Westpac said in a commentary that the drought would hit agricultural production in the June and September quarters. “But incredibly, the net cost to the economy of the drought could be close to zero,” it said. “World dairy price increases could offset the costs of lost production due to drought.”
Individual dairy farm incomes for this season will vary widely from the nationwide average – particularly depending on access to irrigation.
The impact of the drought on the meat sector to date is negative and closer to the historical experience.
Higher dairy incomes would go a long way to offsetting lower production in both the dairy and meat sectors, particularly from the second half of 2013, the bank said.
“However, because this particular drought has had such unequal impacts on different parts of New Zealand’s farm sector, there’s also still some uncertainty around the flow-on effects on confidence and spending – those whose incomes get a boost may not raise their spending by as much as those whose incomes have taken a hit curtail theirs.”
As the timing of higher payments to dairy farmers may lag behind the hit to production and as confidence takes time to return, dairy incomes may boost GDP later rather than sooner. Overall, the bank expects that the drought will have an impact of up to 0.6 per cent of real GDP over 2013. . .
Prices have risen steeply but on much smaller volumes because many farmers in the regions affected by drought have gone to once a day milking or dried their cows off completely.
That economists think the dairy price rise could offset the economic impact of the drought shows the decline in the relative importance of the sheep and beef industries.
However, the worst impact from that sector won’t show until next season when the decrease in breeding stock shows up in decreased lamb and calf numbers.
The drought hasn’t broken in all regions, and even if it had, the impact continues long after the rain comes.