Could El Niño disrupt New Zealand’s agricultural production?

El Niño could create a headwind for New Zealand’s agricultural production, economists say.

The National Institute of Water and Atmospheric Research (Niwa) last month declared the official arrival of the weather pattern, which usually causes dryness in the east and more rain in the west.

Niwa said the country will see dramatic temperature swings over the next three months, with periods of unseasonable warmth, followed by sharp, cold southerlies.

BNZ economist Doug Steel has analysed how agriculture has performed during the various patterns over three decades.

“In short, El Niño conditions tend to be detrimental to New Zealand agriculture, at least on average,” he said.

Bad weather has already contributed to difficult conditions this year.

The latest example was the heavy rain that caused major flooding down south in September and led to a state of emergency across Southland.

Then there was the long-signalled arrival of El Niño.

“That has had many planning and bracing for what this iteration will bring, especially through spring and summer,” Steel said.

Many previous droughts have been associated with El Niño events, so that alone means the risk is worth monitoring, he said.

This El Niño follows three consecutive La Niñas, so even a mild event could see the change in weather surprise some.

For milk production, the results were mixed but tended to suggest under-performance during El Niños.

For all El Niño years since the late 1970s, annual growth in milk production averaged 1.4 per cent compared with overall average growth of 3.3 per cent over that period.

That indicated an average drag of about 2 per cent on milk output from El Niño conditions, he said.

“While a crude assessment, if that were to play out against the recent flat underlying trend, it points to an outright decline in milk production in the current season,” Steel said.

“We have long been monitoring El Niño’s development but, as the signals have strengthened, we are now factoring in more of the rising risk.”

Recent adverse weather, generally low milk prices and elevated costs have already presented a challenging start to the dairy season.

Fonterra recently noted reduced milk production in the North Island, which was seen as a result of both higher costs and the weather conditions.

Dramatic temperature swings, unseasonable warmth, followed by sharp, cold southerlies can characterise the El Niño Southern Oscillation (ENSO) which occurs across the tropical Pacific Ocean roughly every five years. Photo / Getty Images

New Zealand milk production fell 0.9 per cent, year-on-year, in August.

BNZ has lowered its production forecast, factoring in a 1 per cent fall, from a previous forecast of flat production.

“If there is a silver lining here, some concern about New Zealand milk production appears to have contributed to arresting a large and lengthy decline in dairy prices,” Steel said.

“This is hardly the best way to generate price support, but it looks to be part of the mix.”

Prices on Fonterra’s Global Dairy Trade auction platform have bounced back by about 12 per cent from their mid-August lows.

BNZ has increased its milk price forecast for the current season to $7.25 a kg, compared with the midpoint of Fonterra’s current range of $6.75/kg.

Westpac senior economist Nathan Penny said El Niño could lead to drought.

“That said, feed is currently ample and water tables are very high so any impact, is likely to be somewhat muted,” he said.

“On the downside, we see risks that New Zealand spring production is stronger than many in global dairy markets anticipate.”

In addition, the timing of a recovery in Chinese demand remained highly uncertain.

“In other words, there’s a lot of water still to go under the bridge this season,” Penny said.

In the meat sector, BNZ research over the past 30 years has shown that during the El Niño years, New Zealand lamb prices have fallen by about 4 per cent on average for the season.

In contrast, lamb prices have increased by around 12 per cent on average during La Niña seasons, the bank said.

NIWA says warmer-than-average temperatures are most likely until Christmas.

The remainder of the country is likely to experience near-average or above-average temperatures over the period.

Above-normal rainfall is expected for the west of the South Island.

The north and east of the North Island are likely to have below-normal rainfall until the end of 2023.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.