El Niño hits Australian farms and utilities hard

Australian utilities and agriculture are among the sectors most exposed by an El Niño, according to Fitch Ratings. The global credit rating agency notes that the Bureau of Meteorology officially declared an active phase was underway in June, a shift that has contributed to below-average rainfall across southern and eastern regions. The pattern also brings warmer daytime and overnight temperatures nationwide.

The drier conditions associated with the weather event can reduce water storage levels and inflows, which may weaken revenue and increase operating expenditure for water utilities through greater use of desalination plants and chemical treatment. Credit rating agencies warn that drought-response measures, such as water restrictions and drought pricing, will help support cash flow as regulators adjust for demand volatility.

Hotter weather could also increase electricity demand, putting pressure on spot prices and grid stability while raising bushfire-related risks for transmission and distribution assets. For energy retailers, a combination of higher spot prices and unplanned outages could translate to short-term earnings volatility, especially those with retail loads exceeding their owned or contracted generation output. However, regulated utilities are likely to see limited credit impact because regulatory frameworks allow for revenue cost recovery in subsequent years.

This dynamic creates a difficult operating environment for the power sector. Utilities face the dual challenge of maintaining grid reliability while managing costs that may rise faster than revenue. The pressure is amplified by the physical threat to infrastructure from extreme heat and fire, which can force unplanned outages and require expensive repairs to transmission lines and substations. The system is being asked to absorb more stress just as the demand for cooling is climbing.

Agriculture has fewer protections against prolonged drought conditions and is likely to be among the most affected sectors. El Niño typically brings lower rainfall, weaker pasture growth, lower crop yields and irrigation stress. Fitch Ratings said the weather event could see farm output fall, pressuring food supply chains and increasing food price volatility. Australian wheat and barley production volumes fell by an average 28 per cent and 18 per cent, respectively, in El Niño years, according to the Australian Bureau of Agricultural and Resource Economics and Sciences.

The conflict in the Middle East adds another layer of risk to the sector. El Niño would also add complexity to the agricultural sector’s exposure to the region amid volatile energy and fertiliser costs. Lower agricultural production could reduce export volumes, though ports and logistics operators are unlikely to see widespread disruption. Heat, bushfires and drought are more likely to create localized impacts rather than sector-wide shutdowns.

Despite these challenges, thermal coal producers could be among the few clear beneficiaries. Drier conditions are generally more favourable for mine operations than the flooding associated with La Niña, lowering the risk of weather-related disruptions and potentially leading to higher supply volumes. Hotter weather across Asia and lower hydropower availability could also support seaborne thermal coal demand and lift prices, benefiting Australian exporters. However, greater reliance on thermal generation would increase energy-transition challenges, requiring more fossil-fuel use to meet short-term demand.

Higher electricity demand would also reinforce the need for storage, firming capacity such as batteries, transmission investments and climate resilience, making El Niño a practical stress test for the energy transition. Credit effects from the weather event are likely to be limited for sectors with contractual protections or strong operational resilience. Hyperscale data centres are likely to face “very low” credit risk because power costs are passed through to tenants, and many facilities use air-based cooling systems and have redundancy to maintain uptime during grid outages.

Insurers could face bushfire-related claims if hotter and drier conditions lead to a more severe fire season. The credit effects will also depend on losses from other natural perils such as flooding, reinsurance protection and the sector’s ability to reprice risk.