Sunday, 12 May 2013

Tobacconomics


Tobacconomics
Having been involved in tobacco farming for a while I have now learnt a few tips that can make you a successful tobacco farmer in Zimbabwe and I thought I could share some tips with you.   With this experience in tobacco production, I have decided to define  “tobacconomics” as “the combined analysis of production and finance of tobacco farming.” Many farmers make impulse decisions in to growing this golden leaf without full knowledge of what they may be getting into.  Tobacco production has complex elements that are usually overlooked by many “fly-by night” farmers and many have burnt their fingers in the game.  One needs to understand the game in order to make meaningful returns.
At what level do you want to operate?
You can only make money with Commercial Tobacco Farming only when you have access to the RIGHT CAPITAL.  When you chose to go commercial, make sure you are well capitalised in terms of your farming equipment, curing facilities and working capital.  The moment you compromise any of these, then your demise is knocking at your door.  Many small scale farmers have been successful because they have managed to keep their cost down by use of equipment such as ox-drawn equipment and conventional (now constructing rocket barns) which do not attract high costs and makes it profitable for the farmer.  Despite that they get low yields, their costs are also low that they make a reasonable margin. 

The power of leverage
Return on equity (ROE) is the best way to learn how much money a company is making for its investors and is calculated as follows:
 
Asset Turnover x Sales Profitability  x Leverage      =     ROE

Profitability and Turnover in commercial tobacco production is generally low and hence the need to rely on leverage to make a good return on investment.  This Leverage can be obtained by accessing contracts from tobacco contracting companies, for example.  It is therefore not advisable to use your own capital when engaging into this farming enterprise.

Controlling losses and managing risk
Due to the high financing levels of tobacco required, it is imperative that one controls all possible losses in each operation.  All operations have a high potential for loss, therefore, as a farmer you should be able to identify the risks and losses associated with each process and define clearly how these can be mitigated.  Tobacco responds to good growing and handling conditions and these should be as precise as possible to maximise your profit.  The biggest challenge with our farmers is that they are not aware of these potential losses and so they cannot formulate processes to mitigate the drastic effects of these.  Most of these risks and losses are farm and situation specific and need to be attended situation by situation.  Investing in irrigation is a good way to managed your risk and increase your yield.

Focus on Yield and Quality (then price)
In a compensatory nature, most farmers tend to blame the price matrix for their low yields.  Prioritise yield maximisation, then Quality and then the price will take care of its self.  Normally when your yield is right, it follows that your quality will be good and hence you have a good price.  In some instances I have advised farmers to top their crop at lower leaves eg 14 and 16 so that they can maximise on the length of their leaves.   Long leaves normally attract a good price, yet your weight will not be different from one who has topped at 18.  In cases where the prices are not favourable, as long as you have the yield, you are bound to perform above average.

Efficiency is everything about tobacco production
You cannot compete with the system when your methods of production are extremely inefficient.  Tobacco production systems over the years have been progressing.  Each farmer should be conscious of how to improve efficiency on the following determinants; Labour and curing fuel, as these are the farmer’s major costs.  In modern systems of production, on a communal scale, the use of rocket barns will increase curing efficiency and on a commercial scale, tunnels are much more efficient than any other system of curing tobacco.  Hence, it will be difficult to compete with one who has good curing systems, even when the prices of drop.  Labour efficiency can be achieved by mechanisation and use of tools suck as clips instead of strings.   

It doesn't cost much to pay attention to detail
The cost of ignoring certain detail is greater than paying attention to detail.  A simple misplacement of fertiliser on the station can cost more that correctly placing it.  It is very imperative to be aware of what detail is required on every operation.  In most cases farmers are ignorant of the type of detail that affects their margin. 




Having analysed the above, one should be encouraged to assess their risk involved in tobacco production, prior to engaging themselves fully as many have in actual fact made tremendous losses whilst they thought the game was easy.  Maximum benefits can only be achieved when farmers start engaging themselves in precision farming practices. 

1 comment: