HomeBusiness DigestSide marketing of crops: A problem or symptom?

Side marketing of crops: A problem or symptom?

BY VICTOR BHOROMA

The Zimbabwean government recently criminalised the side marketing of soya beans and unginned cotton by farmers and middlemen under the Grain Marketing Act of 1966. This was done through Statutory Instrument (SI) 97 of 2021 (Control of sale of Soya Beans) and Statutory Instrument 96 of 2021 (Control of sale of cotton). The new regulations mean that unprocessed harvested cotton (containing seeds) and soya beans are now controlled commodities where the government and selected agencies become the authorised buyers.

Exports of the same commodities were also banned, with offenders (both buyers and sellers) fined three times the value of the side marketed crop and facing jail terms of up to two years. The regulations also state that the Grain Marketing Board (GMB) or an authorised agency in the case of cotton cannot buy raw cotton from middlemen who are not contracted to produce the affected crops. The regulations also limit farmers to storing and moving not more than 100kg of soya beans without permission from GMB. They can however move any amount on delivery to GMB.

Why the ban

In the past five years, Zimbabwe produced an average of 51 metric tonnes (mt) of soya beans per year against total demand of more than 240 000mt annually for food, animal feed and industrial need to produce cooking oil, margarine, soya chunks, soap, and powder milk among other basic foodstuffs.

This means that the country is a perennial importer of soya beans with over US$115 million used to import the commodity yearly. This explains the high cost of producing the listed consumer goods on the local market and the struggle industry has to compete with imports from South Africa which are competitively priced.

Soya is classified as a strategic import and local producers such as oil expressers get a significant chunk of foreign currency from the auction market to import the critical raw material. Therefore, the ban on exports is targeted at ensuring that local demand is met first before the commodity can be imported to meet the sustained demand gap.

In terms of cotton, an average of 80 000 MTs is produced annually in the past five years with 85% of it destined for the export market while 15% is ginned locally for domestic use by the few remaining fabric spinning companies. Cotton exports to South Africa earned Zimbabwe about US$30 million in 2020.

The government’s Presidential Inputs scheme targeting 400 000 rural farmers has been key in ramping up production as most farmers took up cotton farming to receive free inputs. The main challenge with cotton is that the bulk of the exported cotton is shipped out in raw form instead of being value added locally and exported as fabric.

Therefore, the ban on cotton exports is meant to push exporters into processing cotton into fabric and to curb tax revenue leakages from informal lint exports by middlemen.

Side marketing menace

For the past few years, various middlemen have been going directly to contracted farmers and offering hard currency on the spot for the two commodities at prices below contract prices before exporting the crops through illegal channels or simply hoarding the commodities long enough to gain from price appreciation on the local market.

Middlemen often exchanged seed cotton for cooking oil, sugar and other basic commodities using parallel market indexed prices thereby shortchanging desperate farmers. They would then sell the seed cotton to local cotton companies at higher prices, making super profits at the expense of the contractors who invest in contract farming, in training farmers, source foreign currency and deliver inputs to the farmers. They also prejudice farmers who are supposed to be paid higher prices and repay their contracted debt for continuity.

Causes of side marketing.

There are varied reasons why side marketing of crops is now rife in the market. However, the major cause is farmer viability challenges which stem from lower producer prices set by the government and the contractors.

Currently, the producer prices for soya from GMB is ZW$48 000 per mt, which translates to US$370/tonne using the open market rate. However, farmers use the open market rate to buy inputs or to convert earnings to hard currency after their payment. The price is way below the US$450 offered by middlemen and below the US$515 global price.

Middlemen offer farmers cash in hard currency on the spot (free from tax obligations incurred in local currency transactions) and limited risk on the transportation of the commodity. Farmers have also encountered payment delays from the government in the past on the prices pegged in local currency, which then increases their losses.

In June 2020, the government approved a price of ZW$43,94 per kg (about US$0,50) for the 2020/2021 cotton marketing season. Through the facility, farmers were supposed to be paid US$10 for every cotton bale delivered to merchants with the balance paid through bank transfers.

However, farmers ended up waiting for months to get payment and were later paid through groceries as merchants tried to find innovative ways around the cash crisis that characterised the market then. Farmers also turn to side marketing if production is affected by droughts and yields fall below the contract output levels.

Other causes of side marketing include high interest rates levied by contractors on availed imports during the farming season and greed by selected farmers who have a double dipping mentality and little regard for contractual obligations.

Poverty levels also play a key role in fueling side marketing as farmers have day-to-day needs which may not be sufficiently covered by their net income after selling produce to contractors or the government. Middlemen often take advantage of these immediate needs.

Ensuring sustainability

The enacted regulations will go a long way in protecting both the contractors and the farmers by making it difficult for fly-by-night middlemen to disrupt the value chain.

Nevertheless, there is a need for the government to implement the commodity exchange market which will go a long way in eliminating arbitrage opportunities availed by either setting low producer prices or above the market prices.

Similarly, payment delays for delivered produce should be eliminated to ensure viability for farmers who rely on hard currency earnings to buy inputs and fund their household needs.

High levels of inflation in the local currency have also helped to nurture side marketing as producer prices set months before the agric marketing season are rarely in sync with future exchange rate movements. Thus, stability on money supply by the central bank is extremely critical in ensuring viability for farmers.

Legacy issues to do with land tenure and lack of bankable title deeds for farmers also affect the models of funding used in the country. Financial institutions have folded their hands on providing farmers with loans.

Most local farmers in Zimbabwe either do not have title deeds or hold 99-year leases which cannot be used as collateral in accessing bank loans. Banks play a critical role in achieving optimum production and value chain financing in the market.

Side marketing may as well be a symptom of deep-seated structural challenges in the agriculture sector which need policy reforms by the government to address. For now, maybe the legislation may serve in curbing side marketing.

Bhoroma is an economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.

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