Zimbabwe_Agricultural_Sector_Market_Study_final.pdf

ZIMBABWE AGRICULTURAL

SECTOR MARKET STUDY

RAISE PLUS LIMITED SCOPE OF WORK IQC

June 2010

This publication was produced for review by the United States Agency for International Development. It was prepared by Weidemann Associates, Inc.

ZIMBABWE AGRICULTURAL

SECTOR MARKET STUDY

Submitted to:

Mr. James LaFleur, COTR

USAID/Zimbabwe

Submitted by:

Weidemann Associates, Inc.

Contract No.:

AEG-I-26-04-00010-00

Task Order No.:

674-10-019

Period of Performance:

May 1, 2010 – July 23, 2010

DISCLAIMER

The author‘s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

Acknowledgements

Weidemann Associates would like to acknowledge the generous assistance of USAID/Zimbabwe, especially Chief Economist Jim LaFleur for making documents and personnel available to the study team and for his direction and insights.

The practical and logistical assistance and office support provided by the LEAD Trust were also invaluable and greatly facilitated this work.

However, the greatest debt of thanks is owed to the many stakeholders who provided of their time and information. Their patience and hospitality in the face of lengthy and repeated questioning are greatly appreciated and made this survey a pleasure to undertake.

Table of Contents

Acronyms .................................................................................................................................. i Executive Summary Introduction

Format of Report Methodology Limitations Market Overview Liquidity Market Structure Uncertainty

Ongoing Developments Credit Availability and Use in the Agricultural Sector

Microfinance Institutions Market Share Microfinance Banks MFI Lending Prospects for Rural Areas APEX Fund for Microfinance Women in Trading and Microfinance

Commercial Banks Finance Component of Out-Grower Arrangements

Tobacco Cotton Changes in Tobacco and Cotton Marketing

Conclusions Addressing Excess Supply Increasing Effective Demand

Availability of Finance Summary of Recommendations Commodity Market Surveys

Maize Supply Demand Potential for Growth Recommendations

Soya Beans Supply Demand Potential for Growth Recommendations

Sorghum Supply Demand Potential for Growth Recommendations

Groundnuts Supply Demand Potential for Growth Recommendations

Sugar Beans Supply Demand Potential for Growth

Recommendations Tobacco

Supply Demand Potential for Growth Recommendations

Cotton Supply Demand Potential for Growth Recommendations

Beef Supply Demand Potential for Growth Recommendations

Poultry Supply Demand Potential for Growth Recommendations

Dairy Supply Demand Potential for Growth Recommendations

Pork Supply Demand Potential for Growth Recommendations

Domestic Market Vegetables Supply Demand Potential for Growth Recommendations

High Value Export Vegetables Supply Demand Potential for Growth Recommendations

Bananas Supply Demand Potential for Growth Recommendations

Coffee Supply Demand Potential for Growth Recommendations

Tea Supply Demand Potential for Growth Recommendations

Paprika Supply Demand Potential for Growth Recommendations

Sugar Cane Supply Demand Potential for Growth Recommendations

Annex 1: Summary of Production and Market Data Annex 2: List of Respondents i

Acronyms

A1 & A2 Small- and Medium-Scale Farmers

AMA Agricultural Marketing Authority

ARDA Agriculture and Rural Development Authority

CBZ Commercial Bank of Zimbabwe

CFU Commercial Farmers Union

CGA Cotton Ginners Association

Cottco Cotton Company

CRI Cotton Research Institute

CSB Corn Soya Blend

DOC Day Old Chicks

DZL Dairibord Zimbabwe Limited f.o.b. free on board

FAO Food And Agricultural Organization

FTLRP Fast Track Land Reform Program

GMB Grain Marketing Board

GMO Genetically Modified Organism ha hectare

HVEV High Value Export Vegetables

ICAC International Cotton Advisory Committee

IRD International Relief and Development kg Kilogram km Kilometer

MAMID Ministry of Agriculture, Mechanization and Irrigation Development

MFI Microfinance Institution

MIS Management Information System

MS Multicurrency System

MT Metric Tonne

NADF National Association of Dairy Farmers of Zimbabwe

Natbrew National Breweries

NGO Non-Governmental Organizations

POSB Post Office Savings Bank

RBZ Reserve Bank of Zimbabwe

SA South Africa

SACCO Savings and Credit Cooperatives

SADC Southern Africa Development Community

SAFEX South African Futures Exchange

SHF Small Holder Farmer

SNV Netherlands Development Organization

TIMB Tobacco Industry and Marketing Board ii

TTA Total Transformation Agribusiness

UHT Ultra High Temperature

UNICEF United Nations Children‘s Fund

VAT Value Added Tax

VCA Value Chain Analysis

VETCO Veterinary Company

WFP World Food Program

WRS Warehouse Receipt System

ZAMFI Zimbabwe Association of Microfinance Institutions

ZAQP Zimbabwe Assured Quality Pig Scheme

ZAR South African Rand

ZCFU Zimbabwe Commercial Farmers Union

Zimvet Zimbabwe Veterinary Service

ZWD Zimbabwe Dollar

Executive Summary

This study surveyed 18 key agricultural commodities produced in Zimbabwe. The commodities were chosen based upon a review of available literature and interviews with over 125 stakeholders. In addition, interviews with representatives of commercial banks and microfinance institutions were conducted in order to assess the use and availability of finance in agriculture.

