Seasonal businesses blow hot & cold

Seasonal businesses rely on ‘normal’ weather conditions. In simple terms, in summer it needs to be hot and in winter in needs to be cold. But for those businesses relying on ‘normal’ summer weather, conditions have varied significantly across Australia.

• In general, eastern Australia has experienced milder and wetter than ‘normal’ conditions so far in summer 2011/12 whereas southern and western Australia has experienced warmer-than-normal conditions. But rainfall has generally been average to above average.
• North and north eastern Australia is currently experiencing significant rainfall while north-western Australia is bracing for tropical Cyclone Iggy (category 2). La Niña conditions still persist, but flooding and cyclonic activity have not been anywhere near as severe as last year.
• The key La Niña indicator – the Southern Oscillation Index – receded from +23.9 to +11.3 over the past month and well below the 93-year high of 30.2 set in April 2011.

Mixed conditions for seasonal businesses

• In Sydney, yesterday the temperature exceeded 30 degrees for the first time in two months (November 30). But in Perth, the maximum temperature has exceeded 30 degrees on 12 of the last 13 days. And while the maximum temperature in January has fallen short of the 20-year average in Sydney, Canberra and Brisbane, temperatures have been above-normal in other capital cities, especially Adelaide and Perth.
• Clearly we can’t talk about a ‘hot’ or ‘mild’ summer – it depends on what part of the country you live in. Seasonal businesses in the south and west of the nation would have few complaints. But summer 2011/12 hasn’t shaped up as NSW businesses would have hoped after so much promise in November. Across the country maximum temperatures in November were well above normal, assisting clothing retailers with early summer sales, but follow-through proved mixed across the nation.
• For farmers, there would be few complaining about lack of rain; rather rain has been too plentiful at the wrong times. Australia looks set to produce a record wheat crop, but in many parts of the country late season rains have led to downgraded quality, thus affecting final prices. Further, the expected large size of Australia’s grain crop has served to depress world grain prices while a firmer Aussie dollar has added to the trials faced by farmers.
• Still, most farmers would prefer dam levels to be full, not empty, and prefer rain to the drought conditions that prevailed through most of the noughties.
• La Niña conditions continue (associated with wetter-than-normal conditions) but flooding and cyclone activity are far less extreme than a year ago. And while the risk of flooding and cyclone activity exists over the next few months, the Bureau of Meteorology has noted “some indicators have weakened over the past fortnight. Similarly, the majority of climate models surveyed by the Bureau suggest a gradual decline of the current La Niña, with most models suggesting an end of the event during the coming autumn season.”
• Longer run charts show a warming trend across Australian capital cities over the 1990s but then a sideways trend over the noughties. However in the last few years there has been a breakdown so that maximum temperatures in capital cities, on average, are currently little different from long-term averages. Seasonal businesses, utilities, construction companies, farmers and other weather-influenced firms will need to watch future trends closely.

What are the implications for investors?

• Summer has been milder than normal across the east coast, but not markedly so. In contrast, other regions have experienced a more ‘normal’ summer while western Australia has experienced an extended period of above-normal temperatures during January.
  Seasonal businesses and utilities in NSW, especially Sydney, have most reason to complain about the weather. Over December and January there has been 1 day with a temperatures above 30 degrees (7 in 2010/11) and after 17 rain days in December, Sydney has experienced 12 rain days in January.
• Investors need to closely assess the geographic mix of a company’s operations. Firms that have a high proportion of seasonal goods or services in NSW, or eastern Australia more generally, are most at risk in disappointing over the earnings season.