15 May 2002

Tobacco sales suspended in Zimbabwe

Sales at two of Zimbabwe's three tobacco auction floors were suspended amid near-chaos when small-scale tobacco growers protested angrily at the prices offered by buyers. The small-scale growers were infuriated by what they saw as unrealistically low prices, though in US dollar terms the prices were little different from those on the opening day of the sales in the two previous years. At the largest of the three floors, where the volume of leaf sold was tiny, the price averaged 167 US cents a kilogramme, down 3.5 per cent from 173 cents last year. Sales were halted after small-scale growers protested at the prices paid and large-scale farmers tore up their tickets, designating rejection of the sale.

The problem is not the prices but the exchange rate. In 2001, the tobacco market was distorted by the yawning gap between the official exchange rate of Z$55 to the US dollar and the parallel market rate, which rose above Z$325 to the US unit during the tobacco sales season. This meant that buyers could source foreign exchange at the official rate and buy tobacco on the floors at prices well above those ruling in world tobacco markets. As a result the average floor price almost doubled last year from 169 US cents a kg in 2000 to 318 cents. But the actual export price averaged only 175 cents, so the apparent surge in prices was the result not of better tobacco or increased demand but currency manipulation. In a move to stamp out this practice, the Reserve Bank of Zimbabwe has imposed new strict rules, so that all purchases are made in foreign currency.

Growers warned the government that even assuming prices rose to an average 200 cents in 2002, at the official exchange rate, the local currency price of Z$110 would be about half the cost of production. This grim reality on Tuesday dawned on the small-scale growers, who initially blamed foreign buyers and their agents but turned on the government after auction officials had explained the economics of the crisis. Some demanded the cancellation of the sales until Simba Makoni, finance minister, agreed to devalue the official exchange rate. Government spokesmen have repeatedly ruled this out, leaving Makoni to choose between a special, "devalued" exchange rate for tobacco (as is the practice for gold exports), or widening the country's exchange controls to stamp out the parallel market altogether. This latter strategy, while popular with government hardliners, would be self-defeating since it would undermine other export sectors that are still able to exploit the parallel market.

The stand-off between growers and the government is likely to be resolved by a devalued rate for tobacco exports. This, however, is unlikely to revive an industry that looks to be heading for a precipitous decline in 2003. Most commercial tobacco farmers have had their properties listed for compulsory acquisition by the state. By the end of last month, 85 per cent of Zimbabwe's 6000 commercial farms were listed, covering some 10.2m hectares (93 per cent) out of a total of just over 11m hectares. This suggests that if the government takes the vast majority of commercial farms, there will be a very small tobacco crop in 2003. This season's crop is estimated at 168m kg, 17 per cent down on last year and almost 30 per cent smaller than in 2000. Tobacco is Zimbabwe's largest export, earning an estimated US$500m last year out of total exports of US$1.7bn. It is small wonder then that in Harare yesterday both growers and buyers were warning that the sale of 2002 could mark the end of the Zimbabwe tobacco industry "as we know it". (The Financial Times)

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