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November, 2007

Renegade-Auction

The Situation in Zimbabwe

Staff Report

Once known as the “Breadbasket of Africa,” turmoil has created rampant shortages throughout the landlocked nation. A look at the country’s diminished production, stilted by an inflation-ravaged economic infrastructure.

Zimbabwe is a country of shortages - foreign currency, fuel (petroleum and electricity), food (bread, dairy products, and cornmeal, the stable diet of the local population), and even cigarettes. The current state of Zimbabwe’s economy can be attributed to the take over of white owned commercial farms for allocation to landless black peasants, but in fact many of the farms have been given to cronies of the ZANUPF Government.

Flue-cured tobacco production, the principal foreign currency earner for many years, accounting for about one third of Zimbabwe’s foreign exchange earnings, declined to less than a quarter of the peak production of 237 mn kg sold at an average price of 169 US cents per kg in the 2000 selling season to 55 mn kg sold at an average price of 199 US cents per kg in the 2006 selling season. In the current 2007 selling season a crop of 73 mn kg has been sold at an average price of 234 US cents per kg giving a 50% increase in earnings in US dollar terms over the previous season.

The enhanced average price was due to the very good quality and desirable style of the current crop, the best since the 2000 season, due to the near perfect growing conditions for tobacco.

Almost three-fifths of the crop was sold on contract and the remaining two-fifths sold by auction at the three auction floors with TSF selling 16% of the total crop, BMZ 13% and ZITAC 12%. Whilst 8.2% of the bales were rejected on the auction floors, only 0.74% were rejected on the contract sales. The average price for tobacco sold by auction was 242 US cents per kg and that sold by contract was 228 US cents per kg.

Officially inflation is running at just below 7,000% per annum, but the true figure is in the region of 20,000% and the World Bank has stated that it could be close to 100,000% by the end of the year. Most supermarkets have empty shelves due to the Government introduction of the price freeze on all goods at the end of June to 50% of the prices prevailing on the 18th June.

With the mark-down in prices, in many cases below the cost of production of the goods, supermarket and store shelves were soon cleared of goods. Production of many items ceased because it became unviable to produce the goods. However, many have appeared on the black market at enhanced prices, thus increasing the true inflation figure.

Tobacco International interviewed Andrew Ferreira, the President of the Zimbabwe Tobacco Association (ZTA) in order to get an up-to-date picture of the tobacco situation in Zimbabwe. He said that current seed sales of 264 kg indicated a crop of 53,000 hectares (based on 5g of seed per hectare), which should give a crop size in the region of 75 mn kg, much the same as the current season.

However, he added with the stocks of seed held by contractors together with current seed sales gave a potential for a much bigger crop, up to as much as 120 mn kg. The President said that there was a major factor affecting tobacco production and that was the negative inflationary environment, which influenced current viability. He said that there was the problem of electricity outages, up to 20 hours a day, which not only affected irrigated tobacco but also seedbeds, some of which had already died for lack of water.

He added the electricity outages could affect curing the crop as 70% of the crop was cured with modern systems that used electricity, even though farmers had back-up generators finding diesel to run them could be a problem. Ferriera said that due to stripping of tobacco facilities on farms taken from white commercial farmers there was a tobacco infrastructure for only 120 mn kg - half the total of the 2000 tobacco crop, the year the invasions of white owned farms commenced.

He added that 30% of the remaining 170 white commercial farmers were under threat of closure, and many were growing on farms leased from those farmers who have recently acquired farms and, thus the leases were not really secure. The President said that about two-thirds of the crop would be produced by contract growers who have inputs supplied by the contractors up to the equivalent value of US$1.50 per kg.

He added that the remainder of the growers had major problems in finding inputs such as fertilizer and chemicals and consequently would fall out of the climatic cycle with yields and quality being depressed. Ferreria said that labour was becoming an escalating problem, although the minimum wage was Z$1,650,000 equivalent to US$4 per month, growers could not afford to pay more. He stated that at the current cost of production growers needed an exchange rate of Z$300,000 to US$1, which was ten times the official rate of Z$30,000 to US$1.

He added that although there was a special exchange rate for tobacco and a bonus or support price the returns received did not reward the risk taken in growing tobacco.

He wondered whether the country could afford to pay a tobacco bonus. The President said that there was no alternative crop to flue-cured tobacco on the granite sands which make up a major part of the growing area for this crop. He stated that growers had just come out of a very good selling season with the average grower planting 40 hectares of tobacco at a yield on 2,500 kg per hectare producing 100,000 kg of tobacco selling at US$2.30 per kg receiving a gross return of US$230,000, which at an exchange rate of Z$31,000 to US$1 represented a gross return of over Z$7 bn dollars.

He added that with the cost of coal currently Z$15 mn per ton in Harare and 250 tons being required to cure a crop of 100,000 kg, Z$3,750 mn would be required to pay for the coal - over half the total return of the previous season’s crop.

He said that cheap money was available to certain growers from the Reserve Bank of Zimbabwe at an interest rate of 50% per annum up to Z$500 mn per hectare, which represented about 40% of the current cost of production of Z$1.33 bn per hectare.

The ZTA President said that the Association was financially sound for at least another year and the future depended upon how many members remain in the Association, which currently has over 4,000 non-white members. He added that with more tobacco being sold on contract it became less viable to auction flue-cured tobacco and auctions could cease in a year or two.

Ferreria concluded by saying that the turn around in the tobacco industry depended upon the industry getting a market related exchange rate for the tobacco sold as most of the inputs were paid for at prices related to the parallel market exchange rate, currently Z$500,000 to US$1.


Tobacco International - November, 2007

U.S. Tobacco Cooperative


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