What comes after the rain?

Rains have boosted confidence but nevertheless milk production could be down 40% in May and June, and next season's lamb crop may the lowest since the 1950s, the report says.

After heavy rains the bank says "we have more confidence in our forecasts of production bouncing back – led initially by dairy next season and a pickup in meat production the following year," says Steve Topliss, BNZ head of research.

"The rain has helped a lot and certainly averted a worse dynamic evolving from the earlier dry period. This has calmed many nerves, including in financial markets."

But the report says it is important to realise the damage done. National dairy production in February was down 5%, down 10% in March and will be down more than 40% in April and May. "Thankfully the dry conditions occurred at the tail end of the NZ dairy season, but these declines are severe enough to see the season as a whole down by more than 3%.

"Dry stock farmers culled stock early and some culled capital stock. In Q1 2013, lamb slaughter numbers were 22% higher than a year earlier, cattle slaughter was up 17% and sheep slaughter was up 8%. Indicators for April show slaughter numbers remained well above year ago levels.

"The initial signs of these drought-induced processing changes can be seen in the latest merchandise trade figures, for March. Meat volumes were up a seasonally adjusted 11% in the month, while dairy volumes were down 17%. The more meat, less dairy volume will probably continue for a month or so yet.

"Our forecasts continue to include the ramifications from the summer dry. In the near term, the positive export meat volume growth will quickly reverse as the early animal slaughter runs its course and the severely reduced late-season milk flow keeps dairy product volumes negative. Meat and dairy exports account for about 40% of overall goods exports so declines here are important factors behind our expectation that overall goods export volumes will fall through the middle of this year.

"From a production point of view, this reflects the anticipated drop in food processing (milk product manufacture and animal slaughter) through this period. But whether you measure it from the export side or the processing side it amounts to the same thing – a drag on GDP growth. This is one reason we think Q2 GDP, due for release in September, will be on the soft side. We continue to have growth in that quarter pegged at 0.4%, considerably softer than the 1.5% recorded for Q4 2012 and our current 0.7% estimate for Q1 2013.

Although there are no firm estimates on capital stock culling as yet, the report says regarding dairy, it senses this was limited
with likely little effect on the national herd. "That is not to say there was not a large cow cull this year, but rather it was earlier, not necessarily bigger, than usual. We think overall the national dairy herd continues to expand.

"If so, then that is positive for next season's production outlook. It means a decent bounce in milksolids per cow next season, cow condition and, weather willing, will result in more milk overall. At this early stage, our export and economic forecasts include a bounce back in milk production of just over 6% next season. This forms an important part of the overall bounce back in exports we see in 2014."

Feedback from agribusiness partners around the country regarding the change in sheep capital stock during the dry showed responses ranging from -30% to 0%. "That said, the majority suggested little or no change in capital stock. Weighting up the raw results by regional sheep numbers suggests the national sheep capital stock may have declined by something in the order of 3%. The mutton kill figures suggest that could well be the case.

"For beef, the capital stock decline may well have been a little larger, perhaps a bit over 4% off the national herd (again with large variation across regions). A larger hit to cattle compared to sheep fits with the fact that a greater share of the country's beef cattle, compared to sheep, reside in the North Island (where the drought was widespread). The North Island contains almost three quarters of the country's beef cattle and about half the country's sheep.

"Considering the outlook for the coming season's lambing percentage, again there was a lot of variation across regions with responses ranging from a 20 percentage point reduction to a 2 percentage point increase on last season. The weighted results imply an 8.3 percentage point reduction in the national lambing percentage, from last season's 123.3%, to 115.0%. Such a drop would be of a similar magnitude experienced during the recent droughts of 2007/08 and 2010/11 (although the latter period was also hit by spring storms).

"Taken together, the indicated reductions in capital stock and lambing percentage imply a 10% decline in national lamb numbers is possible this coming spring (including a reduction in ewe hogget lambs). Such an outcome would result in around 24 million lambs this spring, in what would be the least number of New Zealand lambs since the mid-1950s. Some bounce back is expected in the following season.

"We should note that a multi-decade low in lamb numbers, were it to occur, cannot all be pinned on this year's drought. It also reflects a general downward trend in sheep numbers over recent decades representing structural change towards dairy within the agricultural sector.

"Of course, such early forecasts are subject to considerable uncertainty, but they give a sense of what may lie ahead.
The first test of the capital stock estimates will come via Beef+Lamb NZ's Stock Number Survey as at the end of June, with results usually released in August.

"While there will be some indications prior, the first formal assessment of the lambing percentage will come via Beef+Lamb's Lamb Crop report, usually released in late November."