The Business Herald’s markets and banking reporter.

Big dry drags on economy

Some parts of North Island suffering critical deficit of 'fuel in the tank' in terms of soil moisture, says dairy expert.

Farmers are being forced to buy in supplementary feed and offload stock as their land dries out, and Federated Farmers says that will hit the bank balance. Photo / APN
Farmers are being forced to buy in supplementary feed and offload stock as their land dries out, and Federated Farmers says that will hit the bank balance. Photo / APN

Twelve months ago the weather gods were smiling on farmers, but with many rural areas now rapidly drying out it doesn't look as if the economy will get the same kind of boost it received from last year's unusually wet summer.

ANZ economist Mark Smith said the effect of dry weather was expected to weigh on economic growth in the first quarter of this year and the bank was forecasting a lift in gross domestic product of 0.4 per cent.

That would be a hefty drop on the 1.1 per cent GDP growth - the strongest lift in quarterly economic activity in five years - the country managed to pull off in the same period of 2012 on the back of exceptionally good farming conditions.

While it's been great weather for beachgoers, as the hot summer rolls on parts of the east coast of the North Island and Canterbury are becoming increasingly dry and farmers are being forced to buy in supplementary feed and offload stock.

Federated Farmers president Bruce Wills was sheltering inside from the searing mid-afternoon heat on his Hawkes Bay sheep and beef farm when the Business Herald called.

"If this hot, dry weather lasts for another two to three weeks then it will start to bite pretty hard and I guess we'll be negotiating with locals and MPI [Ministry of Primary Industries] about whether a drought event needs to be called," Wills said. "We're having to de-stock like a lot of farmers and it's going to hit the bank balance because we're having to sell earlier and lighter."

BNZ economist Doug Steel said from a national agricultural production perspective it was positive that there remained areas stock could be moved to.

"While there's increased cost in transporting stock around, it does make a big difference if you've still got areas with reasonable feed, compared with back in 2008 where [drought] was quite nationwide and there was no place to go," Steel said.

A drought from the spring of 2007 to the autumn of 2008 was estimated to have cost the country $2.8 billion.

Steel said the peak of the dairy season had passed and there was "a lot of milk in the tank". "As we go through February, March and April those months - in my mind - were always going to be down on last year because last year was so good," he said. "The drier conditions are likely to make those negatives look a bit worse."

Fonterra reported a record 11 per cent lift in its milk volumes last year.

Dairy farmer Jonathan Boyle told the Bay of Plenty Times this week that the dry weather had had such a severe impact on his farm near Te Puke that he was feeding $800 of supplementary feed to his cows every day to keep them milking. "We're entering the grip of a drought," he said.

Wills said farmers had been spoiled over the past two summers and dry conditions were the reality of farming on the east coast at this time of the year.

"Farmers are doing the right thing, de-stocking and making certain that the feed supply and feed demand is in balance," he said. "With no rain on the horizon we've just got to keep de-stocking."

ANZ rural economist Con Williams said milk flows had been solid through the peak of the current milking season that begins in June, which provided some comfort for dairy farmers.

If prime North Island dairy regions such as Waikato dried out more it would affect milk national production, he said.

"People will start to think about once-a-day milking or offloading cows."

Sheep and beef farmers were having to offload stock early at lower weights, which would affect their profits, Williams added.

DairyNZ regional team manager Craig McBeth said soil moisture levels were becoming critical in some parts of the North Island.

"It's not just that there hasn't been much rain recently, there's quite a deficit of soil moisture - fuel in the tank if you like," McBeth said.

He said it hadn't been a bad milking season so far but figures from Fonterra indicated production in parts of the North Island was "starting to drop off quite quickly".

Niwa predicts rainfall up until March is likely to be near or above normal in the west and south of the South Island, but close to or below normal in the east of the North Island.

Nick Tuffley, ASB's chief economist, said it was widespread drought that had the biggest impact on overall GDP, but it would be hard to match the exceptional economic growth seen in the first quarter of last year.

ASB is forecasting a 0.7 per cent rise in GDP for the first three months of this year.

GDP figures for the final quarter of last year are yet to be released and should benefit from solid milk production during that period.

- NZ Herald

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