Big dry raises fears of dairy crash

Dairy production is starting to crash in some key areas and meat farmers are rapidly getting rid of stock because of the big dry, putting New Zealand's two leading exports "under the gun", according to Federated Farmers.

Statistics NZ figures out yesterday showed a much worse than expected January trade deficit of $305 million as export returns fell sharply, especially for dairy products and crude oil.

A surplus of about $125m had been expected.

After accounting for usual seasonal changes, exports fell 15 per cent between December 2012 and January this year, led by lower sales of milk powder, butter and cheese.

Dairy product export volumes fell 12 per cent, while crude oil was down 52 per cent between December and January, Statistics NZ figures showed. For January, sales of milk powder, butter and cheese, New Zealand's top export products, were down 16 per cent by value to $1 billion, compared with the same month a year ago.

Drought-like conditions in the North Island will likely hold back farm production and a high New Zealand dollar will also remain a road-block to exports, adding to the case for the Reserve Bank to keep interest rates on hold this year, ANZ Bank said.

The Government officially declared a state of drought in Northland yesterday and big dairy producing region Waikato is also extremely dry, along with Hawke's Bay.

The last bad drought during the 2007-08 summer led to lower dairy production in the first half of 2008 and pushed the country into recession even before the impact of the global financial crisis hit.

Federated Farmers said the widespread dry conditions and the Northland drought meant there was no justification for the high New Zealand dollar. "It seems dairy production is not just falling but in some key areas is starting to crash," Federated Farmers president Bruce Wills said.

Northland's milk production was down 20 per cent in the year to date, while it was down about 15 per cent in Waikato. With a fair part of the dairy season left to run, dairy farmers were either on once-a-day milking or looking at drying cows off. That would mean the end of milking till August, Wills said.

"The economic fundamentals provide no justification for the substantially over-valued dollar," Wills said.

"The dollar is like a balloon and drought declarations ought to be the sharp pin," he said.

The dollar traded at US82.5c yesterday.

Destocking showed up in Statistics NZ figures yesterday showing much higher lamb and sheep numbers slaughtered in the past three months than a year ago, up by about 1.4 million animals.

Bank of New Zealand economists pointed out that while the dry spell would curtail farm production, it would also cause a temporary boost to meat exports as farmers got rid of stock.

In the three months to the end of January compared with a year ago, meat and offal exports rose more than 8 per cent to $1.2 billion.

ANZ said the drought-like conditions in the North Island suggested a "much weaker outlook" for agricultural production and incomes over the first half of this year. As such, concerns about the wider tradeable sector were likely to prevent the official cash rate from moving higher for the rest of the year, ANZ said.

Westpac economists expected a "modest pickup" in export earnings in the coming year because the impact of rising world dairy prices had yet to flow through to trade figures.

There was about a three-month lag between pricing changes to shipment for dairy products, and so the 30 per cent rise in world dairy prices since the middle of last year suggested export values would move up, Westpac said.

Contact James Weir
Business editor

The Dominion Post