Drought tipped to push up milk and red meat prices

Milk and meat prices are tipped to climb, and rural economies are being hit hard, as the ripples of drought spread.

Some rain fell at the weekend, however it's not thought to be enough to break the record drought.

Officials now believe the drought could carve as much as $2 billion out of the economy, slashing 30 per cent off economic growth forecasts.

One bank economist expects milk prices to rise 20 per cent and is not ruling out prices lifting to record highs. People could soon be forking out $5.75 for a two-litre bottle of milk.

Federated Farmers president Bruce Wills said everyone would feel the impact, and rural businesses, like fertiliser companies, were reporting that the phones had gone dead.

"This will have a trickle-down effect on the entire economy, no question. Everybody will wear this."

However Primary Industries Minister Nathan Guy says he was feeling a lot more positive after the recent rain, saying it would do a lot ''psychologically'' for rural communities and would start the grass growing again.

But he said the rain would need to be backed up with more in the next week or two coming weeks.

Finance Minister Bill English earlier signalled the cost to the country could be up to $2 billion.

Prime Minister John Key this morning racheted that number up another notch, pointing to a number possibly as high as $3b.

''The answer is nobody knows. We can go back and model what happened when we had the last most serious drought in New Zealand. I've got a feeling off the top of my head that number was in the order of $2b to $3b, so they are saying look if it was as significant it could be that number.''

Key said he was concerned about the economic impact but also at the impact on farmers.

''Farmers are the backbone of this country and they are under serious emotional and financial stress."

But economists do not believe the drought will be enough to tip New Zealand back into recession, despite projections bringing its cost close to the 2007-2008 drought, which cost $2.8b.

Bank of New Zealand economist Tony Alexander said New Zealand would be shielded from recession by other factors.

"I don't believe we are going to be thrown back into recession again because at this stage there's a construction boom going on and there's an upturn in retail spending and household borrowing under way, so that's going to be a fairly dominant factor.

"But the thing about a drought is you never know it's over till it's over and it ain't over yet."

Wills was hoping more rain was on the way. "Within the next week, when I look at the long range forecast, there's some broken weather patterns across the country. My hope is most of the North Island will be in better heart than it is today."

But farmers were still on a knife edge.

"The impact of this will go on for quite some time. It's hitting home now, emotionally and financially," Mr Wills said.

Alexander said it would take 18 months for the effects of the drought to trickle down to the big cities, but rural New Zealand was feeling the impact now.

ANZ economist Con Williams said milk prices could rise 20 per cent and red meat prices could also be affected.

Wholesale prices for dairy products had risen sharply higher in the last three GlobalDairyTrade auctions and that would translate into higher retail prices for dairy products, including fresh milk.

That would normally take six to nine months to flow through to shoppers, but could be sooner.

Meat prices were low at the moment, but would shoot up later this year.

"We've flooded the market, we're all killing these animals flat tack, that's crashed the price," Wills said.

Once it rained and the grass grew, the markets would become short of supply and prices would go up, he said.

The Dominion Post