Can Cubbie pay its way?

06 Sep, 2012 02:00 AM

MAKING Cubbie Station's massive cropping and dryland grazing operation pay for itself is likely to be far more challenging than any furore erupting from critics of the big foreign investment play.

Not only is water availability to the Lower Balonne property's 22,000-hectare irrigation area prone to extreme irregularity but many industry observers are baffled by how the numbers from its cotton earnings - even in record years - were enough to keep past debt levels in check, or cover a new owner's costs.

Cubbie, on the Queensland-NSW border, has been in voluntary administration since October 2009, with debts estimated at that time of more than $300 million.

Financial analysts conservatively estimate interest on that debt has been compounding at a premium rate of 10pc annually, which in the past three years would be equivalent to at least $30m a year.

Other costs including administration fees variously estimated at up to $1m a month according to Senator Bill Heffernan, would add to the existing debt.

On the plus side, last year the company's receivers McGrathNicol reported Cubbie's 249,000 bale crop in 2010-11 was worth more than $150m.

But after deducting typical industry production costs, the average profit from the big prices that season probably translated to a pre-interest and wages profit of around $43.5m - roughly enough to cover the year's interest bill and administrative costs, although not much more.

The most recent season's poorer returns could have averaged well shy of Cubbie's debt servicing costs and at current market indicators, returns from 2012-13 plantings may be even slimmer.

"I think a lot of people are wondering how Cubbie could reasonably have been expected to reduce a debt as big as that," said one farm financial sector analyst.

"Based on current cotton returns, it's hard to make the numbers stack up for the new owners - if they buy it.

"Cotton at less than $400/bale is a challenge for anybody."

But every property deal was different in terms of how much equity and debt was involved, the length of settlement and the tax deductibility of the costs involved, another observer noted.

It was impossible to second guess the terms of the big deal being stitched together with Cubbie, its bankers National Australia Bank and Suncorp, and prospective buyers Chinese textile company Shandong RuYi and Australian wool and grain merchant, Lempriere.

Latest Australian Cotton Comparative Analysis jointly compiled with Boyce Chartered Accountants, calculated the average cotton industry interim profit last season was $1240/ha (compared with $1919/ha in 2010-11), which would translate to a profit before interest and wages payments of just $27.2m at Cubbie in 2011-12.

Industry average profit estimates for last season were based on cotton sold at $502/bale, with production costs of around $382/bale.

Although irrigated and dryland grain crops and beef cattle earnings are also part of Cubbie's production mix and would bring in extra returns, bankers say it would be hard for other farm commodities to beat irrigated cotton returns at prices above $420/bale.

Further complicating the equation is the fluctuating water availability issue, with Senator Heffernan pointing out that 25pc of the total flow in the Lower Balonne system occurred in just four years between the 1920s and 2000s.

"I can't see how you can really manage the variability of the water - I don't think the Chinese realise how unreliable the water supply is," he said.

"A hell of a lot of money needs to be spent re-plumbing the place (Cubbie) to make irrigation more cost effective - there's up to 2.5m of annual evaporation from some of its storages."

He said the federal Treasurer Wayne Swan's claim that surplus irrigation water from Cubbie could be sold downstream after wet seasons was "ridiculous".

The current infrastructure made it impossible to release meaningful volumes of extra local flow from Cubbie's vast levee network.

Senator Heffernan, who chairs a senate inquiry into the Foreign Investment Review Board, is worried foreign government loans to Cubbie's new owners could entitle the company to huge Australian tax deductions.

He said any condition of any foreign ownership in Cubbie should be include provision of full details of sovereign loan assistance to the buyer and auditing of tax arrangements to keep taxation earnings in Australia.

He also wants the cotton crop ginned and marketed through local entities, not shipped direct to China.

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6/09/2012 4:32:50 AM

With a fly in fly out Chinese workforce employed by the parent company on Chinese rates. With Chinese machinery owned by the parent company, and imported directly avoiding any tariffs and Australia dealer costs. By selling the produce at below the cost of production back to the parent company, avoiding any Australian taxes. Yes it can pay its way…The Chinese aren’t stupid (unlike some others)
Norm of Forest Lake
6/09/2012 4:49:26 AM

Congratulations to Andrew Marshall for asking the right questions. But its a worry when I find myself agreeing with Bill Heffernan - at least in part. The Culgoa hydrology is the real risk for Cubbie. All those crazy southerners who think Cubbie's "water" will save the MDB fail to recognise the very long periods of virtually no flow in the area. The previous owners bravely endured at least 6 - 8years when they had about 1 reasonable crop -- try running that business !
6/09/2012 4:54:02 AM

Who cares wether the numbers stack up under Aussie ownership !! It's Chinese now & with there labor costs , management ( Chinese state mangement teams are paid low peanuts so are more productive than Aussies CEO's living on expensive peanuts !) . Chinese need food & clothing , Aussies need cheep rubish chinese gadgets. I wonder how much they pay for the Opera House & Bridge , They can't take these away either unlike what's under our soil !!I'd more worry if I was a S.A. , They will be growing Rice at the mouth of the Murray soon with there cheap chemicals . Our government debt to them !!
6/09/2012 7:05:21 AM

for overseas investors, it’s not about making a profit. it’s all about owning the rights to food and fibre, and with the ability to bypass our over regulated, over taxed supply chain, they may even make a profit. how stupid is australia when capital injection is selling the farm?
6/09/2012 7:37:02 AM

Because Australian investors were lining up at the door eh? How many of you worryingly xenophobic Aussies own shares in a mining company that does business overseas? Without foreign investors many of you would struggle to get the finance you need to farm because land values would likely have already fallen in the order of another 20-30% from where they are. Them thar are the facts! Try farming with 75% of your normal borrowing costs.
6/09/2012 7:59:41 AM

I reckon it is simple really. We should only sell land (as opposed to lease) to compamies from countries where we can buy their land - reciprocal rights - easy. We can't buy yours you can't buy ours. How easy is that?
Bushie Bill
6/09/2012 8:43:44 AM

I expected a much higher analytical and knowledgeable approach from you, Qman. Have you read the contract and approvals? Why would we allow the events you state to happen? Unlike arses-out-of-the-pants subsistence corkswingers, our government can and does buy the best legal advice in the land and our negotiating skills are as good as any in the world. All the crap here is a clear demonstration of pigheaded ignorance, an unpreparedness and intellectual inability to reason, think and consider a wider interest than your own selfish ones and blatant xenophobia. Fear rules in ignorant RARA!
Loc Hey
6/09/2012 9:22:08 AM

Bushie Bill the worlds biggest hate monger of everyone west of the sandstone curtain has spoken. Everytime we read another xenophobic post from you BSB it reminds us all of speeches from the extreme side of politics yelling hate filled crap in 1939. Why don't you do us all a favour and go back there.
6/09/2012 9:34:11 AM

If the Government has no concerns about the proposed purchase, why have they only allowed and eventual 50% Chinese ownership? If all is OK why not 100% ? The big risk I see is not from the Chinese government, but our own. In the very recent past they have shown that they will spend hundreds of millions of taxpayers dollars to buy back water for little environmental gain. See Twynam, Tooralie and Tandou. It is true that the Chinese cannot tow Cubbie back to Bejing, but they can certainly sell the water and take the cash back. Just like Twynam.
6/09/2012 9:44:39 AM

great comment loc hey well said G so selling the farm if capital investment nuffield?
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