Farmers faring well amid summer heat
Dairy farmers are faring well despite data showing above average temperatures for most of the country.
Enter mother nature, her refusal to let the wet stuff fall from the sky giving us an unwanted drought of our own. Weather is the worst variable in the farming production chain, because despite the prudent planning of many farmers we have no control over it. It’s no surprise the impact of this summer’s drought is the main economic theme around the farming campfire.
Although the North Island is worst affected, the financial impacts will be felt across the rural community and the country. Extremely dry weather continues, official drought now having been declared in Northland, Waikato and Hawkes Bay and others following. As a result, stock has been sent to slaughter early and dairy production has been cut back to reduce feed requirements. From an income perspective, reduced production will be particularly disappointing as farmers are unable to benefit from the pick-up in dairy and meat prices over the past six months.
The impact of lower revenue will be further compounded by higher production costs, with the increased feed requirements a major contributor. This will have a lasting impact on our economy overall, as reduced profits will see farmers scale back on investment next season.
New Zealand’s pasture-based farming system relies on rain to grow animal feed. While improved irrigation in some areas has reduced this reliance, rain as always remains critical to farming. While milk collection in the seven months to December was up 6% on the previous season, the last five months are shaping up to be much weaker – milk production for the full season is expected to be up only 1% on last year.
Lower dairy production will have a direct impact on gross domestic product (GDP). GDP in short represents New Zealand’s total earnings and in turn our economic growth, changes to economic growth projections impact many areas of our economy as the reserve bank will look to make policy adjustments to minimise the impact the drought has on the country’s finances as a whole, needless to say this will impact everybody. This goes to show how important the weather is for the New Zealand economy, in every recession for the last 50 years; drought has been at least a contributing factor.
However, it is hoped the dry conditions won’t be damaging enough to offset the positives of a strengthening housing market and the Christchurch rebuild. But it’s clearly negative for the economic growth outlook this year and a sharp change to how things were shaping up at the start of the year.
Although it’s hard to see any positives from the drought it may have a favourable downward impact on the Kiwi dollar, as the value of a country’s currency rises and falls with its economic prospects.
We are currently seeing US dollar strength on the back of some recent favourable economic data over there. The US sharemarket has recently hit an all-time high and confidence is beginning to return to the US economy. The impact of the drought in New Zealand and the US economy starting to strengthen means we may see some further Kiwi dollar weakening. This has already happened as the Kiwi dollar is well off its recent highs. But for now the economic prospects for our farmers who are struggling depends on the simplest of things, rain.
