Tobacco farmers’ pressure to side market explained
OF the 206 million kilogrammes of tobacco sold in 2021, over 94% was financed and sold through contract whilst approximately 6% was self-funded and sold through the competitive bidding process at auction.
Tobacco can only be sold to licensed buyers by registered grower numbers at licensed contract and auction floors. A grower number is a unique identity number registered and allocated through the Tobacco Industry and Marketing Board (Timb). It carries grower production history, estimates, tobacco input debt and third party debt amongst other details. A tobacco farmer cannot legally sell tobacco without a grower number.
When a contractor advances inputs to the farmer, the contractor becomes entitled to the crop to the extent they have financed the crop. The contracted grower number can only sell at the specific contract floor until released. When self-funded, a grower number can only sell at auction.
When tobacco is sold at any Licensed Contract or Auction Floor, the debt linked to the grower number is automatically deducted through a sophisticated e-marketing system managed by Timb. The system integrates all tobacco sales by registered growers at licensed floors countrywide.
The industry thus heavily relies on the integrity of farmers to sell through their own grower numbers at their contracted floor to ensure sufficient debt recovery.
Side marketing
Side marketing typically occurs when a tobacco grower uses a grower number other than their own to sell tobacco at a contract or auction floor. The grower number used can belong to a spouse, the grower’s child, a relative, a friend, or any other third party.
It can also occur when farmers sell their crop to unlicensed buyers “makorokoza” at the farm gate.
When a contract floor buys tobacco that is financed by another floor they are deemed to have side marketed.
Likewise, when auction floors buy tobacco that has been financed by a contractor they are deemed to have side marketed.
Farmer’s pressure to side market
Two key needs that guarantee farmer satisfaction are fair tobacco pricing and affordable inputs. Other demands include 100% forex retention, selling convenience and fast and efficient floor services.
When needs are not met, the pressure to side market emerges as discussed below.
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Pressure to obtain the best price for their crop. For the recently ended 2021 tobacco season the average price for tobacco by floor ranged from US$1,97 per kilogramme (kg) to US$3,17 per kg. The huge price disparity partly emanated from the absence of a transparent competitive bidding process at contract floors.
Given the price disparities, farmers are forced to hunt for the best paying floor in order to maximise their returns. A different grower number is used to sell at their preferred auction or contract floor.
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Pressure to escape high input costs and US$ debt
The source of funding for the majority of contractors is offshore. Offshore debt has its own funding costs and administrative costs up until it reaches the farmer. The debt to the farmer will be denominated in US$ given its off-shore nature.
The funding model results in reduced farmer US$ net proceeds as the debt is US$ denominated and charged against the farmers’ 60% forex retention. Zimbabwe’s net foreign currency inflow is affected as offshore debts need to be serviced by the contractor.
Given there is no set standard price per input type. The debt to the farmer in some cases is high in comparison to the input type provided.
Faced with high input costs, low prices, and lower forex retention farmers are pushed to side market in an effort to escape a debt-trap and maximise profit.
Ethics when faced with financial pressure usually fall away as the need to survive outweighs the moral obligation to settle debt.
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Pressure for efficiency and convenience
Farmers may opt to sell to notorious “makorokoza” who offer instant USD cash payment. The price offered by these individuals is, however, usually significantly lower than that offered at floors. What attracts a farmer to this route is instant cash payment, zero transport costs and zero administrative hiccups, which are sometimes experienced at the floors.
The need for 100% forex retention will also drive the farmer to sell to “makorokoza”.
Contract floors have been permitted to decentralise to various towns while auction floors remain in Harare. To exploit the low transport costs, shorter traveling time and accommodation logistics associated with selling to nearby decentralised contract floors, self-funded growers are forced to sell through the contract system.
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Self-inflicted pressure and attitude Some farmers are reluctant to honour their collateral free debt simply because they can and have done so in the past.
Other farmers believe their debt is immaterial as contractors are making profit anyway from the low tobacco pricing. The price of the golden leaf has decreased from about US$3,67 per kg in 2013 to US$2,80 per kg in 2021, for some this serves as justification to escape debt and recover the lost revenue from subdued prices.
Another misguided belief amongst perpetrators is that everyone is doing it, so why should they drown in debt on their own?
Impact of side marketing
When a grower side-markets a debt cannot be recovered. There is risk of the cost of non-performing debt being pushed back to farmers through low tobacco price offering and/or higher inputs costs to ensure the contract floor’s survival.
This creates a dangerous cycle, which leads to the demise of the industry.
A mental model shift is required for stakeholders as the rotten fruits of sidemarketing are low debt recovery, reduced funding and investor confidence. Funding costs will also increase as lenders try to manage non-performing collateral free debt.
Possible solutions and way forward
The Tobacco Value Chain Transformation Plan aims to increase tobacco production sustainably to 300 million kgs through localised tobacco funding amongst other excellent strategies by 2025.
If successfully implemented and local, affordable government funding registered with the Timb stop order system is channelled directly to farmers through noncontracting entities/banks, we should comfortably expect cheaper local debt, lower off-shore debt and an increased pricing through competitive bidding.
Side marketers divert tobacco through bona fide grower numbers. Increased monitoring and verification of grower numbers, grower and contractor estimates may assist in addressing the matter.
The proposed improved security features by the Ministry of Lands, Agriculture, Fisheries, Water and Rural Resettlement for A1 land offer letters, should theoretically make verification of proof of land ownership for Agritex officers and TIMB easier when registering grower numbers
Timb appointed inspectors to name and shame “makorokoza” in 2021 — a commendable move that provided psychological pressure to other perpetrators given the criminal consequences.
Over 94% of farmers are highly dependent on funding, it is thus crucial for stakeholders to act responsibly and ethically to ensure sustainable tobacco re-financing and profitable farming.