Tobacco auction system faces demise

Latest figures from the country’s biggest tobacco auction floors operator, Tobacco Sales Floor (TSF), provides the clearest indication that independent auction floors could be on their way out.

This should be a wakeup call to policy makers and local financial institutions that if no local sustainable funding mechanism is hammered, sooner or later all proceeds of tobacco, save for a few millions paid directly to farmers will not come to Zimbabwe.

TSF, which claims to have the biggest market share among the three independent auction operators, managed to sell just 6,69 million kg out of the 183 million kg national crop.

This means combined, the independent auction floors now only handles less than 5 percent of the total national tobacco crop. In 2015, they were handling as much as 25 percent with contract sales accounting for the balance of 75 percent and the figures continued to dwindle.

In a statement accompanying TSL’s results for the full year ended October 31, 2020 management said subsidiary TSF had only sold 6,69 million kg from independent farmers.

TSF still holds the largest market share in this segment and has the highest seasonal average price.

The decline in independent tobacco farmers means most tobacco farmers are at the mercy of contractors.

Under the contract system, a farmer has to sell the crop to the contractor who provided the inputs.

Contractors do not always provide favourable terms to farmers and have often been accused of manipulating both input costs and the end of season prices.

But without ready funding from local banks, tobacco farmers always turn to contractors.

TIMB chief executive officer, Andrew Matibiri, is on record saying the shift away from independent auction floors though unfavourable, is necessitated by the absence of funding from banks.

“As long as the situation persists, farmers will be forced to seek funding from contractors,” he said.

“We are concerned by the situation, but without money there is nothing we can do.”

Leading banker and FBC Holdings Limited’s chief executive John Mushayavanhu, is on record saying tobacco should be wholly financed using local funds if the country is to benefit from the crop.

“Tobacco should be financed using local dollars 100 percent. We end up with say 200 million kg of tobacco financed by local money and sell them for nostros (foreign currency),” he said at his company’s results briefing in August 2018.

“If you look at the percentage of the tobacco that goes to the auction floors and the tobacco that goes to the contractors, it’s now skewed towards merchants, so as a country we are now having a situation where the merchants come in and finance our tobacco using inflated prices and then take the money out.

As a country we are not benefiting as much as we should.

“That is the challenge we must address as a country,” said Mushayavanhu.

In the past when tobacco production was not so skewed towards merchants, inflows would be felt across the economy.

This has not been the case in the last few years despite the high output tonnage averaging 200 million kg in the last three years.

However, most local financial institutions have not been extending much funding to the agriculture sector, thereby forcing most farmers in the sector to resort to funding from merchants.

One of the stumbling blocks to farmers’ access to agricultural finance has been their inability to provide collateral for loans while others fail to provide a business case to access funding.

TSF is, however, making inroads in providing auction services to the contractors.

In the period under review, it handled 8,46 million kg belonging to tobacco merchants.

If this plan does not produce desired results, then the costs of running the auction floors might not justify keeping them up running.-ebusinessweekly.co.zw