Little sign NZ Inc is focusing on '99% certain' El Nino summer

Wednesday 28th October 2015

New Zealand may be heading for a "super El Nino" weather pattern this summer, reminiscent of 1997/98 when drought parched the east of the country and sapped agricultural production, but there's little sign that risk has registered with farmers or financial markets yet.

The National Institute of Water & Atmospheric Research expects to publish an update on El Nino in its Seasonal Climate Outlook next week. In its last outlook, published Oct. 1, NIWA said the current weather pattern was tracking close to the 1997/98 El Nino, when farmers suffered through severe drought, in the strongest such weather pattern since 1950. NIWA says there's a 99 percent probability of El Nino conditions continuing over the next three months, intensifying along the way.

Whole milk powder futures contracts for settlement in May 2016 were last at US$2,725 a tonne, just 4 percent higher than the WMP futures expiring next month. Volumes traded remain relatively low, suggesting traders aren't yet certain enough that a 'big dry' is looming to put on big bets. Whole milk powder sold at US$2,694/tonne at the GlobalDairyTrade auction last week, up from its August low of US$1,590/tonne but well down from its highs of 2013 and 2014 of above US$5,000/tonne.

"With a potential El Nino hitting the country, then obviously that could see less milk production, people will be cutting costs and they won't have as much to spend on feed," said Nigel Brunel, director of financial markets at OMF. "If it has a big impact on dairy areas, then I think whole milk is probably looking a bit cheap."

El Nino is likely to mean drier conditions in the north and east of the country, hurting farmers on the east coast of the South Island who have suffered dry conditions the past 12 months and are still officially in drought. Still, the jury is out on how severe the impact may be and the government’s main focus is on making farmers aware of the risk so they can prepare.

“I’m concerned about it, but the probability of it happening gets down to science,” said Primary Industries Minister Nathan Guy, who grew up on a farm near Levin. Farmers “should start planning now so that it doesn’t catch them on the hop if indeed it does occur.”

His ministry has this month for the first time published a brochure with practical advice on how farmers can prepare for the drier summer weather and he is raising the issue as he travels around the country, talking to arable growers in Auckland and farmers in Hawkes Bay.

Economists and currency traders are starting to pepper their research notes with references to the potential impact of El Nino, while waiting for more evidence a major event is underway, such as the NIWA reports and weekly 'hotspot' reports, which include soil moisture readings.

“It’s a risk. It’s not much more than that at this stage,” said Cameron Bagrie, chief economist at ANZ Bank New Zealand, the country’s largest bank.

History shows El Nino can shave around 1 percent off gross domestic product and take two years for all economic impacts to feed through. However, he says more needs to be known about the intensity and length of this event before an assessment can be made.

“The probability is not trivial,” Bagrie said. “We are not getting too caught up in that right here and now. It’s in the risk box as opposed to a certainty.”

Westpac Banking Corp is assuming drought will subtract 0.6 percentage points from GDP growth over the first half of 2016, although noting at this stage there’s a wide margin of uncertainty around the actual impact.

National Australia Bank, which owns Bank of New Zealand, also said today that a stronger El Nino weather pattern heightens drought risk in the first half of 2016.

Fonterra Cooperative Group, the country's largest milk processor, is unlikely to be able to step in and help farmers with interest-free loans, as it did when it cut its payout earlier this year, given its balance sheet is starting to look stretched.

Many are citing increased use of irrigation as potentially mitigating the impact of an El Nino, as well as more drought tolerant pasture species. However, water restrictions may apply and sheep and beef farmers are less likely to have irrigation schemes because of their hilly terrain.

Nathan Guy wants farmers to be thinking about conserving feed from peak growing months, and getting stock ready for a quick sale if need be.

Silver Fern Farms, the country’s largest meat processor, has yet to see any sign of farmers culling stock early ahead of the potential drought, a spokesman said.

Grass growth is lagging behind normal due to cooler weather and there's no sign of farmers planting more crops in readiness for a dry summer, according to rural contractors.

“We have these regular adverse events and a big thing with those is forward planning and doing the thinking early,” Guy said. “Droughts tend to occur over a long period of time. You don’t just wake up like a flood or a snow event or a wind storm and suddenly it’s hit you – you can actually make some decisions early and try and mitigate the consequences.”

BusinessDesk.co.nz

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