New tobacco strategy targets US$5bn exports

ZIMBABWE plans to take a new approach on beneficiation of tobacco as it seeks to maximise exports from the crop to US$5 billion by 2025, according to an official document outlining the strategy.

This comes as net inflows were just 12,5 percent of total of tobacco exports in 2019 and 2020, despite it being touted as the country’s second largest foreign currency earner.

Zimbabwe, which is the world’s sixth largest producer of tobacco is processing only 2 percent of the commodity. The latest push for beneficiation and value addition seeks to unlock US$5 billion in export revenue by 2025, according to the strategy document prepared by the Ministry of Agriculture and approved by the Cabinet recently. On average the country is currently earning between US$800 and US$1 billion annually from tobacco exports.

The government’s grand plan also seeks to raise localisation of tobacco funding to 70 percent by 2025, boost output to 300 million kg, increase the level of value addition of the leaf into cutrug and boost the production of cigarette to 30 percent from 2 percent.

“The value addition and beneficiation plan will seek to boost capacity levels of existing tobacco processors and cigarette manufacturers and attract new investment into manufacturing of tobacco products and securing exports markets,” said the document.

This would be achieved through incentives for local beneficiation, stable and predictable Government policies, predictable tax regime to allow for planning and re-investment as well encouraging the Government support through lines of credit.

“Investments laws guiding investments into tobacco sector will be reviewed and create a business friendly environment that is attractive to both foreign and local investors into tobacco sector,” the document said, which has since been approved.

According to the Reserve Bank of Zimbabwe, net inflows tobacco averaged 12,5 percent of total exports over the past two years, totaling US$47,5 million and US$39,4 million.

Export market barriers

With very few exceptions, indigenous tobacco merchants have failed to penetrate this market due to formidable entry barriers in the form of access to low cost funding, long working capital cycles, access to markets in the exclusive old-boys club of global tobacco as well as lack of factory processing capacity.

As a result, local merchants have been condemned to trading as speculators on the auction floors, surrogate buying on behalf of the big merchants as well as management of contract growing schemes on behalf of the large merchants. Returns from all these activities are a pittance in relation to the returns that indigenous players could make in export markets as leaf merchants or cigarette manufacturers.

Effectively the indigenous tobacco merchant does not have a seat at the main table and is surviving on the crumbs dropped by the giants. While tobacco farming provides handsome returns especially in relation to other crops, the farmer is only participating in only one percent of the value chain. Indeed, celebrating the success of tobacco farming equates to celebrating the tail of the elephant as the bulk of tobacco returns are transferred offshore.

Analysts says there is need for policymakers to formulate an effective indigenisation roadmap for the tobacco sector in order to address constraints relating to funding, markets and processing facilities.

Among other things this strategy should incorporate is a focus on niche markets where local merchants can benefit from deals at a government to government level as well as leveraging regulatory power in the creation of alternative tobacco processing facilities.

Review of contract farming laws

The strategy also intends to establish a legal framework governing contract farming and review of the Tobacco Finance Order of 2004 to fully account for the country’s export earnings while exploring alternatives sources to tobacco funding.

About 150 000 small scale farmers continue suffering losses due to significant power asymmetry between the buyers and the farmers. Tobacco merchants grade the quality and peg the price, which may mean that farmers receive lower prices than they would have received had their crop sold in a competitive market.

Farmers also get inputs from merchants at inflated prices than on competitive market, trapping them in cycles of poverty and indebtedness.

While Zimbabwe’s tobacco auction system used to be the marketing model of tobacco in the world, ‘free’ volumes have shrunk as farmers, mostly those who benefited under the land reform joined contract schemes as they did not have money to finance themselves.

“There is no transparency on pricing of imported inputs and farming equipment,” said the document.

“This has resulted in country being prejudiced of its true and fair value of export tobacco. The TIMB (Tobacco Industry and Marketing Board) estimates that foreign and local components in the cost of production are 60 percent and 40 percent respectively. The full localisation of funding will require local financing of tobacco inputs.”