Australian farmers are getting hit from two directions simultaneously and markets have not fully priced either one.
The first hit is already happening. Since late February, the Strait of Hormuz, the narrow waterway that funnels a huge chunk of the world's oil and fertiliser, has been effectively shut down following the flare-up between Iran, the US, and Israel. About 20 to 25% of global seaborne oil and up to a third of the world's traded fertiliser normally passes through it. Brent crude is now sitting above $105 a barrel, and fertiliser is getting harder and more expensive to source. Farmers are paying more to grow less.
The second hit is still coming. La Niña, when it rains a lot, ended in March, and El Niño, when it doesn't rain a lot, is now building in the Pacific. The Bureau of Meteorology is expected to make it official around August or September, with most forecasters putting the odds of a moderate to strong event at 61 to 80%. During a typical El Niño, rainfall across the Murray Darling Basin, Australia's food bowl, drops about 28% below normal.
Here is the problem: farmers walking into a potential drought are already carrying higher fuel and fertiliser costs. The squeeze comes from both ends at once. CBA's own economists reckon output could fall 25 to 30% in a bad scenario.
So what does this mean for your portfolio if you're exposed to the sector? Stocks directly in the firing line include Elders, Nufarm, GrainCorp, Bega, Ingham's, and Treasury Wine Estates, all tied closely to farm income and crop volumes. NAB and Bendigo Bank carry the most rural lending exposure of the major banks. Insurers IAG, Suncorp, and QBE face growing claims risk from bushfires and drought.
On the flip side, dry weather is actually good for miners, less mud, fewer delays, better equipment uptime. Rio Tinto, Fortescue, Whitehaven, New Hope, and Aurizon tend to perform better in dry conditions, as do infrastructure and services businesses like NRW Holdings, Perenti, Downer, and Ventia. Urban-focused property developers Stockland and Mirvac are largely insulated from the agricultural fallout.
Watch for the BoM's official call in August or September. That is the moment this shifts from a weather conversation to an earnings one.
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