But the ANZ Bank has a more pessimistic view, fearing the drought combined with softening international markets could reduce economic growth by at least 0.5% in the first half of this calendar year alone.
The bank’s rural economist Con Williams said his pessimism was based on lower international milk prices.
Treasury warned dry conditions throughout much of the South Island and parts of the North Island would mean lower dairy output, exacerbating already low dairy prices, while the sheep meat and beef production season would be short and early.
It forecast the meat season to have higher production in the December and March quarters and a fall in the June and September quarters.
Lower milk prices meant dairy farmers were also likely to have less incentive to buy supplementary feed to boost production later in the season, a move that would flow through to the rest of the economy.
Despite that, Treasury still expected what it called strong economic growth for the December quarter as “robust employment growth supported household demand”.
Retail sales driven by consumption grew in the quarter while tourist spending underpinned strong demand for services.
In this calendar year lower fuel prices and falling interest rates had underpinned consumer confidence, the Treasury report said.
“All up capital (breeding) stock numbers don’t look to have been greatly affected as yet.”
Con Williams
ANZ
Inflationary expectations were still low.
Treasury maintained its forecast of 0.8% gross domestic product growth for the December quarter, considerably more conservative than that forecast by the ANZ which picked 1.2%.
The ANZ Market Focus report said the large, early season meat kill would impact on the economy later in the year when fewer animals were killed and farmers replaced capital stock.
Equally, lower milk flows would impact economically later in the season.
Should the remainder of the season return to normal, the bank expected next year’s milk production should not be influenced by further herd-culling.
The biggest drought impact on meat production had been lower weights in finishing stock bought forward earlier, rather than culling of capital stock.
“All up capital (breeding) stock numbers don’t look to have been greatly affected as yet.”
Williams acknowledged since the bank’s report that Waikato and Bay of Plenty were now starting to dry out and existing dry areas had recorded only modest rainfall which might make his forecasts slightly optimistic.
But farms and farmers were becoming more resilient to drought, using management techniques such as condition scoring ewes and preferential feeding as well as the extension of irrigation.
“The 2013 drought is a case in point where milk production bounced back to an all-time record high just a year later,” the bank report said.
“Production potential for 2015-16 hasn’t been too badly affected as yet but the end result will depend on how long the dry conditions persist and how market pricing evolves.”