The assessment of credit highlighted the scarcity of finance generally within Zimbabwe and the almost total lack of domestic finance for agriculture. Statistics from the banking sector indicate that as of the end of April 2010, there was about US$1,708 billion circulating in the economy compared to the estimated US$10 billion required to rehabilitate the economy. As a result, industries including agro-dealers have found it increasingly difficult to access funding for recapitalization and expansion purposes. With few exceptions (such as finance for export crops including tobacco and cotton), this situation can be expected to continue for the foreseeable future.

Commercial banks indicated that their deposits are almost exclusively demand-based and can be withdrawn at short notice so that almost all loans have to be made on a similar short-term basis. This precludes almost any form of agricultural loan except for poultry production (which can effectively use short-term loans). Moreover, the scarcity of funds, not only among banks but within business generally, has resulted in high demand that has driven up interest rates to the point where loans to agriculture are not viable.

There are 95 registered microfinance institutions (MFIs). Eighty percent of the market share in terms of the value of loan portfolio is in the hands of eight MFIs. MFIs are funded primarily by commercial banks and offer terms of up to 90 days, with most interest rates in the range of 15 to 20 percent per annum. MFIs relend these funds to their customers with similar terms and at interest rates of about 6 to 15 percent per month, with a few lending at a rate of 20 percent per month. Without the infusion of outside capital, the loan portfolios of MFIs slowly increase or decrease as retained earnings from operations increase or decrease.

Both banks and microfinance institutions select premium clients able to manage high interest rates, such as large trading companies, retail outlets and other businesses that have high rates of financial turnover and large profit margins. It is unlikely that either type of institution will seek out the business of rural agricultural producers until the more lucrative urban market has been saturated. Experience elsewhere suggests that this process at least two years and maybe decades, although the depth of experience in Zimbabwe may hasten the process.

The largest source of finance for agricultural production is likely buyers of tobacco and cotton, who have extended an estimated $158 million in credit to producers.

Both commercial banks and MFIs lend to agro-businesses, but availability of suitable collateral can be a constraint. The controversial land situation prevents this asset from being used as collateral. Some MFIs are attaching chattels as collateral, thereby allowing new entrants into agricultural trade, but the proportion of loans in this area at present is small. Large traders and processors are able to access loans from international banks using external guarantees or collateral. Such loans are often at substantially lower interest rates than those obtained by local businesses with no international partners. This gives larger traders a significant advantage in current agricultural markets.

A number of MFIs cater exclusively to women and are quite successful. With their support, women traders have expanded their businesses in local markets.

The market surveys indicated that agricultural markets in Zimbabwe exhibit:

1. A marked lack of liquidity throughout the marketing chain from producer to consumer.

2. A lack of a competitive market structure following the recent shift away from state controlled marketing of key staples and the collapse of the input supply network that had previously acted as both suppliers of inputs and potential markets for produce.

3. Uncertainty with regard to national macroeconomic policy, free marketing system and prices.

These three conditions contribute to inefficiencies within the marketing chain and increase transaction costs, resulting in reduced prices to the producer and increased prices to the consumer. Within this environment, markets for agricultural commodities are evolving. Key changes noted during the market survey included:

1. Shrinking markets for some staples, including bread, sugar beans and groundnuts.

2. Increased price sensitivity in the market, especially regarding maize meal, an increasing proportion of which is now purchased from hammer mills, and regarding domestic products that used to enjoy national brand loyalty but are now losing market share to cheaper imports.

3. The waiving of standards and regulations as a natural response to reduced purchasing power. This process is allowing new entrants into the market.

4. Increased regulation in some areas: Notwithstanding (3) above, some commodities such as cotton have become subject to increased regulation as a response to side selling in a manner that weakens the negotiating position of growers.

The results of the market surveys indicated that market growth of only two commodities would be limited to the rate of growth of the economy overall, i.e., beef and pork, both of which have no immediate potential for export. Conversely, the production and marketing of two commodities, tobacco and cotton, could be expanded without difficulty, based upon the already proven models of outgrower and contract farming production to meet export market demand.

Six commodities have the potential for considerable growth in export markets: vegetables, coffee, tea, paprika, bananas and sugar cane. However, growth is constrained by factors external to the marketing process. Export vegetables have potential markets in Europe and to a lesser extent South Africa, but growth is constrained by the skill levels of the Small Holder Farmers (SHFs) upon whom expanded production will depend. The same technical inputs will also be required for the successful expansion of coffee exports from the small-scale sector as well as finance for the rehabilitation of coffee plantations. Similar finance and skills are also required (albeit over shorter periods) for the increased production of tea, paprika, bananas and sugar cane.

