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June, 2009
U.S. Tobacco Cooperative

A Sad Tale of Tobacco In Zimbabwe

Staff Report

Mismanagement and political turmoil leads to economic and agriculture devastation. There’s at least one plan to get the Zimbabwean tobacco industry back on its feet.

After much haggling for almost 12 months, presided over by former South African President, Thaba Mbeki, Zimbabwe finally has an all-inclusive Government comprising the former governing party, ZANU-PF, the main opposition party, the Movement for Democratic Change (MDC-T) led by Morgan Tsvangirai and the breakaway fraction of the MDC led by Professor Arthur Mutambara (MDC-M).

At elections held at the end of March last year the MDC-T won 100 seats in Parliament, the breakaway fraction MDC-M 10 and President Robert Mugabe (ZANU-PF) 97 seats. This is the first time since Independence in 1980 that ZANU-PF does not have a majority in Parliament. As Tsvangirai only achieved just under 50% of the vote and did not win outright there had to be a run-off election between the top two candidates. This was scheduled for June but Tsvangirai withdrew because of intimidation by ZANU-PF and Mugabe, being the only candidate, won. Finally in February 2009, after much haggling, especially over which Government Ministries each party was to lead, Tsvangirai was appointed Prime Minister under President Mugabe.

For the last few years Zimbabwe has suffered massive hyperinflation with the last reported figure being 231 mn% per annum. During this period 22 zeros were knocked off the Zimbabwe dollar, wiping out peoples’ savings and finally in February the Government decided to “dollarize” the economy by adopting the US dollar. Prior to that, the US dollar had been used on an informal but illegal basis. Since the formal change to US dollars there have been many more goods in the shops, for example there is no shortage of bread and maize meal, the basic food of the majority of the population. Many items (including inputs for tobacco production) are expensive in US dollar terms and much of the population does not have the US dollars to make purchases. There is a general shortage of US dollars in cash, no checks are currently used because checks cannot be written in US dollars and no one will accept Zimbabwe dollars for any transaction. Even the Government is short of US dollars because the flow into the Treasury has been below expectations.

This season the Zambian flue-cured tobacco crop, after reaching a peak of 23 mn kgs and then falling by almost 50% to 12 mn kgs, is expected to be in the region of 12 mn kgs. The majority of the crop is produced by large scale commercial farmers with quite a number being former Zimbabwean farmers. The growing season has been a good one with not too much rain and thus a good crop has been produced with a fair percentage of the desirable styles. There have been viability problems due to the exchange rate when the Zambian kwacha firmed against the US dollar, resulting in higher labour costs and as well as input costs such as fertilizer and fuel. Growing are looking to expand their production by turning to irrigated tobacco which will result in higher yields per hectare and thus improve viability.

A small amount of burley tobacco is produced in the Eastern Province but it is very difficult to determine the volume produced because quite a lot is sold in neighboring Malawi and Mozambique as their borders with Zambia are very porous.

Turning to the tobacco situation just prior to the start of the selling season on May 5th 2009, the growing season has been particularly good with rainfall patterns favoring tobacco production, a dry start followed by regular evenly dispersed rainfall throughout the remainder of the season. The above average rainfall in March has filled up most of the dams so there will be adequate water for next seasons irrigated tobacco crop.

As a result of the very favorable growing season there is a very good flue-cured tobacco crop of very acceptable styles. The crop is expected to be the same size as the 2001-08 crop of 47 mn kgs or slighter smaller.

Commercial growers planted more hectares this current season than the previous one and this has compensated for the decrease in plantings by small scale and new farmers. Commercial growers now account for over 90% of the production in Zimbabwe and almost all of this tobacco is bought by contractors who supply inputs i.e. fuel, fertilizer and chemicals.

The amount of tobacco that will be auctioned is very small and will average out at about 2 mn kgs for each of the three auction floors in operation. This raises doubts about the continued viability of the auction system. In fact, the whole viability of the tobacco industry is in question with the crop size not large enough to cover overheads like selling and research. Prior to the year 2000 when the land invasions started in Zimbabwe, there were 1,600 registered, commercial, flue-cured tobacco growers. Now there are only 170. Overall, the total number of registered growers is 38,000 but many of this number do not produce any tobacco at all.

The major feature of the 2008–09 tobacco season in Malawi is the size of the burley crop, currently estimated at a record 221.5 mn kg. However as the crop is unregulated, it is impossible to accurately estimate the crop size. Informal estimates put the crop size at over 250 mn kg. The cross border movement of burley from both Zambia and Mozambique through to Malawi is another factor in the equation.

