El Nino weather patterns can be bad news for Australia, bringing on disastrous droughts. And one is on its way. But there is an ASX stock that could benefit.
That could be very bad news for Australian farmers, but may help profits to flow for one ASX stock.
El Nino’s imprending arrival comes after the World Meteorological Organisation (WMO) released a dire warning: “There is a 98 per cent chance that Earth will set a new record for the hottest year in recorded history by 2027.”
If you don’t remember everything from your Year 9 science class, El Nino is natural weather pattern, characterised by unusually warm water temperatures, that periodically develops across the east-central equatorial Pacific.
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El Nino – the name means “the boy” in Spanish – often leads to changes in global weather patterns including increased rainfall in some regions, and drought in other places, including Australia.
Source: WeatherZone
El Ninos typically occur every 3 to 5 years, and during those events, there is a temporary weakening or reversal of the trade winds over the tropical Pacific Ocean, causing these winds to blow from east to west.
This, in turn, causes the ocean near Australia to be cooler than usual, bringing lower than average winter and spring rainfall over eastern and northern Australia.
Severe droughts in Australia in 1982, 1994, 2002, 2006, 2015 were all associated with El Nino.
Not all El Nino events lead to drought, but the event in 2015 did, inflicting substantial economic hits for agriculture and livestock produced and reducing water supply.
Link between climate change and El Nino
There is evidence to suggest that climate change influences the characteristics of El Nino events.
Although the exact nature of this relationship is still an area of active research, some studies suggest El Nino events may become more frequent or more intense under future climate change scenarios.
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“Extreme El Nino and La Nina events may increase in frequency from about one every 20 years, to one every 10 years by the end of the 21st century under aggressive greenhouse gas emission scenarios,” said Michael McPhaden, a senior scientist with the US National Oceanic and Atmospheric Administration.
Australia’s CSIRO has also published an article last month to corroborate that theory.
“Even if greenhouse gas emissions were slashed and global warming was kept to 1.5℃, as per the goal of the Paris Agreement, we can expect more frequent strong El Nino events for another century,” said the CSIRO.
Importance of the Murray Darling Basin
According to the latest forecast from our own Bureau of Meteorology (BOM), there is a ~50 per cent chance of El Nino and a high likelihood of a positive Indian Ocean Dipole (IOD) forming later this year.
The bureau says an IOD is “defined by the difference in sea surface temperature between two areas (or poles, hence a dipole) – a western pole in the Arabian Sea (western Indian Ocean) and an eastern pole in the eastern Indian Ocean south of Indonesia”.
“The IOD affects the climate of Australia and other countries that surround the Indian Ocean Basin, and is a significant contributor to rainfall variability in this region,” it says.
Over the past three months, the Murray-Darling Basin has experienced an average to below- average rainfall, consistent with the chance of drier El Nino conditions later in the year.
Spanning 77,000km, the Basin is Australia’s largest river system and provides quality water for drinking and agriculture, contributing to around $22 billion worth of food and fibre production every year.
Around 40 per cent of all Australian farms are in the Basin, which means that a drought could be catastrophic to our agricultural industry.
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Why ASX-listed Duxton Water could benefit
One ASX company that could benefit from a potential drier season is Duxton Water (ASX:D2O).
Duxton owns and manages a portfolio of water entitlements and assets, primarily located in the Southern Murray Darling Basin.
In the past, irrigators received a permit to access water based on their agricultural plantings; but in the 1990s, it was realised that handing out more water permits was not sustainable, so a cap was placed on further issuance.
To allow water-users to continue to develop however, the government formed a trade capability by recognising the permit as a perpetual right to the resource, and by separating this asset from the land. So, one can own water without land, and land without water.
Today, these rights are called water entitlements – a perpetual right to a particular volume of water.
Each year, the entitlement holder receives an allocation based on their entitlement and its particular characteristics. In some years it may be a full allocation (all of their entitlement) and in other years the holder may get no water.
Exchange platforms and brokers were introduced to facilitate trade of these two assets – entitlements, and the annual usable volume of water (allocation) – and that’s where Duxton Water comes in.
The company says the prospect of a drier outlook usually increases demand for leases and forward contracts from its customers.
“Finalising new leases has been one of our key priorities over the last month,” said the company.
“There remains consistent demand for new leases to commence July 1, 2023, with counterparties still favouring longer term options (5-10 years).”
Duxton’s forward looking statements
Duxton says a forward sale of water allocations is important to farmers as it mitigates their risk.
“Forward allocation sales act as a price hedging tool for irrigators, as they provide visibility to cost and supply of allocation for the year ahead,” it said.
Given the drier than average outlook and receding floodwaters, Duxton looks well suited to take full advantage of the current conditions.
At April 30, the company had 58 per cent of its permanent water portfolio (by value) leased to Australian farming businesses, accounting for 78 per cent of the company’s high-security portfolio.
Looking ahead, Duxton says it will continue to have discussions with customers about forward sale of allocations for next season.
“Water is a defensive asset class that continued to generate positive returns for our shareholders.
“We remain confident in the long-term strategy of our business and would like to reaffirm our intention to continue to provide shareholders with a biannual dividend, franked to the greatest extent possible.”
This content first appeared on stockhead.com.au
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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