Three commodities have the potential for domestic market expansion based upon import substitution, namely, poultry, milk and groundnuts.

Finally, five commodities can increase their share of the domestic market through the achievement of increased efficiencies in the farm-to-market chain: groundnuts, maize, sorghum, soya and domestic market vegetables.

For a number of different commodities, farmers receive poor prices because they are obliged to sell crop early in the season and to a limited number of buyers to raise cash, resulting in a situation where in the short term at least, supply exceeds demand. Farmers could benefit if both aspects of this situation (i.e. excess supply and limited demand) could be addressed. A number of interventions are recommended including:

Development of improved contracting mechanisms, including realistic arbitration procedures and support to local contract enforcement mechanisms.

Provision of support to contract farming operations and out-grower schemes in grower management, including contract formulation, quality and volume-based payment and the management of quality and volume of supply.

Promotion of access to professionally managed storage for both growers and all traders.

Facilitation of finance to traders and processors.

Development of spatial and temporal marketing information systems for traders and growers

Provision of business support to small and medium sized traders to increase business efficiency and reduce transaction costs.

Nevertheless, the key conclusion that can be drawn from this market survey is that while lack of finance is the main constraint to increased production, in a competitive market, long-term finance for agriculture of a duration and at interest rates that are affordable will not be readily available for some time. On the other hand, shorter-term finance that could be used to stimulate marketing is available and if facilitated, could result in real benefits to farmers and consumers, who would both gain from a more competitive marketing chain.

Introduction

Format of Report

This report is based upon fieldwork undertaken in Zimbabwe over a three-week period, during which market surveys were undertaken for 18 different commodities, and a review was made of relevant literature. The report is divided into three sections. The first section is divided into four chapters. Chapter One, Market Overview, presents an overview of the current agricultural markets in Zimbabwe and considers the key constraints and ongoing developments in the market, providing the background against which the market surveys were undertaken. Chapter Two looks at one particular key aspect of the market in greater depth, assessing the availability and utilization of finance for all aspects of agriculture, with particular reference to the role of women in microfinance. Chapter Three presents the conclusions drawn from the individual market surveys, and Chapter Four provides a summary of the recommendations made in the course of each market survey and from the overall analysis.

The second section presents the market survey reports for each commodity, which have informed the first section. For each commodity, the nature of current production and the main producer (groups) were assessed together with the current demand, the market chain and the main stakeholders in the market. The potential for growth and constraints to growth were determined, as were initiatives that would result in a more efficient and effective market resulting in increased and or more profitable production.

A tabular summary of production and market data for each commodity together with the list of survey respondents, are contained within the third (annex) section.

Methodology

The report is based upon a literature review undertaken simultaneously with extensive fieldwork in Zimbabwe to assess the markets for 18 agricultural commodities, namely:

Beef Tobacco Export Vegetables Pork Cotton Coffee Poultry Paprika Tea Milk Groundnuts Domestic Vegetables Sugar Sorghum Bananas Maize Soya Sugar Beans

The initial list was generated from World Bank data indicating the most significant crops in terms of value in 2009, moderated in discussion with USAID/Zimabwe. A team of enumerators visited over 125 stakeholders involved in the production, processing and marketing of each of the commodities listed above. A standardized questionnaire was used to elicit information, but interviews were not limited to the questionnaire responses. Information was triangulated and best estimates of market supply and demand were made on the basis of either available published data or from the stakeholder responses. The information was then compiled in the form of reports each following a structure detailing the nature of supply, demand, potential for growth and recommended initiatives to stimulate development.

Simultaneous to the assessment of the commodity markets, a review was undertaken of financial institutions in Zimbabwe and of the availability and use of finance in the agricultural sector. Most of the commercial banks were visited, together with a number of the most active microfinance institutions (MFIs). Key executives were interviewed and information was collected on the nature and extent of the financial products available from the various financial institutions, interest rates, durations of loans and the nature of the security required. The results have been compiled in Chapter Two, ―Credit Availability and Use in the Agricultural Sector.‖

Limitations

While the study resulted in a comprehensive assessment of most of the targeted commodity markets, this methodology, despite the considerable investment in man-hours, nevertheless has generated a superficial assessment of some markets. In some cases, this is because of the limited number of respondents (such as for sugar or paprika, where only a small number of stakeholders were available), while in others, information is mainly available from informal sources (such as for domestic vegetables). In many cases, respondents were reluctant to respond to detailed questioning, and as a result some information is not complete.

Nevertheless, the survey has gathered enough data to support recommendations for increased market efficiency.

