Drought cost offset

Though the widespread drought has caused milk production to plummet and resulted in a record sheep and beef kill, economists have signalled the net cost to the economy could be ''close to zero'' - thanks to global dairy price increases.

In a report released yesterday by Westpac, the bank said the consequences of the drought had been ''unexpected''.

In eight weeks, world whole milk powder prices had surged to record levels. In the four auctions to April 2, whole milk powder prices ''shot skyward'', rising 62%, largely a consequence of the drought. The price surge, particularly during the past four auctions, had largely held up in New Zealand dollar terms.

Booming Chinese milk demand had been met by New Zealand and that demand was still growing at a rapid pace. When dairy production in New Zealand dived, the effects were immediate, the report said.

With no other producers able to ''fill the gap'', one thing had to give and that was prices. Chinese mothers insisted on baby formula made with foreign milk powder, the majority of which was from New Zealand, no matter what the price.

The net financial effect of drought would differ widely between farms and some farmers' situations would be much worse than the average across New Zealand.

Anecdotally, some farms had had production fall by 10% to 20% this season, compared with Westpac's estimate of a 1% fall for the country as a whole.

In the meat sector, farm incomes would fall from last season, particularly for sheep farmers, and unlike the dairy sector, there had been no offset from higher prices.

Slaughtering had spiked to record levels, carcass weights had fallen and costs were higher as farmers bought in feed and moved stock to areas less affected by drought.

The effects of drought in that sector would linger into next season as farmers rebuilt their flocks and herds.

The drought would hit real GDP in the June and September quarters and, overall, the bank expected it would have an impact of up to 0.6% of real GDP over 2013, the report said.

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