AGRICULTURAL INFORMATION SERVICES DEPARTMENT

­                       REPORT TO CONGRESS 2009

                  

                                     

                                    PRESENTED BY VICE PRESIDENT C TAFFS

 For many years this report to Congress got more dismal each year. This year, however, I am pleased to report there have been some improvements on the economic front and in the business environment that all sectors, including commercial agriculture, operate in. But there is much less to be optimistic about regarding the current political situation, with a lame-duck GNU operating in a dysfunctional manner because of a lack of commitment by certain elements within the coalition. The downstream effect of this state of affairs on commercial agriculture is that the land resettlement fiasco remains unresolved. As has happened in the past my report this year will concentrate on comparing what is occurring now with events prevailing at this time last year. In July last year there were two main issues that preoccupied members in going about their business operations. These were the fallout from the ongoing fast track land resettlement programme and the disintegrating economy.  The changes to this situation are indicated in the sections that follow.   

A.  AN OVERVIEW OF THE ECONOMY

 

Economic Situation 2008

After several years of poor results the economic performance in 2008 was particularly abysmal. This situation has been well publicised in the media, and it is not intended to go into any great detail about it here other than to mention some adverse developments concerning the main economic indicators below. With regard to balance of payments a comparison between the two years 2007 and 2008 shows a deterioration in performance. The balance of payments deficit increased from USD 33 million in 2007 to USD 410 million in 2008. This was mainly as a result of the 14,3% fall in the value of total exports from USD 1,6 billion to USD 1,37 billion. Mineral exports which make up more than half the total fell from USD 801 million to USD 676 million while tobacco receipts dropped by 24% to USD 203 million. Total agricultural exports decreased by 14% from USD 541 million to USD 465 million. Total imports increased marginally from USD 1,9 billion to USD 2,0 billion Three events that occurred during the initial months of 2009 have been instrumental in shaping economic developments during 2009. These were the Government Budget proposals made in January which were followed by amendments made to the proposals in March, and the monetary policy statement in February. Main 2009 Budget Proposals (January 2009)The annual government budget statement for 2009 was announced two months late on the 29^th January 2009.  The main features regarding the macro-economy were as follows. A positive growth of 2% was predicted for 2009 with GDP increasing to USD 5.5 billion. This target is clearly unrealistic given the poor performance of the agricultural sector which is outlined below, together with output reductions reported for other important sectors like manufacturing and mining. On the positive side the most striking element of the proposals was the recognition that the tremendous hyperinflation of Zimbabwe’s currency was out of control and that it would be sidelined for the foreseeable future by declaring currencies like the USD, GBP, and ZAR legal tender to be used alongside the local dollar in business transactions. The new system was to cover payment of wages, taxes, and utilities, and also the general pricing of goods and services. The budget itself was presented in a multiple currency format. The main purpose of the measure was to try to anchor runaway inflation and bring about some stability in the economy. The government budget proposed total revenue at USD 1.7 billion being calculated as 30% of GDP (USD 5.5 billion) with expenditure pegged at a higher level of USD 1,9 billion. Goods and services paid in forex were to be taxed in forex and this also applied to salaries and wages. The budget allocation for the health ministry at USD 157 million exceeded for the first time in many years the allocation for education (USD 149 million). This was a reflection of the breakdown in health services and the spread of diseases like cholera. In the same vein the responsibility for urban water supplies in major centres was to be removed from ZINWA (for gross inefficiency) and given to local authorities.  