Noble flags dent from defaulting US cotton farmers

Noble Group highlighted hits from US cotton farmers defaulting on deliveries, and of poor Brazilian weather on its sugar operations, even as it unveiled a jump in agriculture profits.

The coal-to-oilseeds commodities giant, whose rise has made a billionaire of founder Richard Elman, said while high cotton prices had boosted the group’s revenues from the fibre to 54% in the first half of 2011, its profits were "impacted" by "market concerns about counterparty risks".

This was especially true in the US, the top cotton exporting country, "as farmers reneged on commitments", Noble said, adding that it had taken a "prudent approach" over its exposure to deal default.

Default wave

The comments come amid a surge in complaints of farmers, merchants and mills walking away from deals as New York futures prices more than doubled, hitting a record 227 cents a pound in March, before halving again.

Commodities giant Louis Dreyfus is known to have sued farmers in Texas, America’s top producing state, alleged to have broken supply agreements as prices soared. US farmers have received an average of 81.5 cents a pound for last year’s harvest, official estimates show.

Meanwhile, the decline in prices since March has fostered a jump in defaults by buyers, with net cancellations of orders for last year’s US cotton harvest – that is cancellations minus new orders – approaching 800,000 running bales since the start of April.

The International Cotton Association, which arbitrates on international disputes, has opened more than 110 proceedings so far in 2011 against an average of 45 in most full years, with price volatility an important stimulus to defaults, if not the only cause, Kai Hughes, the ICA managing director, told Agrimoney.com.

He highlighted default by growers has particular impact. "Someone reneging at the beginning of the supply chain effects everyone across the supply chain," through merchant to mill to fabric maker to garment manufacturer to retailer.

Sugar setbacks

Noble also flagged a hit to its Brazilian sugar operations from the poor weather which has sparked a series of downgrades to output hopes from the world’s top producer.

"Our volume growth was modest," the company said.

"Otherwise-strong operating income was negatively impacted by the Brazilian drought. Weather conditions led to delayed [cane] planting, which in turn lowered the crushing volume at our two existing mills."

Noble, which reported a 17% rise in first half sugar revenues, in June completed the $950m purchase of two further mills.

‘Very successful stronghold’

Nonetheless, Noble’s overall agriculture profits rose 69% to $294.3m for the half, and were especially strong in the April-to-June period, on revenues up 61% to a record $8.52bn.

"We continued expansion of our origination mainly in Brazil, Argentina and Paraguay and distribution activities mainly in South America and Middle East and we developed a very successful stronghold in South Africa," the group said.

Group earnings for the half jumped 71% to $343.0m, on revenues up 63% at $39.7bn.

The results were released after the close of trading on Singapore’s stock market, where Noble Group shares finished 1.7% lower at Sing$1.44 on Thursday.

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