Market Overview

Agricultural markets in Zimbabwe are currently characterized by three main conditions:

1. A marked lack of liquidity throughout the marketing chain from producer to consumer.

2. A lack of market structure following the recent shift away from state controlled marketing of key staples (e.g. maize and soya) and the collapse of the input supply network that had previously acted as both suppliers of inputs and potential markets for produce.

3. Uncertainty with regard to national macroeconomic policy, free marketing system and prices.

These three conditions contribute to inefficiencies within the marketing chain, increasing transaction costs, resulting in reduced prices to the producer and increased prices to the consumer. These conditions affect many different areas as outlined below.

Liquidity

The abandonment of the Zimbabwe Dollar rendered all savings in that currency worthless and reduced an individual‘s or business‘s net worth to that of their assets together with whatever foreign currency they might have been holding at the time of the domestic currency‘s collapse.

This included all moneys held by banks. Thereafter, the amount of money within the economy could only be increased by foreign investment, remittances, donor finance, or exports. It is not surprising, therefore, that almost all individuals and businesses have become extremely illiquid.

The impacts have been felt at all levels:

1. Individual growers have few savings with which to purchase inputs and are therefore obliged to seek inputs on credit. This has been resolved in a number of ways:

a. Donor programs — over $73 million was spent providing inputs to more than 700,000 households and produced an extra 330,000 MT of grain in 2009/10.

b. Outgrower schemes, including those developed by horticultural companies such as Selby‘s.

c. Contract farming, including the arrangements put in place by cotton and tobacco marketing companies.

2. The extreme demand for finance has allowed banks to charge high interest rates for the limited amount of cash that they have available for lending. International banks with access to external funding have finance available, and will lend to clients who can provide external collateral at close to international rates (since such clients could readily access funds outside the country if need be). However, such banks may lend to purely domestic clients at significantly higher rates. The amount of funds is restricted mainly by the country risk put on their Zimbabwean portfolios, while the rates are determined by competition between the domestic clients for the limited pool of funds. Local banks will lend to the same group of local clients at the same elevated rates.

Among smaller companies, MFIs have very limited funds and are able to charge even higher rates given the strong demand from individuals and small businesses.

3. High interest rates and limited availability of finance have restricted the capacity of traders to take positions in the market. Traders are instead obliged to operate on a predominantly back-to-back fast turnover basis, purchasing small lots for immediate resale. In many cases, traders will not purchase grain unless they have already identified a market.

In most cases, traders are unwilling to engage in the purchase and storage of grain, (not only because of the cost, but also because of uncertainty in the market). Farmers can therefore expect to find markets slow and thin. Prices are capped by import parity levels which can be readily determined from SAFEX futures‘ prices, discounted using anticipated (high) interest rates. The result is a low spot price that is unlikely to be profitable and can be expected to oblige producers to once again seek credit for inputs in the coming year.

4. Because most buyers have limited liquidity and few are willing to engage in temporal arbitrage, supply at the onset of the season may exceed demand and prices could fall as low as export parity. Later in the season, as supplies diminish, prices can be expected to escalate to import parity levels. Such oscillations will be most extreme in the more remote deficit areas.

5. Markets will be dominated by those traders with access to the lowest-cost finance. Such traders will be able to offer the highest prices early in the season, and will be able to sell at the lowest prices later in the year. If access to such finance is skewed towards a small number of large companies, they will quickly capture an increasing proportion of all trades. This would undermine the competitiveness of the liberalized food and agricultural markets and prompt govt re-impose market controls.

At all levels, the market has become characterized by restricted purchasing power, resulting in small lot transactions, limited demand and increased overhead costs. The cost of finance is itself a major factor in the pricing of commodities, in some cases accounting for as much as 40 percent of the margin made by companies adding value to a product. The overall result is a high degree of inefficiency within the farm to market chain, increasing costs to the consumer and reduced producer profits.

Market Structure

Agricultural commodity markets in Zimbabwe had been well structured. A number of institutions, including ZimACE and the Grain Marketing Board (GMB), had played key roles in the purchase, storage and sale of commodities, while the network of traders providing inputs to the farming community also served to purchase grain. For most non-staple commodities such as paprika or coffee, established networks of marketing companies, often with their own processing facilities, were fully operational and provided a ready market for each season‘s produce. Overall markets were characterized by established and understood structures, working in an integrated manner with financial institutions to reduce transaction costs. This is not to say that the state-controlled aspects of this structure were necessarily efficient, but they were at least dependable in their roles.

Over the last five years, the structures described above have eroded and most had effectively collapsed by 2008/09. The GMB is still operational but lacks the finance to purchase any significant quantities of grain. Its substantial storage facilities are largely unused and its reputation as a credible buyer or reliable storage agent has been largely lost. ZimACE has been mothballed and the network of input suppliers has been dramatically reduced as it depended on large orders from commercial farms to cover overhead. The marketing companies have, with the notable exception of international tobacco and cotton-buying companies, lost their working capital and with it the capacity to purchase in any significant quantities from the market.

