Lack of rain hurts farming stocks

The recent trading update by the nation’s largest beef producer Australian Agricultural Company (AACo) (ASX: AAC) should draw investors’ attention to the severe lack of rainfall across much of Australia’s farming districts over the past seven months.

As the Bureau of Meteorology records in its monthly drought statement, the Northern Territory is experiencing its driest wet season in 20 years. Plenty of other records are being set too, including the driest January in South Australia for 24 years and the warmest January in New South Wales since 1939.

For AACo the dry weather has forced the company to issue a market update which warns the market that it may need to downgrade profits if current trading conditions continue. AACo sells a substantial quantity of breading cattle and due to the low rainfall many of AACo’s customers are not restocking their herds, in turn this lower demand is driving down prices.

To diversify its reliance on the domestic market and due to the on-going issues in the live export market, AACo is looking to secure an equity partner to help build an abattoir in Darwin. This would appear to be a smart move by the company and hopefully one it can commission sooner rather than later.

Few farming stocks benefit from severely dry conditions regardless of whether they have direct exposure — such as AAco, PrimeAg (ASX: PAG), and Tandou (ASX: TAN) or indirect exposure through the provision of services — such as GrainCorp (ASX: GNC), Ridley (ASX: RIC), and Nufarm (ASX: NUF). Perhaps one bright spot is companies that hold valuable water rights including PrimeAg and Tandou, and sandalwood plantation owner TFS Corporation (ASX: TFC), which has access to the Ord River irrigation scheme.

Foolish takeaway

The weather is an always present factor when investing in farming related stocks. This makes the industry undesirable for many investors but the volatility from weather related events can also provide investment opportunities for the alert investor.

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