The transformation of the Zimbabwean tobacco industry over the last two decades, with the accompanying growth in the sector and the increase in exports, has been a national success story combining the private sector, a semi-independent regulator set up by Government, and tens of thousands of small-scale growers who have learned to grow a quality crop.

The transformation, though, has not been without hurdles now becoming apparent, and saw a major retreat of the Zimbabwean banking sector from the industry.

Up until land reform, the growing and curing was totally dominated by around 2 000 large estates. These very large-scale farmers had individual relationships with banks, with specialised bank staff actually visiting their farms, and who borrowed for inputs, harvesting, curing and grading from the banks, usually leaving their title deeds in the bank-manager’s safe.

Some exceptionally established growers had personal liquid wealth to fund their own crop, but most had to borrow at some stage in the season.

The entire crop was sold on auction, something the growers had set up early in the history of the commercial industry. While foreign buyers dominated the early decades, there were a growing number of Zimbabwean merchants entering the market, and these were largely funded through a vibrant merchant banking system that developed to cope with the fact that the tobacco had to be bought over a few weeks, but processed and sold to the eventual foreign buyer over many months.

The banking sector had its safeguards, like the stop orders at the auctions that saw farmer loans immediately repaid as their crop was sold, and the very tight export and foreign currency controls ensuring that the merchant banks were repaid automatically as the export revenue arrived.

Land reform meant that everyone had to become very creative. The huge change was a switch to contract farming for the bulk of the crop with the merchants through the contractors lending physical inputs to small-scale farmers and the farmers legally obliged to deliver to the merchants. 

Since a reasonable, although minority percentage, of the crop was still sold by auction, the prices for each type and grade of tobacco were set at the floors. The security for the input loans was the crop itself, which is why contractors like to move around and physically check the plants on the farms.

The Tobacco Industry Marketing Board, with representation from across the industry, became a far more active regulator, registering the farmers, which also included gathering proof that the farmer had some sort of land right, and registering the merchants. 

One major effect, with the hyperinflation seen at this time being another major driving force, was a retreat by the Zimbabwean banks. We have now reached the stage where most of the crop and its subsequent processing is financed by off-shore arrangements through the merchants, returning us to the 1920s and seeing a fair slice of the profit from the industry ending up with those off-shore financiers.

That off-shore financing through the merchants also saw a rapid decline in the percentage of the crop going to auction. 

With most of the larger growers holding A2 resettlement farms, banks were nervous about financing just on the security of the crop, so these farmers also had to enter the contract system. 

So less than six percent of the crop is now sold on auction, considered to be too low a percentage for establishing fair prices.

This has been compounded in the last season, the Covid-19 season, by a sudden input of side marketing. When the entire crop had to be delivered in Harare, it was easy for the TIMB to control that since deliveries could be physically checked if necessary, merchants could control their contractors, and there was in any case a general agreement that no one would steal another merchant’s farmers. 

Farmers who wanted to switch had to do this after delivering their crop and before the next season.

The decentralisation of deliveries has allowed dishonest merchants, dishonest contractors and dishonest farmers to wide market. That process can, and probably has, depressed prices. 

The final export price of Zimbabwean tobacco is fixed by what customers around the world are prepared to pay; that cannot be altered. The merchants take a percentage for the value they add in the initial processing and to cover their finance costs. The contractors take another slice to cover their costs.

With side marketing you can pay farmers less, since they do not have to cover refunds for inputs, and there is more to split between merchants and contractors. While technically honest farmers should not be affected, a general depression of average farmer prices obviously has a knock-on effect.

So the TIMB has to tighten its monitoring and take swift and effective action against all cheats. The advantages of decentralisation are so great that it should be permanent, not just a temporary Covid-19 arrangement. But obviously the loopholes need to be closed and the efficiency of the system enhanced. The whole industry needs to be involved.

The problem of local financing is now being addressed with the Reserve Bank of Zimbabwe creating a US$60 million revolving fund that can be used to finance selected farmers who would then return to the auctions and repay through the old stop order system.

Discussions are still in progress over how this will work, but again it seems obvious that far tighter monitoring of arrangements is needed, involving TIMB and probably the Government, at the very least through its Agritex network. 

The new arrangement is an idea whose time has come, although contract farming will still be norm for most farmers since US$60 million will finance just around a quarter of the hope-for expanded crop. But cheating and side-marketing will wreck it. 

Farmers tend to be blamed for side-marketing, and so they should, but we need to remember that in every side-marketing arrangement there are two parties, the cheating farmer and the cheating buyer.

The buyer is probably more to blame, as being driven solely by greed. Some farmers, so their organisations report, have resorted to side-marketing a part of their crop to raise the funds to cure and deliver the rest, which suggests that some contractors are not as efficient as they should be. 

The whole system now in place has worked remarkably well and the Reserve Bank intervention should make it work even better and create more value for Zimbabwe as well as ensure the pricing system works properly. But equally obviously there are strains in the system that need to be resolved, carefully as we do not want to throw the baby out with the bath water. 

The entire industry needs to take a deep breath, with the honest majority at all stages being willing to back the TIMB fully and actively as the individual cheats are weeded out.