After experiencing two (2) severe consecutive droughts in the 2018/19 and 2019/20 season the agriculture sector is poised for a sharp recovery this season thanks to proper preparations, buttressed by normal to above-normal rainfall across the country.

Zimbabwe’s government has supported the majority of households (over 90 percent) with farm inputs under the Presidential Input Scheme that supported Pfumvudza (conservative agriculture) and the Command Agriculture. This saw the area planted for most crops largely increasing relative to the prior season.

According to the First Round Crop and Livestock Assessment Report released in March, maize hectarage surged by 24% to 1.9 million hectares from 1.5 million hectares realized in 2019/20. Other notable changes were in soybean in which area planted rose by 33%, cotton 40%, tobacco 7% and pearl millet 26% among other crops.

Initial government estimates project the country will witness its best ever season since 1984. Staple maize is projected at about 2.8 million metric tonnes which is 308 percent above last season’s harvest. In 2019/20, the country harvested 910,000 metric tonnes of staple maize which was below half the national requirement of about 2 million metric tonnes.

This bumper harvest will provide relief to both authorities and the average citizen. First, it will help to moderate inflation. Though moving in the southward direction since August 2020, prices remain high and beyond the reach of many citizens. Granular analysis of the all-items basket tracked by Zimbabwe National Statistics Agency (ZIMSTAT), the food basket which carries more weight has been the problem child due to dire food shortage.

As the country begins harvesting, prices of many basics like mealie meal will nosedive by a huge margin. The reason behind being, the operation of market forces -as supply increases to match demand, prices will be forced to cool down until a clearing price is determined. Secondly, the bumper harvest will help the National Treasury to save scarce foreign currency of at least US$14 million per month thanks to expected importation break post-harvest.

Nevertheless, there are other downside risks associated with this bumper harvest. My biggest worry is on the financing part. In Zimbabwe, the government through the Grain Marketing Board (GMB) has the sole monopoly to buy bulk maize according to Statutory Instrument 145 of 2019.

Government has elected to maintain the pre-production prices set by Cabinet 3 months ago. GMB is now buying a tonne of maize at ZW$32,000 which is a 52.4% increase from ZW$21,000 paid prior to harvest. In US dollar terms using the current RBZ auction rate of ZW$84.48, this amount translates to US$378.79 per tonne.

From government’s perspective, paying high producer prices this season will encourage farmer participation next season. This perspective has economic intuition behind: Agric commodities follows a Cobweb cycle -fluctuations occurring in the market in which quantity supplied by producers depends on prices in previous production periods.

Government programs should be budgeted for to provide transparency and accountability in use of public funds. In presenting the 2021 National Budget, finance minister Prof. Mthuli Ncube set aside about ZW$8 billion for purchasing grains for the Strategic Reserve. However, on the commemoration of Independence Day, President Mnangagwa announced that Treasury has set aside ZW$60 billion for prompt payment to farmers who deliver their produce to the GMB.

Where will this extra ZW$52 billion, which is about 12.3 percent of the ZW$421.6 billion 2021 National Budget come from if it were not initially budgeted? There is much speculation going on in the market and here are 2 possible scenarios:

First scenario

Since the Treasury chief himself confirmed that they have the money, it means that in the interim they will re-distribute budget votes and table a Supplementary National Budget later.

Second Scenario:

The Treasury will run right away to the Reserve Bank for money printing. This option opens another cane of worms with potential to return us to exchange rate and price instability.

The Reserve Bank governor, Dr. John Mangudya, has ruled out the second scenario and argued that since this payment will not be a once-off transaction, it will not have any impact on exchange rate or prices. But in my view, this is not wholly true.

Even if the farmers are paid over 3-months, say May to July, the amount at stake is huge. Government will be paying ZW$20 billion per month translating to ZW$5 billion per week. Pumping additional ZW$5 billion per week increases ZW dollars circulating in the system. Since the local currency still suffers huge confidence deficit, the search for a stable store of value (US$) will likely send parallel rates running amok. The black-market rate is the most consequential and referenced rate in Zimbabwe as almost all businesses are benchmarking their prices to it.  

The exchange rate (parallel) will not be disturbed if and only if the rate of growth in money supply is sustainable, that is, it commensurate with the rate of growth in the overall economic activity. Make no mistake, base money is highly price sensitive because its components largely perform ‘medium of exchange’ function.

Besides the likely implication on exchange rate and prices, will the government be able to recover the cost? Will it sell maize to millers below or above ZW$32,000? If above, what will be the cost of the final product in shops?  

Furthermore, this expected bumper harvest will likely be for domestic consumption only despite ample grains for the export market. Why? Because the cost of production in Zimbabwe is high putting it at a disadvantage with rivals. For instance, a tonne of maize is costing US$378.79 in the domestic market using official rate. But across the Limpopo, on the South African Futures Market (Safex), a tonne of maize is averaging US$220 and according to Statista, the world average price of maize is currently at US$160. It is actually cheap to import maize as far as from Brazil than to buy local.

It is the lack of an efficient market mechanism to determine commodity prices that is affecting the agriculture sector. In my view, prices are best determined by the ‘Invisible hand’ -forces of demand and supply- rather than the ‘Visible hand’ which resembles the State. The advancement of commodity exchange, the Zimbabwe Mercantile Exchange, will gradually lead to price discovery.