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The Government's plan to eradicate Mycoplasma bovis by culling more than 150,000 head of cattle will have a similar impact on the sector as a drought, says ASB Bank chief economist Nick Tuffley.
However, the resulting curb in production could put upward pressure on dairy prices, thereby dulling the impact, Tuffley said.
The Government today said it had reached an agreement with farming sector leaders to attempt to eradicate the disease, which is not harmful to humans.
The cull of about 126,000 animals in addition to the 26,000 already underway would take place over one to two years and cost $886 million over 10 years, the Government said.
"Using very rough figures, it suggests that production will be impacted in similar way to what you would expect with a drought," Tuffley said.
"And you do, in that circumstance, have the potential for prices to be supported over the period when the culling happens, so there will be some revenue offset through a higher milk price."
A 10c rise in the milk price represents a $180 million increase in revenue for the sector.
Tuffley said that in rough terms, a 30c lift in the milk price would offset the loss in revenue suffered from lower production.
"But, as we see in droughts as well, we will get people [who] will suffer a disproportionate impact because they will be the ones who will have all the cash-flow pressure arising from having their stock culled, waiting for compensation, and then having to rebuild their herds," he said.
"At an industry level, the impact from a revenue perspective will be blunted by the extent to which milk prices get forced up."
Tuffley expected to see upward pressure in whole milk powder and butter prices as a result of the cull.
Prime Minister Jacinda Ardern said to not act would cost even more than what would be spent on trying to eradicate the disease. The estimated cost of not acting was $1.3 billion over 10 years.
"Today's decision to eradicate is driven by the Government's desire to protect the national herd from the disease and to protect the base of economy — the farming sector," Ardern said. "We have this one shot to eradicate, and we are taking it together."
The Government will meet 68% of the cost, with DairyNZ and Beef and Lamb New Zealand covering 32%.
The Government earlier said phased eradication involved ongoing depopulation and included any new infected properties.
In a normal year, about 4.2 million head of cattle are processed through New Zealand meat works.
Last week the country's biggest dairy company Fonterra, pitched its opening farmgate milk price for the 2018/19 season at $7.00 per kg of milksolids — one of its highest yet.
As at May 24, the number of infected farms was 37, in Waikato, Hawke's Bay, Manawatu, Canterbury, Otago and Southland.
High-risk animal movements have been traced to 3000 farms. About 300 properties are in biosecurity lockdown and 858 are under surveillance.
DairyNZ said it backed the Government in its efforts to eradicate the cattle disease.
"The decision wasn't made lightly and reflects our hope that the disease can be eradicated," said DairyNZ chair Jim van der Poel.
"Our farmers have been waiting for almost 11 months on a way forward and part of the challenge has been a lack of certainty about the long-term solution for New Zealand.
"Today we have that certainty," van der Poel said. "Over 99% of our dairy herds in New Zealand have no signs of this disease, and we want to keep it that way."