New Zealand dairy farmers are facing a potential profit squeeze as a strong El Niño weather pattern is forecast to bring drier conditions, significantly increasing farm working expenses and the national break-even milk price. DairyNZ modeling indicates that a very strong El Niño could push farm working expenses to $6.78 per kilogram of milksolids (kgMS) and the break-even milk price to $9.07/kgMS. This comes as the national break-even milk price was already forecast at $8.62/kgMS before accounting for El Niño's full impact. Feed expenses are projected to be a major driver of these increased costs, potentially rising from $1.56/kgMS to $2.02/kgMS under a very strong El Niño scenario. The North Island is expected to be most affected due to its higher reliance on rainfall and purchased feed.
Milk production is also anticipated to decline, with DairyNZ modeling suggesting a national production drop of around 2.1% under a strong El Niño and approximately 3.3% under a very strong El Niño. This expected dip, rather than a collapse, is a significant concern for the industry. While the dairy sector is currently in a strong financial position due to favorable milk prices in recent seasons, allowing farmers to pay down debt, the added uncertainty and cost pressures from El Niño are creating tighter margins.
The broader New Zealand economy could also experience a drag on GDP growth of up to 1 percentage point in a worst-case scenario, although the agricultural sector is better prepared than in previous El Niño events due to increased irrigation and drought preparedness. Inflationary effects are likely to be mixed but tilted higher, with potential upward pressure on dairy and imported food prices. Despite a recent 1.1% dip in global dairy prices, bringing the average price to US$3,868 (NZ$6,718) per metric tonne, the long-term impact of reduced New Zealand production on global prices could be significant, given the country's role as a major exporter of internationally-traded dairy products. However, the global milk supply is more flexible now than in past decades, which could temper the extent of price increases.