Main Monetary Policy Proposals ( February 2009)The RBZ Monetary Policy Announcement rapidly followed the Budget Statement and in the main announced measures to reinforce those emanating from the Budget. The major focus was on tackling hyperinflation and the ruinous effects that this development was having on the economy. Local currency management was greatly improved by lopping twelve zero’s off the currency to facilitate transactions. Thus the $ 10Trillion note became equivalent to $ 10. The Zimbabwe dollar was to remain legal tender and dual pricing continue [NB the Zimbabwe currency was later abandoned at the end of February]. The legalisation of multi-currency transactions involving the USD, ZAR, EURO, PULA and GBP among others announced in the Budget was extended by a series of actions that relaxed forex dealing licensing requirements. Exporters were given a boost with retentions of proceeds being reduced from 15% to 7,5% and the balance being allowed to be retained in their FCA’s indefinitely. Requirements for offshore payments for goods and services were also eased.  RBZ was to relinquish its quasi-fiscal operations, and concentrate on carrying out its core functions. To improve service delivery parastatals and public utilities could now charge in forex. Other measures like the liberalisation of maize and wheat marketing with the GMB becoming a residual buyer of these commodities was welcome news to farmers. Farmers were now permitted to charge for any produce in forex and this development in the future would assist in budgeting and maintaining viability and remove the speculative element out of farming. Other measures like allowing tobacco and cotton farmers to retain all their sales proceeds was designed to encourage more farmers to grow these crops. Dollarisation has undoubtedly been a move in the right direction to stabilising the economy.  Revision of the Main 2009 Budget Proposals (March 2009)The revision was carried out through the formulation of the Short Term Emergency Recovery Programme (STERP) that synchronised the 2009 Budget announced in January to political and economic developments arising out of the eventual formation of a coalition government. It was a downward revision of the 2009 Budget Framework targets in line with actual revenue collection developments in January, February and early March 2009. It reconfigured the Estimates of Expenditure to incorporate additional Ministries in line with the formation of the Inclusive Government.The 2009 Budget presented in January 2009, provided for revenues of US$1,7 billion and expenditures of US$1,9 billion. However, because of collection shortfalls revenue anticipated for the 2009 fiscal year was reviewed downwards from US$1.7 billion to US$1 billion. Legal obstacles to the use of multiple currencies in order to facilitate trade and tax collection in the economy were removed.  As an additional incentive to exporters the removal of all foreign currency surrender requirements to RBZ was also announced.  InflationBy the end of 2008 rampant price inflation was the most visible sign of economic collapse in Zimbabwe. In January 2009 inflation was estimated at over 6 million percent per month. Compare this with an annual rate of 165,000% applicable in February 2008.The primary underlying driver of inflation    was high money supply growth resulting from uncontrolled government spending. The RBZ had to resort to printing vast quantities of new banknotes to meet government payment commitments and the continued RBZ funding of quasi fiscal operations.  Towards the end of last year the extremely rapid depreciation in the purchasing power of the Zimbabwe dollar led to the ongoing process of “dollarisation” of the economy with prices and charges largely being quoted in US dollars, and to a lesser extent the RSA rand. Prior to the budget and monetary policy announcements mentioned above many retail outlets and traders were licensed to trade in foreign currency and the process had been ongoing since September last year. Those outlets yet to receive licenses up to February this year traded illegally because virtually all transactions were now priced in forex. However under the new guidelines issued in the budget and monetary policy statements this problem has fallen away. The abandonment of Zimbabwe’s currency as a medium of exchange means that price inflation is now measured in US dollars. Increased availability of the latter currency in recent months saw some reduction in US dollar prices for many basics after March but a very small element ( < 2%) of overall price inflation has crept in more recently. 

