HomeLocal News2020 tobacco marketing season: The good, the bad and the ugly

2020 tobacco marketing season: The good, the bad and the ugly


THE 2020 tobacco season is almost complete. It was a unique marketing season done under the strict World Health Organisation guidelines to curb the spread of the global pandemic, Covid-19.

The selling season, which opened on April 29 after a Covid-19-induced delay, clocked 90 days on September 7.

According to data from the Tobacco Industry Marketing Board (Timb) 180,8 million kilogrammes valued at US$452,3 million was delivered at the country’s contract and auction floors.

During the same period last year, 240 million kg valued US$479 million went under the hammer. This year’s average price at US$2,50 per kg was 25% firmer than last year’s US$1,99 per kg.

It was a unique season with set guidelines by Timb where floors accepted tobacco deliveries between 6am and 5pm. Farmers on the floors and outside were broken into small groups of less than the prescribed maximum of 20 growers.

Growers with less than 100 bales per sale had to nominate a Timb registered grower representative.

Inspired by Sergio Leone’s Italian movie titled Il Buono, il Brutto, il Cativo starring Clint Eastwood as “the Good”, Lee Van Cleef as “the Bad”, and Eli Wallach as “the Ugly”, this piece delves into the good, the bad and the ugly of the 2020 tobacco season.

The good
This year’s average price stood at US$2,50 per kg — 25% higher than last year’s US$1,99 per kg. In 2018, the average tobacco price was at US$2,92, in 2017 it was US$2,96, while in 2016 and 2015 it stood at US$2,95.

Zimbabwe Tobacco Association (ZTA) market report noted that although prices are firmer than 2019, they are well below the 2018 ones.

“With lower historical prices and a fixed exchange rate for 60% of the season, there was very little viability from tobacco this season. Sadly, inconsistent policy has contributed to this,” ZTA said.

George Seremwe, the Tobacco Association of Zimbabwe president, said the average price was fair in United States dollar terms, but the poor exchange rate and failure to be physically present affected small-scale farmers.

“Only farmers who sold early were affected by the exchange rate. Covid-19 did not make it easy either since most of the small-scale producers did not attend the sales to negotiate their prices. We have seen a decline on kilogrammes compared to last year. This is due to the marketing season last year and the drought,” Seremwe said.

The complete closure and removal of all flea markets and all vendors around the perimeter of auction and contract sales floors ahead of and during the 2020 tobacco marketing season enhanced social distancing to curb the spread of Covid-19.

Economist Victor Bhoroma attributed the foreign exchange stability witnessed in the past two months to a slight increase in foreign currency supply on the parallel market generated from tobacco sales.

Tobacco farming, just like gold, plays a key role in providing forex liquidity critical for the importation of pharmaceuticals, fuel, raw materials and wheat.

The bad
Statistics show that deliveries to the auction floors are declining. They were merely 9,19 million kg out of 180,8 million kg total deliveries. The auction floor deliveries constituted 5% of total deliveries. The remaining huge chunk of 171,6 million kg were delivered through contract floors.

Established in 1936, through the Tobacco Marketing and Levy Act, the auction floor system was, for years, the only platform where tobacco was sold in Zimbabwe.

The contract system made its debut in Zimbabwe in 2004 and has been gaining ground ahead of the auction floors.

In 2004, when contract floors were established, auction floors enjoyed a huge market share of 76,8%.

In 2005, it contributed 60% and in 2006, it nosedived to 45% before tumbling further to 40,5% in 2007.

In 2008, it was 37,5%, 2009 (50%), 2010 (47,5%), 2011 (43,9%), 2012 (36,1%), 2013 (32,5%), 2014 (23,6%), 2015 (23,6%) and 2016 (17,2%). In 2017, it plummeted further to 16,5%, before dipping to 14,3% in 2018 and last year.

Zimbabwe has three auction floors, namely Premier, Tobacco Sales and Boka, which are all facing a bleak future.

Tobacco experts say the only way to save the auction system from total collapse would entail banks increasing their lending to farmers so as to wean them off from over-reliance on contractors.

Delivery mass restrictions, stringent Covid-19 measures at auction floors, where growers with less than 100 bales per sale were not allowed to attend but forced to nominate a Timb registered grower representative, were a cause for concern.

High transport costs also arose during the season as trucks with less than a net of seven tonnes capacity were prohibited from transporting tobacco to the floors, forcing farmers to engage bigger and expensive transporters thereby eating into returns critical for retooling.

To try and minimise costs due to the fixed exchange rate, some growers were forced to deliver to the nearest decentralised selling point.

Moreover, this season the total output dropped to 185 million kg from 60 million kg produced in 2019.

In addition, unlike the previous season due to Covid-19 restrictions, downstream enterprises did not benefit much from the usual tobacco auction activities.

“Transporters, catering service providers, furniture makers and chemical suppliers didn’t see a boost in sales due to decentralised auction activities and limited movements,” Bhoroma noted. “There was not much injection in terms of liquidity as was the norm in years gone by. Most businesses were opening for limited hours while others remained closed. So the Covid-19 restrictions impacted business activities.”

The ugly
The fixed exchange rate gave farmers a torrid time as it eroded their earnings. Farmers were getting 50% of their earnings at the interbank rate at a time the parallel market rate was running amok. The other 50% was paid out in foreign currency through nostro accounts and the money was regarded as free funds.

The Reserve Bank of Zimbabwe (RBZ) replaced the interbank market with weekly foreign exchange auctions on June 23, 2020, when almost 60% of the crop had been sold. Tobacco grower associations have been pushing authorities to consider an exchange difference settlement or a hard currency pay out after the forex auction system started operating.

“While firmer prices are a relief this season, the fixed exchange rate of 25:1 (against retooling rates of 100:1) which was in place until June, when over 60% of the crop had already been sold, has threatened viability and sustainability of the growing industry moving forward. They have been no compensatory measures for farmers who sold at 25:1,” ZTA noted in its report.

The season was not without controversy after Timb chief executive Andrew Matibiri failed to provide satisfactory answers to the Justice Mayor Wadyajena-chaired Parliamentary Portfolio Committee on Agriculture during a tour in June as to why some companies were buying tobacco without requisite documents.

It emerged during the tour that Countryside Leaf, which is housed on the same premises as Mbaluk, was buying the golden leaf without a licence.

What is needed going forward
Farmers need confidence and ZTA says the best way to start instilling it is to announce 100% retention of US dollar proceeds, with the status of free funds remaining as well as compensatory measures for those who sold at a fixed rate of 25:1.

“If these issues are not urgently addressed, there will be no growth in production and growers will rapidly diversify out of tobacco. The ball is in the court of the policy-makers. The latest Monetary Policy Statement failed to take recognition of the issues affecting tobacco growers,” ZTA said.

There is also a significant threat that auction floors will no longer operate, in their traditional form, as there are very few farmers able to finance themselves. This is so especially after selling their tobacco well below re-tooling rates
Outlook for 2020/21 Season
The bulk of the planting starts from September till November.

Latest seed sales available are 867,5 kg versus 740,2 kg sold in 2019. There has been a significant increase in the purchase of seed by contractors, most likely to try and lift the crop back to above 200 million kg levels.

“With poor returns from the season, not many farmers bought the cheapest input which is seed. Sales proceeds from the season have been largely used on living expenses and not much on re-tooling for the new season,” ZTA said.

“US dollar prices paid for tobacco this season have been fair, but inconsistent monetary policies over the past two seasons have resulted in the significant reduction in the crop this season. Farmer confidence and morale is very low and it will be difficult to boost production levels back to +200 million kg again.”

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