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Obert Chifamba Agri-Insight
I have never been very good with figures at school or even outside.
And neither have I been gifted with the ability to comprehend economics as a subject, but I can pick it when something happens in a process that is supposed to flow smoothly but somehow, does so incongruously.
The current goings-on in the pricing of tobacco has just left me searching for answers, which I suspect may be difficult to stumble on given that the industry has in recent times created the impression that someone somewhere is controlling everything that happens during the marketing time.
Prices have in most seasons seemed to hit a ceiling that they can never break free of.
Day 1 prices that should logically be low because of the mediocre quality of the first leaves to be marketed, which usually have primings, have in most cases turned out to be the predominant prices for the entire season even if the quality would have improved significantly.
Maybe that is how the law of diminishing marginal utility, which states that the value of a good or service declines as its supply increases, operates because as the better quality and more quantities of tobacco come, prices tend to start declining or just become static.
Under normal circumstances better quality should attract better prices too and not the other way round.
It is no surprise therefore that tobacco farmers and their various unions and associations recently voiced their concerns on the deteriorating situation in the industry, which if not arrested in time, may be heralding the slow death of a very important crop to the country’s economy.
Tobacco prices have been steadily declining in recent times. This has seen an entire season’s prices failing to surpass a highest that would have been set when the selling term is still in its infancy.
The 2023 marketing season, for instance, had a highest price of US$6,20 per kilogramme fetched at the start of the season, which was not eclipsed even when the season progressed with the highest grades of leaves coming.
Essentially, the situation is hinting at the need to adopt a cost-pricing model to replace the current buyer-bidding system that is compromising the crop’s profitability, as it does not factor in the cost of production.
The danger with the buyer-bidding system is that the price setter, who happens to the merchant will not be alive to what the farmer would have gone through in the production process in terms of costs.
In fact, it may make sense if farmers are also involved in the price-fixing so that the prices can be reflective of the cost of production, which is a key determinant in whether prices are viable or not.
On the one hand, there is growing need to break the price ceiling that we have witnessed being consolidated over the years to keep the highest auction floor price at US$4,99 per kilogramme and US$6,10 at the contract floors against last year’s high price of US$6,80.
It is important for the tobacco industry to have competitive prices that are determined by the quality of the crop and not the collusions of individuals or groups of people.
Prices must be reflective of the true value of produce.
In the 2023 tobacco marketing season, prices were firm during the first two weeks of marketing and started falling gradually towards mid-season — a trend that continued up to end of the season.
This, in a way, gave credence to farmers’ perennial concerns that merchants are colluding to give them low prices while they (buyers) later make a lot of money after buying the crop for a song.
If this is what is happening, then farmers are justified in those instances when they withhold produce and demand Government’s intervention, which in most cases has brought some relief.
The Tobacco Industry and Marketing Board (TIMB) has moved in to enforce strict compliance in the meeting of contractual obligations by both farmers and contractors, who in most cases are the buyers.
This, however, does not seem to have made some impact in the pricing modalities and farmers have not found much joy even after some contractors responded positively to TIMB’s push.
What may now be needed is for the regulator to find a way of being involved in the fixing of prices since it will be aware of the economic dynamics under which the crop for a particular season would have been produced.
TIMB needs to find a way of moderating the way merchants fix prices so both parties — merchants and farmers can remain in business.
It is crucial for the country to adopt a pricing model that is sensitive to inputs cost, something that the current pricing model does not seem to consider.
Suffice it to say therefore that a minimum entry price plus a margin is essential for increased productivity, production and sustainability.
It is unfortunate to note that the 2023 tobacco marketing season was using an old buying model, which is not production-cost driven given that high costs of production characterised the season with prices for such basic requirements as fertilisers, fuel and labour rising regularly.
The sad reality on the ground was that the 2023 tobacco marketing season recorded a one cent increase in the average price from US$3, 00 per kilogramme in 2022 to US$3, 01 against increased production costs of up to 100 percent, thanks to rising input prices.
This effectively put paid to any hopes farmers had of getting competitive prices that would make tobacco profitable and sustainable even in the absence of the contractor.
This development leaves farmers trapped in debt because they will not be able to repay loans to the last cent, which leaves them owing contractors and therefore expected to produce under contract again.
After all, contract arrangements are not supposed to be eternal arrangements but something that allows the farmer to gain her footing and be able to produce effectively on her own to the point of doing self-financing.
The situation panning out in the tobacco industry is one that makes farmers perennial dependents on external help, which does not allow them to grow individually.
Tobacco growers need to come to a point where they produce a crop from their own resources, sell it and get all the earnings and not to be takers of the remainder of what contractors would have deemed necessary to give them.
It is an undeniable fact that an adequately resourced farmer can plan more effectively than one who waits for aid from external sources to start their operations.
Online Reporter