US embassy cable - 05HARARE326

C O N F I D E N T I A L HARARE 000326 
 
SIPDIS 
 
STATE FOR AF/S 
USDOC FOR ROBERT TELCHIN 
TREASURY FOR OREN WYCHE-SHAW 
PASS USTR FLORIZELLE LISER 
STATE PASS USAID FOR MARJORIE COPSON 
ALL AFRICAN DIPLOMATIC POSTS 
 
E.O. 12958: DECL: 12/13/2014 
TAGS: EFIN, ETRD, PGOV, ECON, EINV, ZI, Agriculture, Economic Situation, Trade 
SUBJECT: EXCHANGE RATE HAMPERS COTTON EXPORTS 
 
Classified By: Classified by Ambassador Christopher Dell 
under Section 1.4 e/g 
 
1. (C) Summary:  Cargill Managing Director John Battershell 
told Econoff on February 23 that ginners of cotton - the 
country's top foreign exchange earner in 2004 - have given 
the GOZ an ultimatum: either the GOZ heavily subsidizes the 
crop or it permits a more realistic exchange rate than the 
present Z$ 6,000:US$.  With the 2005 harvest already 
underway, Cargill has been refusing cotton shipments from 
Zimbabwean farmers pending a resolution of the crisis.  End 
Summary. 
 
--------------------------------------------- ---------- 
Government would subsidize two-thirds of cotton harvest 
--------------------------------------------- ---------- 
2. (C) Battershell said his firm's problems in Zimbabwe are 
"exchange rate, exchange rate and exchange rate."  At the Z$ 
6,000:US$ official rate, Battershell said Cargill and Cottco, 
the two large ginners, can pay farmers no more than Z$ 
1,047/lb.  Beyond that, they lose money and will not accept 
shipments of raw cotton from farmers.  For their part, 
farmers need at least Z$ 3,000 to cover inputs such as seed 
and fertilizer. 
 
3. (C) According to Battershell, ginner and farmer groups 
have been negotiating with the Reserve Bank (RBZ) over a 
solution, but with no success to date.  The Cargill MD said 
ginners would accept either a subsidy or an exchange rate 
closer to the parallel market rate of Z$ 12,000:US$. 
However, Battershell said he doubted the RBZ would pay a 
trillion dollar subsidy (about US$ 83 million in parallel 
terms), covering two-thirds of the price paid to growers.  He 
said cotton ginners have lobbied for a special sectoral 
exchange rate such as the one for gold exporters.  However, 
the RBZ has told ginners it does not want to establish new 
exchange rate for each segment of the economy. 
 
4. (C) Battershell contended that the overvalued zimdollar 
has thrown his sector completely out of whack.  To 
illustrate, he cited wages of farm laborers.  Before the RBZ 
established its currency auctions in January 2004, the 
lowest-skilled laborer on cotton plantations earned less than 
US$1/day.  Now Battershell says cotton farmers pay the 
equivalent of US$9/day to the same workers, after wages are 
converted at the Z$6,000/US$ rate.  The Cargill MD claims the 
present wage makes Zimbabwean cotton production uncompetitive. 
 
-------- 
Comment 
-------- 
5. (C) Many of Zimbabwe's 250,000 cotton farmers will shift 
to other crops if they do not turn a profit this year.  This 
would be an unfortunate twist for this economy, since cotton 
production surpassed tobacco last year as the country,s top 
foreign exchange earner.  In fact, cotton output is still 
close to pre-land reform levels in 2000 (down from 357,000 to 
333,000 tons) whereas tobacco output has fallen sharply (down 
from 237 to 65 million kgs). 
DELL