North Island dairy farmers face the cold comfort of higher dairy prices at a time when much of the island - representing about 46 per cent of the country's dairy production - is descending into drought.
Soon after results from the latest overnight dairy auction, which showed that local conditions had forced international prices up by 10.4 per cent over the past fortnight, Primary Industries Minister Nathan Guy said the Government had officially widened the drought zone to include most of the North Island.
A state of drought has been declared in South Auckland, Waikato, Bay of Plenty and Hawkes Bay.
The area covered includes the Auckland Council area south of the harbour bridge, and all of the Waikato, Bay of Plenty and Hawkes Bay Regional Council areas, including Coromandel and Taupo. Northland was declared a drought area last week.
ANZ Bank has estimated the impact of the dry weather to be about 0.5 per cent of GDP or more than $1 billion, compared with what it would have been with normal rainfall, especially when effects such as lower hydro-electric production in the North Island were included.
ANZ rural economist Con Williams said higher prices would only partly offset the effects of drought on production.
"If you look at the drop in daily milk flows and put that through from a profitability perspective, then it would be very much cold comfort for those North Island producers," Williams said.
On the flip side, South Island producers who could maintain reasonable levels of production stood to benefit from higher prices, hesaid.
Fonterra had a strong start to the 2012/13 season, which ends in May, but the dry conditions mean the co-operative is forecasting total milk collection volumes to finish about 1 per cent ahead for the full season.
Federated Farmers dairy chairman Willy Leferink said farmers could at least face the possibility of higher payouts if the current price trend continued.
"But for those who are close to the wire, it is going to be hard to swallow," he said.
Fonterra's Global Dairy Trade auction, conducted overnight, showed wholesale prices are up 23 per cent from a year ago and 54 per cent above their mid-May 2012 lows.
Auction results showed whole milk powder prices broke through the US$4000 ($4800) a tonne barrier for the first time since March 2011, while all the major categories recorded increases of 4.6 per cent or more.
On the strength of the overnight auction, Westpac economists revised up their 2012/13 payout forecast to $6 to $6.10/kg, compared with Fonterra's forecast of $5.90 to $6, and by 20c to $6.40 a kg for 2013/14.
ANZ said its analysis suggested the dry weather was likely to weigh on producer incomes and primary sector production this year.
"While the current episode is not as bad as 2007-08, and a higher base to dairy production from the prior season helps," said the bank, "our estimates still suggest that lower agricultural and primary production is likely to shave 0.5 per cent off gross domestic product by the end of the year."