El Nino drought 'won't tip NZ into recession'

Farming practices have improved and changed over the years, making the sector more resilient to drought. Photo / Christine Cornege

The current El Nino weather pattern will make its presence felt on the agriculture sector if - as many predict - it leads to drought, but it will not be enough to tip the country into recession, the NZ Institute of Economic Research (NZIER) said.

Past El Nino events have hit farmers, and the economy , hard, but farming practices had improved and changed over the years, making the sector more resilient.

"Even under a severe event, recession is far from pre-ordained," the independent economic consultancy said, it said.

Weather experts say the current El Nino could rank among the strongest El Nino events recorded, along with (along with 1972/73, 1982/83 and 1997/98).

Severe El Nino events can generate recessions, it said. "But so do many other events - such as the Asian financial crisis - and not every El Nino event generates a recession."

El Nino is a set of warm conditions in the central Pacific that brings dry conditions to the east of New Zealand and rain to the west, reducing agricultural production.

Today farming is much different to farming practices than in the last three El Nino events.

"While the share of agriculture in the economy is roughly similar, today's farming practices are much different and have shifted towards dairy and away from sheep and beef in response to strong dairy prices," NZIER said.

Farming practices were also more efficient - grinding out more value from each animal from improved genetics and farm management, particularly for sheep and dairy.

Land use for dairying has risen to 1.1m hectares in 2013/14 in the North Island, and 0.6m hectares in the South Island.

Some growth is on relatively marginal land for production but land under irrigation has also increased. In 2012 there were about 720,000 hectares of land under irrigation across all agricultural sectors.

Irrigation also makes a material difference to resilience, mitigating the extent to which warm El Nio conditions are translated into drought, it said.

"Farmers today are also more likely to be creative in dealing with drought - they can see it coming and use alternative feed practices and shift stock around to reduce exposure to dry conditions," it said.

Farming practices can also generate bumps along the way. Culling tends to increase in drier conditions when farmers reduce stock to balance available feed.

"This can produce a short bump up in agricultural production but followed by declining exports at later periods. Milk production increased in most years since 1992/93, but dropped markedly due to the droughts in 1997/98, 2007/08 and 2012/13.

"Overall, in drought years milk production decreases and meat production increases. In the post drought years, milk production recovers and meat production falls."

Since 1990, the sheep flock has almost halved but efficient farm management and genetics mean the tonnage of lamb for export is roughly flat, even though much prime sheep country is now used for dairying.

Reserve Bank research points to a net impact of 0.3 per cent of GDP from the 2013 drought, but an event that has a larger impact on the North Island could generate a 0.7 per cent impact on GDP.

The location of dairy has shifted markedly over the past 25 years, driven by farm conversions in Southland and Canterbury.

How - and where - hot and dry El Nino conditions manifest in local drought conditions will determine the magnitude of the impact that flows through to the national economy, NZIER said.

"But perhaps most important is the relative impact of El Nino not within New Zealand but across the globe," it said. "If many of our competitors are also adversely affected by El Nino then we would expect some offsetting impact of commodity prices being pushed higher by a lack of supply of dairy, although higher supplies of meat may push some commodity prices lower."