“An oligopoly is a market structure where the industry is dominated by a small number of sellers (oligopolists). The dominant sellers, since they are so few in number, are each likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms.
“A cartel is a special case of oligopoly when competing firms in an industry collude to create explicit, formal agreements to fix prices.”
In 2011, the collapse of the tobacco price in Malawi (the country’s main source of foreign exchange) arguably contributed to the protests in Mzuzu and Lilongwe that left 19 people dead.
Ironically, a 2005 World Bank report entitled Pathways to Greater Efficiency and Growth in the Malawi Tobacco Industry, a Poverty and Social Impact Analysis reported that “Tobacco buyers… operate as a cartel: they have a monopoly on processing,”
It further stated that “monopolies/oligopolies, rents and inefficiencies all along the value chain are passed down to producers, depressing their incomes and return on investments. Smallholders in particular are trapped in a low productivity/low income strategy.”
Now, since the opening of the Zimbabwean tobacco auction floors in February, a sizeable number of tobacco growers have expressed concern over low prices which they perceive as deliberately manipulated by buyers.
Reports of anti-riot police presence at auction floors and allegations that some tobacco growers picketed outside the Tobacco Industry and Marketing Board (TIMB) offices while singing revolutionary songs collectively depict the seriousness of the situation.
The fact is that one cannot prove whether a tobacco cartel exists in Zimbabwe based upon ostensible evidence.
However, there are factors to consider that reflect why, unlike Malawi, it would be more difficult for the Zimbabwean tobacco industry to cartel.
Firstly, there are thirteen known contract companies operating in Zimbabwe, and approximately 30% of small-scale tobacco growers are in contract farming arrangements with these companies.
This is important because contract farming allows small-scale farmers to have access to inputs, credit and advisory services and furthermore, it allows the farmers to have direct contact with increasingly difficult international markets and this forces the farmers to produce what the market wants.
Ultimately, the contract farming arrangements help the farmers to manage price risk.
As it stands reports emerging from the tobacco floors indicate that while some farmers are disgruntled by the US$0,60c/Kg price that is being offered for their tobacco, others are content, having sold their produce for up to $4,99/Kg.
The price discrepancy can arguably be attributed to the difference in produce-quality emerging from contract farmers and non-contract farmers.
Secondly, there has been a significant increase in the number of tobacco farmers in the country. Reports indicate that in 2014, about 95 000-registered tobacco growers will sell their produce.
This is an increase from 73 000 last year.
However, the problem is that there is not necessarily more money available on the market to purchase this excess produce than there was during the same period last year.
This consequently makes it a buyers market, and the likelihood is that buyers will only be willing to pay top dollar for top quality produce. More so after Brazil and Malawi open their floors.
Finally, the populist-socialist ideological orientation of the Zimbabwean socio-political structure discourages the formation of cartels in the tobacco sector. Especially because the country prides itself in the empowerment of some 100 000-tobacco farmers (of which about 40% are communal).
Consequently, it would be nothing short of folly for tobacco buyers to deliberately hoodwink unsuspecting growers by forming a cartel and manipulating prices.
Especially when one considers the ongoing liquidity crunch and the national treasury’s expectation that significant revenue will be remitted to the fiscus from tobacco sales.