THE Competition and Tariff Commission (CTC) says the tobacco industry regulator should lobby for regulations compelling all merchants to purchase a certain percentage of their tobacco requirements from auction floors to enhance competition, The NewsHawks can report.
In its latest report, the CTC accused merchants of manipulating the golden leaf’s pricing at the auction floors, thereby fleecing desperate farmers of millions of dollars. As such, it called for the Tobacco Industry and Marketing Board (TIMB) to counter check mechanisms on the contract systems.
“To promote use of the auction system, TIMB must promulgate regulations compelling all merchants to purchase a certain percentage of their requirements from auction floors. This will enhance competition, leading to increased prices at the floors as well offering a counter checking mechanism on the contract systems,” the report reads in part.
The CTC said decentralisation of tobacco marketing in 2020, reinforced by travel restrictions, entailed that contracting merchants received some of the independently produced tobacco, which ideally should be sold via the auction.
This provided the environment for contractors to exercise their market power as farmers could not sell at the auction.
“It follows from above that it might have been a deliberate long-term strategy by tobacco merchants to eliminate the auction-marketing model, where competition is relatively intense as merchants compete based on market forces,” it said.
“This was through enticing farmers to switch to contract farming by offering high contract price. The year 2020 then created the environment for merchants to render the auction ineffective. Given that 2020 concentration ratios were higher on the auction unlike under contract, but with higher producer prices above the contract, shows that there was more competition under the auction marketing model.”
However, the CTC said it remains to be seen whether the auction will rebound in the 2021 season, but the likelihood of that happening still remains very low. It said these developments in the tobacco sector call for intervention in order to revive the auction marketing model, crucial in ensuring that farmers are not exploited by merchants.
“While the exercise of market power might be beneficial to merchants, it exposes them to great risk of side marketing by farmers as they seek better prices and selling terms. In light of the importance of the sector as one of the major foreign currency earners, there is need for intervention to ensure sustainability and that competition is increased amongst merchants,” it said.
Meanwhile, the CTC said TIMB must discard the price matrix currently being used to determine minimum contract prices and introduce a new model that ensures farmers get fair value from contractors.
“Worth reflecting on is the need to review use of the price matrix by TIMB in determining the minimum contract price. This is due to the recent data which shows that 95% of tobacco produced was marketed under contract and only 5% under auction,” it said.
“It does not make economic sense for the price of 95% of tobacco produced in the country to be dependent on the price of 5% of the produce. In reality, it should be the other way round. Furthermore, the indication that merchants discarded its use in 2020 shows their growing market power in the sector.”
Tobacco is one of the major foreign currency earners in Zimbabwe, contributing about US$763 million to the country’s exports in 2020, according to TIMB. The sector also plays a crucial role as a source of employment to the country’s citizens.