Interest Rates

RBZ accommodation rate adjustments failed dismally as a monetary policy instrument to bring hyperinflation under control last year. The secured and unsecured accommodation rates were 10,000% and 40,000% p.a. respectively.

 

A liquidity glut prevailed in the money market for several months late last year. For example, the surplus on the 1^st December 2008 was ZWD 40 trillion which rose to ZWD 24 sextillion by the end of the month.  In early January it was in excess of ZWD 44 sextillion. Investment rates were therefore very low in January because of excess liquidity and ranged as follows: 30 days – 20% p.a.; 60 days – 50% p.a.; and 90 days – 100% p.a.

 

With the advent of hard currencies becoming legal tender all interest rates are now anchored to LIBOR and range up to 6% p.a. above this level

 

Exchange Rates

Up to January 2009 there were three main exchange rates for our dollar against the USD, namely i) the official rate as traded through the banks, ii) the cash rate applicable in the parallel market, and iii) the RTGS and cheque rates also applicable for parallel trading. The wide discrepancies between the three are illustrated as follows. As of 29th January, 2009, the “official/interbank” rate was trading around ZWD 3.5 billion per USD, the parallel market cash rate stood at ZWD 50 trillion and the RTGS/Cheque rate was around ZWD 17.5 quadrillion. The differentials largely arose from the rates that RBZ paid to banks for forex and the time taken to undertake cash dealings in contrast to clearing RTGS/Cheque transactions in the face of rapid currency depreciation in the meantime. To give an idea of how quickly the currency was depreciating on the 2nd of January 2009 the “official/interbank” cash rate was ZWD 4,9 million per USD and the parallel market cash rate was 4,0 billion per USD. An addition of three zero’s to the exchange rates respectively took place during a period of one week in the middle of January after trillion dollar denominated bank notes were introduced. This indicated that a large degree of speculation and currency trading was taking place then.  The abandonment of Zimbabwe’s currency as a medium of exchange and adoption of hard currencies in its place means that exchange rate fluctuations between the US dollar and other currencies (mainly the ZAR) are now the main drivers of price inflation B. COMMERCIAL AGRICULTUREThere has been no significant recovery from the highly disruptive effects on land reform on commercial farm output in Zimbabwe. For several years there has been a very serious under-utilization of resources in the commercial farm areas, and low productivity. This negative development has been the primary cause of economic decline in Zimbabwe.  In summary the following factors still apply:-   

• Previously established commercial farmers are still being evicted from their properties and disruptions to production programmes on farms still continues. There is no security of tenure for these farmers (nearly all of them have not even received offer letters).  Therefore many of them have restricted their cropping and livestock programmes.
• Only a small fraction of A2 farmers have received long term leases. This restricts their ability to obtain credit.
• There have been no extensive programmes put in place to enable new farmers to be trained and acquire skills and not enough time has elapsed for them to get experience in commercial farming. The general lack of farming skills continues to hold back production growth
•  Attempts to circumvent production problems by introducing programmes like “Operation Maguta” have borne little in the way of tangible results because soldiers are generally not farmers and do not have the necessary expertise (especially in commercial farming).
• Output decreases are expected for many commodities this year when compared with last season. This pessimistic forecast is derived from the disorganized planning and implementation that took place when the object was to ensure that all the inputs for the current season were available when required by farmers.

 The Weather In an overall context Zimbabwe experienced reasonably good rainfall in most areas during the 2008/2009 season. The season started well and normal to above average rains were experienced in most months through to April. January was the exception when there was a short dry spell covering most areas.  This greatly improved veld grazing conditions and water levels in dams.  ProductionTable 1 in the Appendix depicts total national output for the main commodities up to last year (2008) with production estimates being made for 2009. Data shown are based on assessments gathered from various sources.  The effect of land reform is well illustrated by the steep decline in output since 2001 for commodities produced primarily by commercial farmers. In summary commercial farm output has remained at around a third of pre-2001 levels since 2004. The three year maize production downward trend is 945,000 tonnes in 2006, 697,000 tonnes in 2007, and 417,000 tonnes in 2008. This year estimates for maize output indicate a rise to around 534,000 tonnes.  Current output is about 27% of that required to meet national demand (1.8 million tonnes) for this commodity. A 23% decrease in soyabean output occurred in 2008 with output approximately 51,200 tonnes when compared with 67,600 tonnes produced in 2007. Production this year (2009) has dropped to around 43,300 tonnes. Flue cured tobacco production at 48,720 tonnes in 2008 dropped by 33% from the total output of 73.400 tonnes achieved in 2007. A significant further decrease to around 39,700 tonnes is expected this year because prices received by many growers last year did not cover the cost of procuring inputs for the current crop. For this reason many small scale growers did not plant tobacco. Although total hectarage is much reduced, commercial growers’ yields per hectare are much better than 2008 because of more rain received and the heavier commercial crop has increased the total tobacco output. Cotton output at 223,000 tonnes in 2008 decreased by 12% from the 255,000 tonnes achieved in 2007. Current 2009 output is down to about 210,000 tonnes. There was a fall in wheat output over the three year period 2006 – 2008. The 2006 winter wheat output was around 170,200 tonnes, a substantial drop to about 64,500 tonnes occurred the following year, and in 2008 a total of about 25,550 tonnes was produced. This is less than 7% of the national annual requirement of 400,000 tonnes. Predictions for the coming winter crops at this stage are a drop in output for wheat to about 18,000 tonnes and a large decrease for barley. Approximately 200,000 head of cattle were sold for slaughter in 2008, which was 20% lower than the total for 2007. Annual milk production in 2008 fell to around 77 million litres from the 87 million litres delivered in 2007. Both beef cattle and dairy production are expected to decline further this year. Dairy output will be around 56 million litres of milk.  C. PRODUCTION VIABILITY AND INPUT SUPPLIES Since the year 2002, the country has faced chronic shortages of foreign currency to meet import requirements. This has translated into reduced supplies of tillage services, seed, fuel, fertilizer, electricity and spare parts resulting in decreased plantings of crops and a decline in commercial livestock output. Agricultural inputs have largely been not readily available and have been expensive to all classes of farmers. There are many causes, the main ones being:-