The result of these changes has been the replacement of a formalized structure with a new format consisting of a large number of buyers of different capacities, some of whom are new entrants to the market and few of whom have developed formal or informal linkages of any kind.

This unorganized structure is characterized by limited price discovery (exacerbated by the low level of mobile phone coverage and weak internet support), limited trust and consequently restricted trader networks. One key aspect is that storage capacity (previously vested mainly in the now cash-strapped GMB) is significantly reduced so that irrespective of the availability of finance, capacity to buy and store grain is physically constrained. The result of all these developments has been that overall transaction costs increased.

Uncertainty

Most Zimbabwean agricultural commodity markets used to be characterized by a degree of certainty with regard to the legal, regulatory and financial environment. This is no longer the case. Current markets are fraught with uncertainty in terms of:

Policy, particularly import and export policies. Trade bans for poultry and potentially for other products can destroy investor confidence in markets, especially if such bans are applied according to ad hoc political criteria. The government policy regarding Genetically Modified Organisms (GMOs) appears to be inconsistent in its implementation, allowing some parties to use GMO grain for milling and others not.

Some sources believe that grain milled for livestock feed may be GMO, while others believe that no GMO products can be used in any livestock feed.

Interest rates can vary substantially from less than 1.5% per month to more than 15%.

This variability makes it hard to predict how markets will behave.

Supply and demand, estimates of which can vary by more than 100%.Thus the CFU estimates maize production in 2009/10 to be approximately 575,000 MT, while the FAO has endorsed the Government‘s estimate of 1.3 million MT. Estimates of demand from maize range from 9.5 million people consuming 110 kg per year each (1.045 million MT) to 12.5 million consuming 133 kg per year each (1.66 million MT). Nevertheless, supply will in any event exceed the liquidity-constrained demand, so that this is in the short term a moot point.

Contract Enforcement and Performance. A general collapse of the judicial system has resulted in an almost total lack of contract enforcement. Court decisions can take years to obtain and once obtained, court orders may be ignored if it is not considered politically or financially expedient to enforce them. As a result, the level of contract performance is very low. Traders indicated that the majority of trades (well over half, and some of those interviewed said ―almost all‖) were subject to some element of non-performance (e.g., late payment, underpayment, late delivery under delivery, poor quality, incorrect packaging, etc.) as a result of which traders increased their margins to offset the risk of losses caused by such non-performance.

Side selling. One aspect of poor contract enforcement that has become particularly prevalent is side selling within the context of contract farming or outgrower schemes.

Many growers will accept and sell some or all of their produce when marketing companies outside of the contract arrangement offer a price marginally higher than the contract price, not surprising given the pressures on growers to maximize cash returns.

The contracting marketing company has usually invested in the grower‘s production by supplying inputs on credit in exchange for the right to purchase the crop. Side selling not only negates that right, but frequently results in the non-repayment of inputs. It is a major obstacle to the efficient operation of outgrower and contract farming schemes and has resulted in higher costs, higher effective interest rates and in the case of cotton, restrictive legislation.

Overall, it would appear that well-organized and efficient market structures have been replaced by a situation where traders operate with little recourse to the law in an environment of constant uncertainty. Such an environment is not conducive to investment unless high profit margins can be built into each trade, once again increasing transaction costs.

Ongoing Developments

Within the environment described above, markets for agricultural commodities are continuing to change. The following aspects are of particular significance:

• Shrinking markets for some staples: This is especially true for those commodities that are more than basic necessities. Thus the Bakers Association report that consumption of bread has declined from 1.5 million to 950,000 loaves per day since ―dollarization‖, sugar beans and groundnut retailers and wholesalers in Mbare market report that sales are roughly 1/3 less than they were 12 months ago, and banana wholesalers report a drop in banana consumption over the last six months. These observations are supported by the level of government revenues which has remained flat over the last six months, suggesting that overall domestic demand is flat or possibly declining, i.e. that the real economy has shown no growth over the last six months1.

• Increased price sensitivity in the market. Almost all respondents noted the limited purchasing power of consumers and the consequent importance of price in maintaining market share. This has been most evident in the maize meal market, where hammer-milled maize (which yields close to 99 percent flour) has become the most popular form of maize meal, as compared with roller meal and breakfast meal, for which extraction efficiencies are 78 percent and 67 percent flour, respectively, and which are correspondingly more expensive than hammer-milled maize meal. Similar developments have been evident in the meat market where the market share of chicken has expanded at the expense of beef and pork, while even within the beef market, the preference for lower priced cuts and ‗Economy‘2 quality animals has become quite clear. At the same time, brand loyalty has become of limited significance. Local brand names (such as Olivine), which used to have sales value based upon nationalism and a reputation for quality, are no longer adequate protection against lower priced generic products imported from South Africa and beyond.

