Finance Minister Simba Makoni had to bow down to tobacco farmers after they withheld their crop because of the low price on the auction floors.
He introduced a special price of Z$200 a kg but farmers were said to be demanding a price of Z$350 a kg.
They claimed that the Z$200 price was a guaranteed loss-maker and would drive them out of business.
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¶1. (SBU) On May 16, after two days of boycotts by
tobacco farmers of the sales of their crop due to an
uneconomic return assured by the official exchange rate,
the Finance Minister Simba Makoni announced a special
support price for tobacco. The scheme equates to an 82
percent forex devaluation for growers, and promises
tobacco sellers a price of Zim $200/kilogram, an amount
the Government determined after a hasty review of
production costs to ensure grower viability. However, we
contacted the industry and heard a very different minimum
price demand from farmers, small, medium and large scale,
who want and are still pushing hard for a guaranteed
floor price of about Zim $350/kg. They claim the $200
price is a guaranteed loss-maker, and will drive all
producers out of business. Discussions on this minimum
price issue are continuing, and there is a real
possibility of another sales boycott should additional
relief not be extended to tobacco sellers.
¶2. (SBU) The problem started on May 14 when the tobacco
sales floors opened. Auction prices on the first day
averaged about US $1.85/kg, in line with world prices and
given the quality of the product on offer. (Zimbabwe’s
tobacco auction period usually runs about four months,
and large-scale growers typically hold back their best
product for the latter third of the season hoping for
price firming and a devaluation. The first part of the
sales season is, therefore, characterized by commercial
farmers offering their scraps and low-quality products,
with small and medium-scale growers bringing in all
ranges of product because they need the cash now, either
to pay back the bank or buy groceries.) Opening day
tobacco sellers did the math, and realized that at US
$1.85/kg and at the official exchange rate they would
only put in their pocket about Zim $100/kg. The small
and medium-scale growers said no, and tore up the sales
tickets. The large-scale producers merely told their
truck drivers not to unload. When no sales occurred on
May 15 the GOZ, nearly panic-stricken, sent in a
delegation led by Makoni to work out a deal. After about
36 hours of open and closed sessions, at 2:00 a.m. on May
16 the Minister announced this package.
¶3. (SBU) In coming up with the scheme, according to
press reports, Makoni considered three variables: a) an
average buying price of US $2/kg, b) the official rate of
Zim $55, and c) a viable threshold price for growers of
Zim $200/kg. To close the gap (between $2x$55=$110 and
the viability price of $200, or Zim $90/kg) and buy the
GOZ time, the Finance Minister granted the subsidy even
though there is no provision in his budget for the
measure. Another way of looking at the package is that
the government is offering an exchange rate of Zim $100
per US $1 to tobacco sellers (versus the official rate of
$55, hence the 82 percent devaluation described in the
opening paragraph). The core of the problem facing the
Finance Minister and the GOZ is the six to seven times
multiple between the official rate of US $1 equals Zim
$55, and the parallel market rate of Zim $325 to $350.
Such a spread allows great latitude for shady dealing and
windfall profits, and as the ruling party considers such
transactions to be in their domain, we are seeing a
struggle between the exporters and the government over
how the spoils are shared or divided.
¶4. (SBU) Comment: We do not believe this current
arrangement will hold for long. It is ad-hoc and based
on no established policy, other than putting out fires.
Producers say the price of Zim $200/kg is about half of
what they need to make money, and they intend to fight
for an increase. Calling it a subsidy, as the government
is doing, is a chimera to avoid being caught taking
advantage of the official/parallel rate divide. This is
not any way to run a country, unless it’s into the
ground. End Comment.