• Reduced capacity of the agro-industry to supply inputs because of:
  • Foreign currency shortages for raw material imports, thus reducing capacity utilization and thereby increasing production costs per unit as well as creating shortages.
  • Low profitability due to the uneconomic controlled prices instituted by government
  • High interest rates that have made the financing of operations expensive in the face of unviable controlled commodity prices
  • Limited rail capacity to ferry fertilizer and other raw materials
  • Power supply interruption
• Government intervention in input supply and distribution has crowded out private agro-dealers, whilst delivery of inputs under its own control has been tardy and limited in coverage. Timely provision of inputs is critical for such crops like tobacco as they have time sensitive operations such as fumigation, fertilization, and suckeride and herbicide application.
• Newly resettled areas are generally under-serviced by private input dealerships, resulting in very high transaction costs to acquire inputs.

The shortage of inputs, coupled with a defective government input allocation process has resulted in leakages of inputs into the parallel market where prices are unaffordable to many poorly resourced farmers. The result has been excessively high input prices, raising the farmer’s overall production costs and this has resulted in reduced cropped areas and lower application rates that have adversely affected yields.  ViabilityUntil the main currency reforms of early 2009 profitability had been undermined by

• Rapidly escalating inputs costs and affordability in relation to returns
• Limited finance to establish large enough areas that cover farm overheads
• Lack of economies of scale for such crops as coffee, tea and tobacco
• Overvalued exchange rates

Hyperinflation caused agricultural production to become very speculative in nature. Soaring input costs deterred growers from buying and using inputs at recommended levels with consequent negative effects on yields and quality. The unaffordability of basic inputs like fertilizer, chemicals, coal, fuel etc. were viewed against unattractive producer prices (Zimbabwean dollar equivalent) of both domestic and export crops that prevailed before farmers were permitted to charge prices in forex. Maize and wheat were subject to price controls, with announced prices often lagging behind inflation and input cost escalations. The recently introduced liberalisation measures described in section 1 above should go a long way to improve viability for all commodities.

 

Finance

Financing for agriculture under the dollarised environment has posed great challenges for farmers. The economy is currently operating on a cash basis. By its very nature agriculture production requires credit because of extended production periods.Unclear tenure policies and lack of track record farming have been barriers to private sector provision of credit to farmers. Various schemes by processors/ exporters of horticulture, tobacco, paprika and cotton have been set up to meet some partial working capital requirements. The processor provides inputs in exchange for the exclusive buying rights to produce for a pre – agreed pricing formula. Financing by commercial banks has been through overdraft facilities at market rates. Such facilities require collateral that is not available to the majority of current farmers. Also these facilities are of a short term nature and very expensive. In addition the banking sector is facing unprecedented challenges regarding the mobilisation of savings and lines of credit for on-lending to farmers. No meaningful external lines of credit are flowing into the country due to the country risk. Internally the banks are failing to mobilise savings due to a crisis of confidence with the whole financial sector, emanating from the previous operations of the Central Bank.Coffee, tea, sugar, citrus and most livestock production are long term commitments that require medium to long term financing for at least 3 to 4 years before getting reasonable returns. Medium term financing has been difficult to raise under the current circumstances. In addition, banks and other financial institutions are unwilling to lend to farmers on a medium to long term basis because of the security of tenure risk.External lines of credit have dried up due to the country’s failure to honour its external debts and the current policies on foreign investment are unattractive. In the past, development of the tobacco, horticulture and coffee sectors were funded through arrangement of external lines of credit that could be paid off with the export proceeds. Such arrangements have failed to take place due to the perceived country risk.