Burley sales commenced on 17 March in Lilongwe and on 23 March in Limbe. As of 24 April, 23.75 mn kg of burley have been sold at an average price of US $1.31 per kg.

A feature of the sales has been a high rejection rate due to over conditioned and wet tobacco. The majority of the crop on offer has been low to medium quality with a high percentage of mixed grades and water stained tobacco. This is quite normal at the beginning of the selling season as farmers, in the rush to sell early, do not pay sufficient attention to detail in grading and presenting their tobacco for the sales. As sales progressed with better quality, higher stalk positions burley on offer, the situation improved with a lower rejection rate.

After the good rains of January, some areas experienced a slight shortage in February. Rainfall improved in March resulting in increased relative humidity which should lead to in good cures of burley that was reaped and cured during March.

The flue-cured crop is estimated at 25.5 mn kg. Generally the crop ripened faster than expected and there were higher incidences of frog-eye on commercial crops resulting in a slight decline in yields in some areas. By the end of February reaping of the early-planted crop on commercial farms was completed. By mid-March reaping of the small scale crop was completed.

Flue cured sales commenced on 21 April.

The Tobacco Association (ZTA) has 3,400 small-scale members and it endeavors to place as many as possible with contract merchants who supply inputs. The remaining growers who do not grow for a contractor suffer from a lack of inputs and finance to produce a crop of tobacco. The ZTA administered scheme with contact purchasing merchants has shown an annual growth rate of 30% over the last three years. The ZTA records show that there has been a 98% repayment of all loans, either cash or financing of inputs.

Currently the tobacco industry is facing a series of problems. There are very few inputs available locally and those that are available are hugely expensive. Farmer morale is at its lowest for very many years as a result of political uncertainty regarding land tenure. Many farmers are facing a new wave of evictions with theft of crops, farm equipment and inputs at levels rarely seen previously.

There is the question of finance for the coming season. From where is it coming? Some farmers have been able to obtain loans in US dollars, but the period is only 90 days and the cost including establishment fees is 15% per annum. Farmers will have to sell early in the selling season to repay these loans and then will not have the finance for the coming season. The contractors who buy the tobacco only provide finance for fuel, fertilizer, and chemicals to grow the crop.

Labour morale is at its lowest level ever and current viability does not allow in real terms for any increase in wages or benefits, which is aggravated by the difficulty in sourcing cash.

Zimbabwe is in a state of “political drift” which does not inspire confidence. This only adds to the vicious uncertainty spiral. Hopefully this is only a temporary phase through which the country is going.

If these problems are not resolved by the end of April next season’s crop size could contract to below 30 mn kgs. Sources within the tobacco industry are putting forward the following suggestions for consideration:

  • The clarification of the land tenure issue;

  • The honoring of the 25% retention of foreign currency in Foreign Currency Accounts (FCA). This has not been honored up until the present time, even though there is an understanding for it to be honored;

  • A financial package to be put in place immediately to kick start seedling production;

  • Allow contracting merchants to provide ration packs to feed tobacco farm labourers on the same criteria as other inputs;

  • Ensure that anyone who grew tobacco this last season is able to grow this coming season by applying a moratorium on arbitrary farm evictions and prosecutions;

  • Provide a bonus and protection for any farmer who produces seedlings for an extra ten hectares or more.
If these six points can be put in place the national flue-cured crop could reach 80–100 mn kgs.

The overriding concern for most merchants who purchase Zimbabwean tobacco is a combination of the future direction of tobacco production and security of land tenure coupled with disruptions on farms. Since the election there has been an acceleration of evictions and threats. The ZTA feels it will be nigh impossible to convince merchants to assist in increased pre-season finance in this environment.

Zimbabwe tobacco farmers will survive this current season but they will need financial assistance for the coming season. World wide demand is increasing and the Zimbabwean tobacco industry must take advantage of its special relationship with China, one of the leading supporters of Zimbabwe.

A 45 mn kg crop could bring in between US $135 and 150 mn dollars and an 100 mn kg crop between US $300 and 350 mn dollars.

This selling season growers will receive the full amount of the sale of their tobacco in US dollars. The purchasing merchants have had to bring in sufficient US dollars to cover the full value of their purchases. They are not allowed to take account of the advance they have made to farmers in supplying inputs for producing the crop. This is a sign that Zimbabwe is terribly short of US dollars. The World Bank and other agencies are not yet supplying finance to Zimbabwe until there is clarity on law and order and security of tenure

Tobacco International - June, 2009

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