Soft commodities enjoy an upswing

COTTON, sugar, soybean and corn prices have hitched a ride to the rollercoaster of international commodity markets, producing some impressive headline numbers.
In recent days spot sugar prices tipped US38 cents per pound and cotton climbed to 143c/pound, overshadowing the previous soft commodity boom of 2007.
Cotton was reported at a high for 140 years of trading, up more than 88 percent for the year, and although sugar is not at the same record, it is certainly higher than recent memory.
The surge in prices will be welcome for Queensland farmers – but the equation is not as simple as to surmise that sugar and cotton growers will suddenly be laughing to the bank.
For sugar, growers are facing one of the most difficult harvests in decades, and it will be some time before they can capitalise on the high prices.
For cotton, the industry is rebuilding after drastically reducing its crop size two years ago and from floods last season.
Also, a large proportion of the coming cotton crop was sold before this recent peak.
In the last decade we have only had one other strong upward commodity cycle, and it came to an abrupt end with the GFC in 2008.
Few sectors of the economy would go without a pay-rise for 10 years; but that can often be the case for farm commodity prices.
If anything, these recent increases are simply compensating for an earlier flatline trend and a good season will allow the sector to rebuild after the challenging times.
But the rebuilding work is also confronting the challenge of the Reserve Bank continuing to raise the official interest rate.
So far, the banks’ additional increases beyond the Reserve Bank rate have been limited to residential loans, but the rural sector will watch carefully in the knowledge that it can do without further cost burdens. The sector is also conscious that the lending market has seen many banks become conservative and unforgiving about lending policies.
In the deregulated money markets we now have, individuals must negotiate their loan packages, but generally farm businesses are paying 5-6pc or more above the now official 4.75pc cash rate.
The latest Queensland Rural Adjustment Authority debt survey had Queensland’s rural debt at $15.06 billion at the end of 2009, meaning a quarter percent rise in rates requires an extra $38 million in annual payments to service the debt.
The bulk of this debt is in the beef industry, while cotton is carrying $1B in debt, sugar is at $890M, horticulture at $1.1B, and dairy at $280M.
Importantly, the majority of the debt is well-rated at A or B levels, which is a reflection of confidence in and strength of the agricultural sector.
QFF is buoyant about the agricultural outlook in Queensland and we firmly believe that there is no need for the banks to be any more cautious with lending to this sector of the economy than it would be for any others.
Now is not the time for the financiers that have supported famers in the past to either leave the sector or lose faith in our stability and stamina.
High commodity prices, good soil moisture and smart farmers are pulling together despite all the odds.
QFF will continue an open dialogue with the banking sector to ensure those that underwrite rural businesses have the best knowledge available to adequately assess any risks to growth.