Overall, traders report a change in food consumption away from bread and towards hammer-milled maize, away from beef and pork and towards chicken, away from cabbage and towards rape, and away from onions and towards tomatoes. This would appear to be in each case a move towards the lower cost substitute commodity in response to falling consumer purchasing power.

• Waiving of standards and regulations. In a market where price is the key determinant, regulations designed to enforce standards of quality and hygiene are of reduced importance to the consumer and have increasingly been ignored. The large slaughterhouses complain of the rise in backyard slaughtering of cattle, sheep and goats and of the sale of uninspected meat throughout the urban centers. At the same time, stock movements out of foot and mouth zones are becoming increasingly common as farmers seek to earn higher profits from urban markets in disease-free areas. In peri-urban areas, small businesses are being set up to supply stock feed and other inputs to farmers without regard to zoning by-laws or certification or quality standards, selling product in unmarked and un-weighed bags.

Such developments are a natural response to increased price sensitivity and reduced regulatory oversight. They need not be considered wholly deleterious since many of the regulations that are now being ignored not only protected consumers, but acted as barriers to new business entrants and reinforced the status quo of the market. In the developing market, where ―caveat emptor‖ is the only guide, businesses may sell poor quality product only for as long as it takes to develop a poor reputation. Quality will in the end sell itself, and by enabling a multiplicity of new entrants, the lack of regulation is creating a new dynamism that will ultimately reinvigorate the market.

Evidence from food security studies of rising malnutrition seem to confirm that this shrinkage is not offset by rise in demand of other staple sources of calories but due to cut back in total intake asper capita income falls.

The Zimbabwe beef marketing system grades cattle into four classes: Super, Choice, Commercial, and

Economy.

• Increased regulation in some areas. In contrast to the developments outlined above, the cotton subsector has witnessed an increase in the level of market regulation, directly as a result of the side selling noted earlier. The heavy losses suffered by cotton marketing companies who had supplied inputs on credit to growers resulted in their representation to government and eventual legislation that has effectively institutionalized the outgrower programs. The intrusion of briefcase businessmen at harvest time, looking to purchase cotton without having previously supplied any sort of inputs, might under other circumstances be considered a legitimate business practice (as long as it did not preclude the repayment of the agreed value of loans made under contract farming systems). However, under recently introduced legislation, no cotton may be purchased by commercial entities that have not provided inputs to growers. This obliges growers to sell to the outgrower or contract farm management companies who have effectively divided up the cotton producers of Zimbabwe between themselves, forming an effective oligopsony that severely weakens the negotiating position of growers.

Unless attractive terms are agreed with cotton growers, such legislation will not result in increased cotton production. Instead, it can be expected that growers will look increasingly at more attractive options such as tobacco. Currently tobacco growers enjoy the option of the auction market as an objective indicator of prices. This limits the capacity of marketing companies to negotiate prices downwards. The legislation introduced in the cotton subsector, while bringing order to the market, is not in the best interests of the growers and is unlikely to be in the best interests of the subsector overall.

Overall, markets are developing in the direction of increased liberalization, as capacity for contract enforcement is reduced, while reduced purchasing power places less emphasis on standards and more upon price. However, this increased liberalization is being undertaken in a climate of increased uncertainty and extremely limited liquidity, which may slow development, while there is a continual tendency of vested interests to reinstate regulations that will limit marketing options, creating both inefficiencies and rent-seeking opportunities.

As noted earlier, some businesses have access to external finance at low interest rates while others are competing for the limited pool of cash in the Zimbabwean financial market and are obliged to pay higher interest rates as a result. The availability of lower interest finance provides a marketing company with a substantial advantage under current circumstances. Such companies can be expected to become rapidly dominant in the market.

Farmers‘ interests are best served where a multiplicity of marketing companies compete for their produce. Consumers can similarly expect the lowest prices when many processors are placing goods onto the market. A multiplicity of marketing companies is struggling to develop in the current adverse climate of limited liquidity. Instead, the current tendency is for a small number of large and financially privileged marketing companies to become dominant and to support regulations and institutions that preserve and strengthen their dominant position. This is not in the best interests of either the agricultural sector or the consumer.

Nevertheless, it is the universal lack of liquidity that both characterizes and shapes current agricultural commodity markets in Zimbabwe. The development of each subsector is largely dependent upon the availability of finance either to the producer or the consumer, or most critically, to the intervening marketing companies. Without external investment, growth must occur from internal resources and can be expected to be slow. However, external investment in an unstructured and unregulated market is risky and may also be slow in coming. Marketing policy must therefore balance the need to create an enabling environment for investment without imposing regulations that would create barriers to entry or would otherwise stifle small business competition.

