New Zealand's largest dairy-farming region may face a summer drought for a second year, slowing the nation's economic recovery and pushing up global milk prices.
The risk of a significant drought in Waikato, the largest milk-producing province, and Northland is “very high,” with little rain forecast for the next month, Agriculture Minister David Carter said in an interview from Christchurch.
“We are heading for extremely dry conditions, probably drought,” Carter said. “It’s not hard to get a significant drought in New Zealand making a difference to GDP.”
Lower farm production could curb New Zealand’s exports, which make up about 30% of the NZ$125 billion economy, and may push up global milk prices.
Fonterra Cooperative Group Ltd., the largest dairy exporter, collected 4.3 percent less milk in the season ended May 31 than a year earlier because farmers halted milking early amid extremely dry conditions in Waikato.
“We’re monitoring the weather conditions closely,” a Fonterra spokesman said in a response to questions from Bloomberg. “While much of the country has had less rain than usual over the last six weeks, it’s too early to know what impact this will have on total milk production for the season.”
“We wonder if the weather risk is starting to be priced into the auction prices,” said Doug Steel, markets economist at Bank of New Zealand Ltd. in Wellington.
“The longer-term contracts well into next year are where the price rises occurred. I would suspect a little of that risk premium going into those longer-dated contracts now.”
As well as milk production, drought can disrupt livestock slaughter as farmers reduce stock levels earlier than normal, Steel said.
“If it doesn’t dent production itself it will put upward pressure on feed costs and profitability on farms is certainly going to decrease,” he said.
La Niña effect
Its forecasts to January suggest below-average rainfall and soil moisture levels are likely on the nation’s South Island and average rainfall in the north.
“It’s certainly a lot drier than normal north of Taupo,” said Steel, referring to a central North Island lake.
“The risk of a drought “is starting to turn a little bit into reality and as for January, February it remains an unknown but the signs aren’t looking that good,” he said.