$1b drought hit tipped for economy

Bank estimates impact of dry weather at about 0.5 per cent of gross domestic product, with next year's output also affected.

Drought is likely to shave 0.5 per cent off gross domestic product by the end of the year and take a toll on next year's output as well, says ANZ bank.

In an analysis of the emerging drought conditions, the bank's rural economist, Con Williams, said that milk production last month dropped by nearly 15 per cent on last year in the worst affected regions - Waikato, the east coast of the North Island and central North Island, as well as Northland which has already been declared a drought zone.

Other areas of the North Island are down 10 per cent but this is offset by some growth in the South Island, though only Otago and Southland, which produce about a sixth of the country's milk, are enjoying normal rainfall.

Fonterra is forecasting national milk production for the whole season will be up about 1 per cent on last year, but that reflects a 5 per cent increase during the first eight months of the season.

"This implies a further reduction of 9 per cent for the remaining three months of the season, with reductions of 20 per cent in the North Island offset with continued growth in the South Island," Williams said.

"In all, North Island dairy farmers who experience a drop in production of 20 per cent from February through to the end of the season will have production around 6 per cent lower than last year," he said.

"Other things remaining the same, this reduces profitability by 39 per cent to $80,000 for an average-sized dairy farm."

It would reduce dairy farmers' income by about $300 million in the first half of 2013, compared to the same period last year.

But that would be offset in the short term by about $150 million of additional meat production as sheep and beef farmers reduce stock numbers and send animals to the works early, at lower weights and prices.

The normal multiplier effect would increase the impact on economic output to $500 million but that only covers the first half of the year.

By the end of the year, Williams estimates the impact to be around 0.5 per cent of GDP or more than $1 billion, compared with what it would have been with normal rainfall, especially when other effects, like lower hydro-electric production in the North Island, are included.

And repercussions would spread beyond this year, because of the time it takes to replace capital stock, and the impact on next year's lamb drop.

"The impacts of [a] prolonged period of dry weather are likely to be long-lasting, with agricultural and primary manufacturing production unlikely to recover to pre-drought peaks for at least 24 months."

Higher dollar limits gains

World prices for a basket of New Zealand's export commodities rose 1 per cent last month, but the higher dollar swallowed most of the gain.

ANZ's commodity price index rose for the seventh month in a row and is now 9 per cent above its most recent low last July, though still 13 per cent below the all-time high in April 2011.

In New Zealand dollar terms last month's rise was just 0.2 per cent, however, and the index is still 23 per cent off its peak in March 2011.

Dairy prices rose 1.8 per cent, to be 18 per cent above last June's low but still 28 per cent off their peak in March 2011.

Forest product prices rose 0.5 per cent, to be 5 per cent off the low in December 2011 but 10 per cent down on the peak in June 2011.