Seeds

Farmers experienced difficulty in obtaining their requirements of maize seed from suppliers this growing season. Besides the main problem of a shortage caused by production cuts, prices were quoted in US dollars that smallholder farmers found difficult to access and afford. Further complications arose by ongoing pricing issues that existed between seed growers and seed houses.  In contrast there generally were adequate supplies of soyabean, cotton, and sorghum seeds.

 

Fertiliser

The Fertiliser Industry continues to operate well below full capacity due to the following:

• Unviable prices relative to the production costs of fertilizer
• Foreign currency shortages that reduce imports of raw materials and spare parts
• Phosphate and anhydrous ammonia shortages
• Power outages
• Limited coal supplies.
• Skilled Manpower shortages
• Poor service from NRZ that reduces deliveries of raw materials to factories

 Manufacturers have been operating at less than a third of maximum capacity. This has had an adverse effect on yields for the summer crops grown by those farmers who were unable to source the quantity of fertilizers required by them. Towards the end of 2008 upward surges in the hyperinflationary spiral greatly diminished the ability of fertilizer companies to maintain viability and payment for product by farmers began to be demanded in foreign exchange or fuel coupons. In turn limited access to foreign exchange by farmers and un-affordability due to high prices reduced the quantity of fertilizers reaching farms to be used on summer crops. Both the RBZ and the EU (through the Stabex 95 scheme) made some cheaper but limited supplies of fertilizers available to farmers. Other small quantities also were made available through donations from RSA and SADC.

Electricity

Power supplies that meet Zimbabwe’s needs are dependent upon local generation capacity and power imports to make up shortfalls, and the adequacy and reliability of electricity transmission and distribution infrastructure. The status until the end of January was as follows.

• ZESA could not provide an efficient service because the power utility was not allowed to charge tariffs that anywhere near cover costs. 
• Sub-economic tariffs prevented ZESA from going into the market to purchase enough foreign exchange to pay for sufficient electricity imports to cover domestic power generation shortfalls.  ZESA was also unable to import all the equipment and spares necessary to maintain generating capacity and keep the domestic grid operating efficiently for the same reason. Breakdowns of generators at Hwange and other power stations therefore were frequent.
• Adequate coal supplies to the thermal power stations were not forthcoming.
• ZESA was also plagued by a spate of thefts of transmission equipment and lines.
•  

Because of these reasons load shedding was severe in both rural and urban areas during most of 2008. This adversely affected crops that rely on irrigation. Towards the end of the year and despite the problems outlined above power availability improved and this was attributed to the slowing down of economic activity, especially in the mining and manufacturing sectors and reduced demand. With tariffs now being charged in hard currency electricity generation and supplies were set to improve, but ZESA set tariffs at such high levels for all consumer categories that affordability has become a major issue. This has led to the suspension of the new tariffs until more reasonable tariff schedules can be drawn up. Therefore once again ZESA is facing critical viability problems and cannot pay for coal and electricity imports and load shedding has greatly intensified this winter. 

Stock Feeds

The decline in the local production of maize and soyabeans reduced supplies of basic ingredients to factories last year. This factor together with price controls that resulted in negative margins severely limited the quantities of manufactured stock feeds reaching farms in 2008. Essential ingredients like vitamins that are imported were also in short supply. With the recent currency and market liberalisation measures stock feed availability has improved and there has been a downward movement in prices recently.

 

Chemicals, Veterinary Products, & Spares

Crop chemicals are wholly imported and supplies are reliant on availability of foreign currency. Price escalations in tandem with foreign exchange market developments forced importers to almost universally demand payment in foreign exchange last year. Forex scarcity inhibited farmers from    using chemicals and demand was slack, and for the same reason the trend has continued into this year. Foreign exchange shortages have also been the main cause of limited supplies of veterinary products and spares for repairing equipment and machinery.

