Halfway through the selling season, Zimbabwe has been hit by a sudden drop in its price of tobacco. The price of tobacco is now at about 37% lower than last year, this comes at a time where inflation could hit 100% by the end of this year.
This recent development is a huge blow for a country that is already facing economic challenges. Tobacco is the number one foreign currency earner in the country, accounting for nearly a fifth of Zimbabwe’s $5.3 billion export earnings in 2018, bringing in almost $1 billion. This field remains a very large employer, with about 172, 000 growers this year, an increase from 111, 000 from last year’s bumper season.
MP Rusty Markham, a tobacco expert and opposition said tobacco is an expensive crop, that costs about $12, 000/ha to farm. The current situation will put the screws on producers that are already under strain. This as the average price at last count was $1.82/kg, against $2.87/kg a year ago, with little wriggle room. Insiders predict that, at the outside, it could rise by US20c.
The state’s land bank collapsed in the aftermath of the post 200 land invasions.
In the wake of the nationalization of the agricultural land in 2005, commercial banks withdrew from the tobacco market, saying that there will be a lack of security to cover loans.
This meant that almost 80% of tobacco operations have been financed in US dollars, mainly from tobacco contractors and merchants in the US, UK and Zimbabwe. Farmers, large and small, get paid in real-time gross settlement dollars (RTGS$). However these farmers have to repay their funders in US currency, at a crippling rate of about RTGS$5.7/$1. Although they can later claim 50% of their earnings back in US dollars, that process has not always proved to be easy.
Markham and other industry insiders, foretell that the low prices will leave growers in a lot of debt. “They will not cover costs, and will therefore not be able to pay back all the money they borrowed from contractors to grow their crop. The ‘exchange’ rate will also hit them hard,” Markham added.
Those with enough information doubt that defaulting growers will be closed down ahead of the planting season, because tobacco merchants and contractors need to ensure continuity of flavor and quality in their products. However, the time frame of how long they will be kept around remains unknown.
Some contractors have resorted to employing former tobacco farmers so they can supervise and help growers to do well enough that they pay back their loans. These farmers were evicted from their farms in the land grabs.
But part of the problem is the contractors/merchants themselves. The auction system no longer works for the large growers, who produce about 80% of the crop. So they are beholden to merchants like, China’s Tian Ze, British American Tobacco through Northern Tobacco, and several other local and international buyers, and the prices they dictate.
It is not clear what exactly is pushing the price down, but industry speculation points to the US-China trade war, a glut of Zimbabwe’s main flavors on the market, contractors punishing the government for paying growers in RTGS$, and fewer people smoking, including in Asia, the primary export market.
Zimbabweans have not yet comprehended the potential price drops of tobacco in the country, others believe this is because of other bad news gripping the country including load-shedding of 10 hours a day, which is expected to continue until the end of the year.
However, until the country’s currency issues are resolved, it is possible that the cycle of bad news will continue.
An economic advisor to the government Ashok Chakravarti, has stressed the need for dramatic changes in “the rate” in the coming months. Chakravarti indicated that during their regular meetings with a group of industrialists and retailers called the “round table” believe that the market must be left to decide the rate of exchange as a precursor to Zimbabwe launching a new currency. They trust this is a move that will significantly decrease the power of the Reserve Bank of Zimbabwe and bring it in line with conventional central banks.