Credit Availability and Use in the Agricultural Sector

The Zimbabwe banking sub-sector comprises the Reserve Bank of Zimbabwe (RBZ) at the Apex, discount houses, commercial banks, merchant banks, finance houses, building societies, the People‘s Own Savings Bank (POSB), asset management companies, microfinance banks, credit only microfinance institutions and money transfer agencies. Savings and Credit Cooperatives (SACCO) are also supervised by the Ministry of Cooperatives. The sub-sector currently comprises seventeen commercial banks, four merchant banks, one discount house and four building societies. The sector is largely dominated by commercial banks following conversion of lower level licenses in recent years. Of the seventeen banks, four have some degree of state ownership and the others are wholly private owned. Four of the privately owned commercial banks are multinational banks with a majority of foreign ownership. The multinational banks face the prospect of losing their majority foreign ownership as a result of the new Indigenization And Economic Empowerment Act [No. 14 of 2007] that requires them to indigenize 51 percent of their shareholdings. For the past three months, investor interest in the country has been on the wane because of the Indigenization And Economic Empowerment Act.

Statistical reports in the banking sector indicate that as at end of April 2010, there was about US$1,708 billion circulating in the economy compared to an estimate of US$10 billion required to rehabilitate the economy. As a result, industries including agro-dealers have been finding it increasingly difficult to access funding for recapitalization and expansion purposes. Where funds are available they are priced at high rates that limit new investments. Ultimately this has negatively impacted prices in local markets as companies pass on the cost to consumers.

Interest rates above regional levels affect have contributed to higher prices of domestic consumer foods making imported food and commodity substitutes (eg milk, mealie meal, meats) cheaper, thus reducing the domestic market share of local industries and local farmers.

Furthermore, the recently gazette indigenization act, has restrained action by investors who are watching how the policy will develop.

Of these institutions, the commercial banks, microfinance banks, and MFIs will be the principal providers of credit to the agricultural sector.

Nearly all of these financial institutions are severely constrained in making loans by the lack of liquidity that resulted from the hyperinflation and subsequent introduction of the Multicurrency System (MS) — now popularly called ―dollarization‖ — in January of 2008.

Microfinance Institutions

Zimbabwean microfinance institutions lost nearly all of their financial assets during the hyperinflation period and the subsequent dollarization. Most microfinance institutions stopped lending during the later stages of hyperinflation or immediately after dollarization was announced. The result was that physical goods accounted for nearly all of their asset value.

Some MFIs owned significant physical assets that retained value, primarily buildings and vehicles. One MFI representative interviewed explained that during the later stages of hyperinflation, his MFI began lending by disbursing loans as physical goods and receiving payment in physical goods. These goods could then be stored until the next loan was ready to disburse, at which time the goods received would be sold and the goods to be disbursed, purchased.

Virtually no lending by MFIs occurred in the remainder of 2008, when lending was still required to be in Zimbabwe dollars and few were available. Some MFIs returned to lending as early as March 2009.

MFIs share with banks similar constraints on lendable funds. Nearly all MFIs lost nearly all of their loan portfolios. Many have not restarted. As of December 2009, the Reserve Bank of Zimbabwe (RBZ) reported 95 registered MFIs, down from 293 in 2004, almost all focusing on serving clients in urban areas.

For most MFIs, funds to lend come from loans by commercial banks, which were collateralized by the value of fixed assets. Bank loans to MFIs during mid 2009 were scarce, typically available for periods of 30 days with interest rates between 6 and 100 percent per month. MFI lending to customers was also for 30 days terms with interest rates from 15 to 20 percent per month.

Today funds from commercial banks are available to some MFIs for terms of up to 90 days, with most interest rates in the range of 15 to 20 percent per annum. MFIs relend these funds to their customers with similar terms and at interest rates from about 6 to 15 percent per month, with a few lending at a rate of 20 percent per month.

Without outside capital infusions, the loan portfolios of MFIs will slowly increase or decrease as retained earnings from operations increase or decrease.

Market Share

While there are 95 registered microfinance institutions, 80 percent of the market share in terms of the value of loan portfolio is in the hands of eight MFIs: Micro-King, CBZ, Woman Development Savings & Credit Union, Pundutso, Zambuko, Collective Self Finance Scheme, Nissi Finance, and Faschig.3 The size of the loan portfolios ranges from US$50,000 to US$5 million. A bigger percentage of this market share is commanded by two institutions, one is a department of, and the other is a subsidiary of commercial banks. In both cases the parent commercial banks advanced loans to their dependent institutions at interest rates that range from 25–30 percent per annum. The institutions are on-lending to their clients at interest rates of about 6 percent per month.

The third-ranking microfinance institution is a women‘s cooperative savings and credit union that has been able to achieve a quick turnaround because of its strong asset base that it mortgaged for bigger loans from banks. The institution only gives loans to cooperative members, who are mainly women in vending, market gardening, commodity broking, hair salons, flea markets, etc.

The rest of the institutions are very small in size, in most cases owner-managed, and are mainly money lenders.

Official data on portfolio size or number of clients of microfinance institutions is not available. This estimate of the largest eight MFIs was compiled by the task order team through conversations with MFIs and financial sector specialists.

