Updated: 2016-05-27 09:13 By Lucie Morangi
Tian Ze Tobacco, a Zimbabwean subsidiary of a Chinese firm, provides interest-free loans and pays higher prices to growers
A Chinese firm is changing the fortunes of tobacco farmers in southern Africa. Tian Ze Tobacco Ltd, located in Harare, Zimbabwe, has inked deals with more than 400 farmers to buy their leaves at a much better price, which has pushed up market rates.
Tian Ze is a registered international tobacco merchant involved in tobacco contract growing, auction floor purchasing, processing and exporting of the leaf to China. Contract growing refers to an agreement between a buyer and farm owner to undertake production according to the needs of the buyer, who may specify quality and price, while the farmer promises to deliver at a specified time.
The Chinese firm has gone a step further. For five years now, it has provided interest-free long-term loans to farmers to acquire modern farming equipment such as irrigation systems and tractors in a bid to boost yield quality.
The exports of the company, founded in 2005, are predominantly destined for China, which consumes over 50 percent of the flue-cured golden leaf from Zimbabwe. Wholly owned by the state giant China National Tobacco Corp, the African subsidiary also buys tobacco leaves from Zambia and Malawi.
Zimbabwe gold leaf owes its "high flavor" status to favorable climatic conditions. It is also used to blend with other leaves to meet buyers' desired tastes. And it has found a sustainable market in China. Government statistics show that China imported 61.72 million kilograms in 2015, up from 43 million kg the previous year. This earned Zimbabwe $513 million, a 28 percent jump from $402 million in 2014. The total country earnings from gold leaf stood at $855 million, according to Tobacco Industry Marketing Board.
"We command the largest market share at 16.6 percent. We mostly source for our leaves in Mashonaland," says Raymond Mambondiani, the quality systems and human resources manager of the firm.
Tian Ze's entry into the market was timely. The price, volume and quality of the tobacco had dwindled following a national land redistribution exercise. This led to difficulties in accessing the global market, traditionally dominated by the US and Europe.
Moreover, farmers were unable to access affordable loans from the banks since they lacked collateral. Self-financing remained the only option but it was unsustainable. A recent market report by the state regulator links self-financing to a 16 percent decline in active growers last year.
"This is especially true for farmers dealing in lower- and average-quality produce. They realize that their returns cannot cover expenses and so they fall out," says Andrew Matibiri, the agency's chief executive officer.
Matibiri is pleased with Tian Ze's no-interest loans and says it has buoyed farmers' confidence in the sector.
The company carries out due diligence on new farmers by evaluating their creditworthiness in terms of prices fetched previously on the public auction floor, which indicates the quality of the leaves. Infrastructure such as irrigation systems, barns, grading sheds and the labor available also shore up creditworthiness.
Nonetheless, farmer involvement in the operations of the farm weighs heavily since the company avoids investing in "briefcase" or absentee farmers. By using its own capital, it disbursed approximately $45 million to its members last year. Competitors, on the other hand, charge 10 to 15 percent interest.
The arrangement has had a three-pronged advantage. First, farmers under the deal are assured of higher prices at the private auction floor. There are about three public and 16 private auction floors licensed in the country. Statistics from TIMB shows that 70 percent of Zimbabwean tobacco was sold on private auction floors last year, with Tian Ze handling 7.5 million kg through the public floors at 50 percent more than what its closest competitor by volume paid.
Second, this has translated to better foreign currency earnings for the country despite falling global prices. The Chinese market paid 50 percent more than what Belgium, which paid the next highest amount in the export market, paid for the leaf last year. While China paid $8.31 per kg, Belgium paid $4.16 for the same amount.
Third, the merchant company has a firmer hold of the supply chain, creating a linkage between the farmer and the market.
Despite the enormous risk of financing farmers without collateral, the Chinese firm says its stringent requirements have seen the quality of the leaf improve. "We are recording fewer defaults and recovered about 95 percent of our loans last year. We deduct a small percentage from the farmers' monthly earnings," says Mambondiani.