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The estimated cost of drought to farmers this season is more than $1 billion but a bigger financial impact could hit next year, says Federated Farmers president Charlie Pedersen.
He said cash flow could be quite good in drought years as farmers killed stock and costs dropped as work such as spreading fertiliser or fencing was curtailed.
"The year of the drought is not the one that you have the enormous hole in your bank account, it's the year after," Pedersen said.
"The accounts and tax paid position is pretty good in a drought year ... but it's the next year where the big costs come in and where the income is absolutely decimated."
Pedersen's best guess was that if there were 15,000 dairy farmers nationwide, 10,000 would be substantially better off this season, 2000 would be the same and 3000 would be substantially worse off.
"We're in business, we choose to be in business and the weather is one of the things that we can't control in our business ... we just have to be prepared for it."
The Ministry of Agriculture and Forestry estimated the impact of the dry weather would cut $1.24 billion from the farmgate, resulting from reduced production and increased costs, including feed supplements.
Based on a change in farm profit before tax, the analysis said the drought would cost dairy farming $894 million and sheep and beef farming $345 million.
Reduced income among some sheep and beef farmers was forecast to be more than $100,000, which would result in overdraft being capitalised back into mortgages and lower equity.
Minister of Agriculture Jim Anderton said the drought could not have come at a worse time.
"Significant flow-on effects are likely next financial year because of expected lower lambing percentages, reduced wool production, reduced capital stock, and animals in poorer condition going into next spring."
Yesterday's cost estimate by MAF followed an announcement in February from Fonterra that production was falling behind the previous year and the weather could cut half a billion dollars off farmer payouts this season.
However, Fonterra said yesterday that overall milk production for the year to date was now about the same as this time last year, and the co-operative recently told farmers this season's payout would be at least $7 per kg of milksolids, compared with $4.46 the previous season.
A Fonterra spokesperson said $500 million still stood as the rough estimate of drought impact but the full effect would not be known until the end of the season.
Westpac economist Doug Steel said he expected the final payout to be $7.20, with the dairy sector bringing the best part of $4 billion more into the country.
Meat & Wool chairman Mike Petersen said the cash impact on beef and sheep farmers would be bigger next season.
"Even if we had rain within the next week, next season's production is still going to be seriously impacted," Petersen said.
March was the big month for mating animals. "I think you'll see the conception rates will be well down on many sheep and beef farms."
