Australian almond producer Select Harvests Limited (ASX: SHV) is likely to benefit from an extreme drought in California.
The US state produces 80% of the world's almonds but is facing its fourth year of drought. California was recently forced to implement mandatory state-wide cutbacks on cities and towns, but farms were exempt. That saw a huge media outcry, as almonds consume an estimated 4 trillion litres of water annually in California – 20% more than households use indoors, according to news.com.au.
The problem has been exacerbated by almond trees covering nearly 400,000 hectares in California, many in locations such as virgin hillsides and desert where there is little natural water.
The boom has been caused by a surge in demand for almonds, primarily from China's rising middle class. Almonds are a popular, healthy treat in China's supermarkets and stores, and apparently a must-have item in gift baskets. China's middle-class households have doubled in number since 2006, and almond demand has shot up by 1,000% in the past decade.
The current drought has caused issues with the supply of almonds, forcing the price higher, and it is expected to stay reasonably high over the next few years at least. Select Harvests is also profiting from the fall in the Australian dollar – as almonds are priced – like most commodities – in US dollars.
But the company is not sitting still and plans to double its acreage by 2018. That will still be small compared to the whole of California – Select has just 4,835 hectares bearing almonds currently.
With the world's population cottoning on to the health benefits of nuts, Select Harvests and fellow nut producer Webster Limited (ASX: WBA) could see demand for their products continue to rise into the future.
Trading on a forecast P/E ratio of just 13.3x and plenty of potential to raise its 2.5% dividend, Select Harvests could be one stock to have a nibble at.
