Faculty of social studies department of economics supply response of tobacco output to price changes in
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| 1.1 Background Zimbabwe heavily depends on agriculture for economic growth and tobacco has been an important strategic cash crop and the backbone of commercial agriculture for the agro-based Zimbabwean economy. According to FAO (2012), tobacco is of great importance to both farmers and the state because of its traditionally high returns, its contribution to national income (13.8% of gross national product, foreign currency (24% of total exports) and employment generation. Zimbabwe is the largest tobacco producer in Africa producing the mainly, Virginia, Burley and Oriental tobacco. It is also ranked the fourth largest tobacco producer and major tobacco exporter in the world (TIMB, 2014). Tobacco production is either done under the auction system or the contract system. The tobacco industry in Zimbabwe is free from government interventions and all tobacco output is supplied to the market as unprocessed tobacco leaf, hence all prices are auction market determined. Tobacco prices are endogenously determined in the market meaning a bumper harvest could cause prices to fall due to excess supply, resulting in reduced production in the subsequent period. Fluctuations in prices could be as a result of fluctuations in quantity supplied. Ina bid to control price fluctuations in Zimbabwe, some production quotas were reintroduced in the early 2 1980/81 season. These quotas were imposed on tobacco farmers in order to restrict production of tobacco with a primary objective of reducing price fluctuations. Although there was a drought between 1991 and 1992, total tobacco output increased sharply from 170 000 tonnes into tonnes in 1993 and during this phase output was about a third higher than in the s since tobacco is regarded as a drought tolerant crop (Zimbabwe Tobacco Association (ZTA), 2001). This dramatic increase was that farmers have increased their confidence in the Zimbabwean economy since the government had undertaken the economic structural adjustment program (ESAP) which was meant to stabilise the economy and open up domestic markets for commodities. In the year 2000, the Government of Zimbabwe implemented the Fast Track Land Reform Program (FTLRP) with an objective of increasing agricultural output. However, Muchapondwa (2008) stated that this program was accompanied by a decline in agricultural output including tobacco which declined from 236 000 tonnes into tonnes in 2006, the weakest performance of the tobacco sector since 1980. According to TIMB (2014), tobacco industry has suffered the most from the land reform program and there has been a reduction in tobacco output by 75% from 2000 to 2009. By realising the downward trend in tobacco output the tobacco sector has to direct its efforts to increase output and boost the tobacco industry by focusing on price incentives to farmers such as announcing producer price before the start of the planting season. In addition, the tobacco industry went into its worst performance due to macroeconomic distortions such as hyperinflation and overvalued exchange rate in the same period which saw tobacco output falling by over 75%. The depreciation of the Zimbabwe dollar against the United States dollar (US) reduced the effective prices realised by tobacco growers forcing them to substitute tobacco production for off-farm income earning activities such as informal trading and illegal mining (Pfumayaramba, The adoption of multiple currencies in 2009 saw a rapid recovery of the tobacco sector. According to TIMB (2014), tobacco production quickly rose from 58 000 tonnes into tonnes in 2014, being accompanied by a steady increase in average tobacco prices which rose from US into US in 2013 for each kilogram sold. The stable increase in tobacco prices improved prospects for the tobacco sector which realised a significant uptake of 3 tobacco production by smallholder farmers with a potential of supplying more than 50% of the cash crop (TIMB, 2014) Download 1.11 Mb. Share with your friends:
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