Tobacco prices go up in smoke in Zimbabwe

A sudden drop in the price of tobacco could not have come at a worse time for Zimbabwe. Halfway through the selling season, the price is about 37% lower than last year — at a time when, on its current trajectory, inflation could hit 100% by year-end.

It’s a blow for a country already in dire economic straits. Tobacco is a leading foreign currency earner. It accounted for nearly a fifth of Zimbabwe’s $5.3bn export earnings in 2018, bringing in almost $1bn.

It’s also a large employer: there were about 172,000 growers this year — up from 111,000 for last year’s bumper season — but only about 2,000 grow more than 2ha.

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 situation will put the screws on producers already under strain. According to tobacco expert and opposition MP Rusty Markham, tobacco is an expensive crop, costing about $12,000/ha to farm.

In the wake of the post-2000 land invasions, the state’s land bank collapsed. Then, as a result of the nationalisation of agricultural land in 2005, commercial banks withdrew from the tobacco market, citing a lack of security to cover loans.

It means that about 80% of tobacco operations are financed in US dollars — mainly from tobacco contractors and merchants in the US, UK and Zimbabwe. Farmers, large and small, are paid in real-time gross settlement dollars (RTGS$) — but they have to repay their funders in US currency, at a crippling rate of about RTGS$5.7/$1. Though they can later claim 50% of their earnings back in US dollars, that process has not always proved easy.

Industry insiders, including Markham, predict the low price will leave top growers in 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,” he says.

Those in the know doubt that defaulting growers will be closed down ahead of the planting season, as the tobacco merchants and contractors need to ensure continuity of flavour and quality in their products. But there must surely be a limit to that patience.

Some contractors employ former tobacco farmers — many of them evicted from their farms in the land grabs — to supervise and help growers so they do well enough to pay back their loans.

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 — China’s Tian Ze, British American Tobacco through Northern Tobacco, and several other local and international buyers — and the prices they dictate.

It’s unclear what exactly is pushing the price down, but industry speculation points to the US-China trade war, a glut of Zimbabwe’s main flavours on the market, contractors punishing the government for paying growers in RTGS$, and fewer people smoking, including in Asia, the primary export market.

The potential fallout of the price drop does not seem to have sunk in yet. Some speculate that this is because of the glut of other bad news, including load-shedding — 10 hours a day — which will continue at least until the end of the year.

But until the country’s currency woes are resolved, it’s unlikely that the bad news cycle will be arrested.

Ashok Chakravarti, an economic adviser to the government, points to the need for dramatic changes in “the rate” in the coming months. He and other industrialists and retailers, who meet regularly and call themselves the “round table”, believe the market must be left to determine the rate of exchange as a precursor to Zimbabwe launching a new currency. It’s a move that will substantially diminish the power of the Reserve Bank of Zimbabwe, bringing it in line with conventional central banks.