Microfinance Banks

The Banking Act [Chapter 24:20] has been amended to provide for the licensing and supervision of the microfinance banks by the Reserve Bank. Since the amendment, two microfinance institutions have submitted applications under consideration by the Reserve Bank for microfinance banking licenses. The major registration requirement is a minimum paid- up equity capital of US$1million, which is beyond the reach of most MFIs. Upon registration, the microfinance banks will by and large be able to offer most commercial banking services except checking accounts and foreign currency dealing. Preference for registration as microfinance banks is given to applications from MFIs with at least 40 percent of their branch network in the rural and peri-urban areas or those that are exploring cell-phone banking systems.

MFI Lending Prospects for Rural Areas

At this time very few loans from MFIs support agricultural production or agribusinesses. Few MFIs will be willing to significantly promote lending in rural areas until urban microfinance has reached most urban neighborhoods and competition between MFIs in those markets begins to decrease margins for loans. In the team‘s experience from other countries, saturating urban markets with micro loans takes years, even decades.

In Zimbabwe recovery could progress at a faster rate because institutions, administrators and technicians that know how to implement micro lending already exist as do thousands of experienced customers. Recovery of the urban markets could be relatively quick if funds to lend become available and the MFIs can qualify to receive those funds.

Zimbabwe MFIs are severely undercapitalized, with net total assets largely determined by the value of physical assets. Shortages of funds to lend will probably keep interest rates high for the next few years; an opportunity for well-managed MFIs to accelerate the process of rebuilding their capital and increasing their ability to acquire external funding. For the next several years micro loans will be delivered primarily to the best customers in urban areas.

Of course, donors or governments can accelerate these processes by strategic infusions of equity or debt capital appropriate to the capacity of each institution to administer. Donors can also motivate MFIs to aggressively serve rural areas by interventions that mandate lending in those areas. Such an effort will be counter to existing market forces, which will increase costs and reduce expected outcomes.

Some MFIs lending to urban customers will reach into rural areas, as for example, when finance is provided to traders who supply inputs to producers or purchase farm output. This is already happening with a few micro lenders. Nevertheless, the share of the urban portfolio that reaches its tentacles into rural areas is anticipated to be a relatively small part of the total loan portfolio.

APEX Fund for Microfinance

The Zimbabwe Association of Microfinance Institutions (ZAMFI) is proposing to establish an APEX fund in which donors, governments, private institutions and investors can place funds that will be used to support the growth and strengthening of microfinance institutions.

The main objective of the fund is to recapitalize viable microfinance institutions in order for them to expand their outreach. The recapitalization process will be mainly through smaller short-term loans and grants. The bigger portion of the fund will be loans, and the grant portion is expected to be about 20 percent of the fund. Smaller short-term loans will initially enable more members of ZAMFI to access the fund, spread the risk and also accelerate the growth of the fund. As the fund grows and ZAMFI becomes more experienced and competent in handling the fund, the smaller short-term loans will be gradually increased in size and tenure, depending on repayment performance of each individual institution. The loan component of the fund is staggered into rescue short-term loans meant to resuscitate institutions that are in an intensive care state, stabilization, growth and innovation loans. The loans are meant to assist the microfinance institutions to grow their loan portfolios to levels that are sustainable.

The grant portion of the fund is meant to strengthen the capacity of the institutions through improved management information systems (MIS), human resource capacity, mobility4 and product development.

Should a donor decide to support the APEX fund, the team recommends that the initial funds be grants amounts sufficient to adequately fund a portion of the startup and operations for the first two years, and that additional funds be mostly loans. Likewise funds provided by the APEX fund to the MFIs could be in the form of grants or loan.

Discussions related to the APEX fund are in progress. While there is widespread interest among the MFIs, it appeared to the team that much work will be necessary in solidifying agreement among the MFIs and in hammering out the details of the potential market, the structure of the owing and managing organization(s) and the operating policies and procedures in order to assure transparency, sound corporate governance, accountability, independence in administration and avoidance of conflicts of interest. ZAMFI has achieved two donor commitments to date that represent a moderate contribution. Because the objectives and structure of the APEX fund have not yet been fully determined, a recommendation as to whether donors should support the fund is premature.

The funding goal set for the APEX fund is $2 million, a very modest amount given the needs of the sector. At that level of funding the impact on the sector will be limited, may not materially shorten the recapitalization period, and may require greater margins to cover operating costs.

The team suggests that a $5 to $10 million fund may be more effective in achieving the goals of the MFIs, reducing the margins needed to cover operating costs and enhancing the investment interest of social investors.

Internal Savings and Credit Groups Before hyperinflation and dollarization, many informal savings and credit groups existed, begun by NGOs. These groups collected savings from members of the group and then used that money to extend credit to group members. These loans carried high monthly interest rates and were mostly administered by volunteer labor. Hence, many of these groups generated very high returns on their savings.