$1 million per tobacco merchant.

The current system has in recent years led to protests by small-scale farmers over the huge price gap between the tobacco sold through the auction system and that for contract farmers.