Tobacco auction: Case of misplaced priority

Tobacco auction: Case of misplaced priority

Source: Tobacco auction: Case of misplaced priority | The Herald March 9, 2017

Business Reporter
THE tobacco selling season begins next week Wednesday and on this day, farmers will be greeted with a new system for auctioning the crop, aptly named the e-auction.

The system is a fundamental change to the traditional process used when bidding for tobacco.

The theoretical advantages of e-auction are massive and below is a list of some of them.

It eliminates collusion from buyers. Collusion takes place when buyers clandestinely agree on a price ceiling, much to the chagrin of farmers.

It eliminates sharing by buyers. This happens when tobacco buyers agree to give each other equal opportunity, relative to their buying power, of bidding for good tobacco without facing stiff competition. In other words, sharing defeats the whole idea of auctioning.

In theory, the ability to eliminate sharing sounds like a panacea to the cancer that has been devouring the viability of tobacco farmers.

The system forces buyers to bid more for the crop, making prices shoot through the roof.

The idea is that by removing collusion and sharing, prices will rise. In theory, this seems like a logical conclusion that will excite any farmer. The above points are rather perceived major advantages of e-auction as far as tobacco growers are concerned.

There are other subtle advantages like faster processing of payments at the auction floors and allowing closer monitoring of the auctioning process by interested parties like merchants and the Tobacco Industry and Marketing Board, the industry regulator.

Exposing the snake oil sold to the tobacco industry

Provisional figures released by the TIMB show that Zimbabwe is expecting to produce 200 million kilograms of tobacco this season. Of this amount, about 184 million kg is a contracted crop and only 16 million kilograms will be sold through auction.

This implies that the massive investment made to bring e-auction to Zimbabwe is for 8 percent of the crop since over 90 percent of the crop will be sold through contract floors where the e-auction system does not apply. It seems when the TIMB realised this ridiculous anomaly, they renamed their e-auction system to e-marketing and claimed that it will eventually cover contractors. But the truth of the matter is that it is not applicable to contractors because there is no bidding at contract floors. The e-auction or e-marketing system has its strength in the bidding process.

TIMB has licensed a lot of buyers and contractors who do not have any external markets.

These buyers are essentially middleman who survive on arbitrage and fleecing farmers in the process.

During the time when tobacco marketing regulations where applied with diligence and accountability, A-Class buyers where only allowed to make inter-merchant purchases or sales of less than 10 percent of their purchases from farmers or auction floors.

Inter-merchant sales is when a tobacco buyer re-sales tobacco to other merchants. Back then, the main reason for this was to adjust quantities of certain styles in their stock by buying or selling to or from other merchants.

Currently, TIMB has not rectified the regulation of inter-merchant sales. There are now A-class buyers who re-sales 100 percent of the crop they bought from farmers. The only reason these A-Class buyers remain in business is because they are buying from farmers at artificially low prices to enable them to put a mark-up on reselling that tobacco.

This is worse than collusion and sharing, which the e-auction seeks to eliminate. This implies that e-auction is just being used as a window dressing mechanism to mask the shocking wrong fundamentals that are gradually pushing the tobacco industry towards the cotton route.

The curse of the middleman is biting the tobacco farmer as much as to bit hard on the cotton farmer.

A middleman, brandishing a TIMB issued A-class buyer licence, has all the motivation to defeat the perceived benefits of e-auction because a lot of money is involved.

Industry players confirmed a good number of contractors are offering growers bad deals, some even having the audacity to just give growers hessian only, and still getting away with it.

TIMB is licensing major contractors to open secondary contract floors. These secondary selling floors touted as “testing ground” for farmers who wish to be contracted in coming seasons.

This practice is bizarre because a serious contractor can easily get performance data on any farmer from TIMB, hence no need for a “secondary floor” to test farmers’ abilities.

Essentially, these secondary floors are mopping up auction tobacco for contractors who do not want to openly bid for tobacco which they have not contracted.

This practice will render the e-auction system, despite the huge investments, even more useless as prices are going to actually fall. Getting the fundamentals right is very easy in the tobacco industry as far as the dual marketing of tobacco is concerned.

The following issues need close attention. If these issues are attended to, the future of tobacco will not take the cotton route.

Are all contractors and buyers bringing new money (off-shore) for tobacco business?

A-class buyers are supposed to bring new money from their off-shore sources during contracting farmers or at the time of buying the tobacco at auction floors. Relaxing this requirement for purposes of accommodating local players with no access to off-shore finance is contributing to the gradual death of the industry. Tobacco buying is a serious business where only serious players should participate.

All contractors should prove that growers who sold through them were contracted by them and that there is proof of financial support to the farmer. This is very easy to prove.

However, TIMB has abated middleman by allowing them to contract even farmers who have been given zero support. This defeats the whole purpose of contract farming.

Industry players lamented how some of the auction floors that have made huge investments spanning more than 30 years in the industry, perfecting their auctioning process to be the most efficient in Africa yet the poor monitoring by the regulator has thrown millions of their investments down the drain.

They lamented how TIMB’s lack of foresight was promoting fly by night investors who are not interested in developing real infrastructure.

Investors who are renting out buildings or building makeshift structures that can be dismantled or abandoned at a moment’s notice. These fly by night investors are not interested in the future of the industry, but they are killing the goose that has been laying the golden eggs in Zimbabwe.

Serious investors who have weathered the storm, gone through Zimbabwe’s worst periods when the country produced less than 50 million kilograms of tobacco, have been left with an egg on their face.

Experts have warned that the death of auction floors will signal the demise of the lucrative sector.