 

Fuel

In 2008 international increases in fuel prices affected agricultural production worldwide especially in oil importing countries of which Zimbabwe is one. Oil prices escalated rapidly during the year and climbed to record USD prices per barrel with the rise in fuel prices translating itself into increases in domestic production costs. When this development was coupled with shortages of foreign currency, accessing fuel became a major challenge for commercial farmers. However, the sharp fall in world prices for this commodity in the last quarter served to enhance affordability and boost agricultural  production viability and availability improved considerably after September, 2008. In recent months the trend has reversed with world prices again moving upwards with local prices being adjusted to accommodate the increases, and stock-outs of fuel recurring.WaterIrrigators have been prejudiced by ZINWA more than doubling their charges for raw water without consultation and this became effective on the 1^st July 2009.Farm EquipmentLast year the RBZ set aside significant funds for the import of another tranche of tractors, combine harvesters, and farm implements and a whole range of these items plus spares were imported. However, few, if any of this equipment was destined for CFU members and for them the lack of secure property rights restricted investment in capital goods.

 

D. CONCLUSION

 Recent developments have the potential to provide a prosperous future for commercial agriculture. However, while much of the uncertainty and risk associated with a destabilized currency have disappeared and the economic situation has improved there is still an urgent need to sort out the political problems that bedevil the country and formulate land policies that enhance farm output and create the right environment to grow the economy.         

APPENDIX
Table 1 : TOTAL PRODUCTION OF MAJOR AGRICULTURAL PRODUCTS in ZIMBABWE (000 tonnes)
	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009 *
Grains and Cereals
Maize	2,043.20	1,476.24	498.54	754.00	950.00	750.00	945.00	697.00	417.10	534.25
Wheat	250.00	314.00	186.50	120.00	121.65	134.00	170.20	64.55	25.55	18.05
Sorghum	61.91	60.74	23.82	59.56	124.00	111.00	126.80	130.80	103.00	113.50
Barley	32.00	32.00	58.00	50.00	36.40	43.00	53.50	32.00	24.50	11.25
Small Grains
Traditional Export Crops
Tobacco Flue Cured	236.13	202.54	165.84	81.81	69.00	73.39	54.25	73.39	48.72	39.70
Tobacco Air Cured	8.16	4.60	3.99	1.99	1.00	0.34	0.27	0.09	0.06	0.06
Cotton	353.00	335.25	195.67	253.00	330.00	198.00	260.33	255.00	223.02	210.09
Oilseed Crops
Soya beans	149.94	175.08	72.41	70.26	71.00	54.00	54.80	67.60	51.20	43.30
Groundnuts	190.89	171.78	58.56	141.18	85.30	n/a	51.27	130.55	116.55	44.46
Sunflower	15.75	31.50	4.39	4.83	18.60	n/a	42.61	42.58	33.40	16.25
Plantation and Industrial Export Crops
Tea	21.80	21.73	22.88	22.54	20.72	16.87	15.43	15.11	13.00	10.00
Coffee	6.54	7.26	6.36	5.04	5.76	3.48	1.30	0.70	0.50	0.50
Paprika	13.87	12.79	13.40	10.80	7.18	4.57	3.11	1.61	0.74	0.26
Flowers	17.86	17.86	21.89	22.80	20.17	16.27	14.33	10.17	8.00	5.00
Citrus	39.32	39.32	33.64	43.19	47.77	34.23	26.31	26.45	19.00	15.00
Fresh Produce	10.22	10.22	7.51	9.64	10.24	7.28	4.95	5.33	4.00	3.00
Sugar	538.00	515.00	581.00	502.74	422.30	400.00	446.65	400.00	380.00	350.00
Livestock
Dairy	187.05	176.77	153.13	114.08	97.64	94.55	92.50	87.36	77.08	56.53
Beef Slaughters (nos)	605.00	630.00	720.00	450.00	450.00	450.00	300.00	250.00	200.00	180.00
* Estimates

 C Taffs(Vice President)09 July 2009