Milk production in New Zealand, the top dairy exporting country, defied expectations by increasing again, even as the government heightened its response to a drought viewed as the worst in some 30 years.

New Zealand milk production reached 2.30m tonnes in January, a rise of 4.3% year on year, industry group Dcanz said.

The figure extended an unbroken run of output rises heading back to 2010, and defied widespread expectations of damage from dry conditions which set in late last year in the North Island, and are spreading to South Island too.

Auckland-based Fonterra itself, the world's biggest dairy exporting company, last month cautioned that "dry weather conditions, particularly in the North Island, in mid-December and January resulted in a slowdown in milk supply growth".

Expectations of a drop in New Zealand milk output have been a large support to world dairy prices, which hit a 21-month high this month at GlobalDairyTrade auction, with values supported by expectations of a drop in European output too in the first half of the year.

'Very difficult dry conditions'

The Dcanz data came even as the New Zealand government declared drought through the whole of North Island.

"It has become clear that nearly all farmers in every part of the North Island are facing very difficult dry conditions," Nathan Guy, the country's minister for primary industries, said, unveiling extra funds for support agencies.

Agrifax, the New Zealand-based consultancy, warned that soil moisture levels are 50mm below normal across most of the country, with a deficit of more than 130mm in some major dairying areas, including Northland, Auckland and Waikato.

"Rainfall levels across much of the North Island were only a-third-to-a-half of their summer norm," Agrifax said.

'Production slipping'

Indeed, commentators remain downbeat on prospects for New Zealand dairy output, forecasting a particularly steep seasonal dip heading into winter, given the impact of the drought on pasture condition, at a time of high prices of brought-in feed.

Rabobank said that that "national production [is] slipping below the prior year on a monthly basis through February", adding that, with little rain in the forecast, producers were "very unlikely" to revive milk production to typical rates for the rest of 2012-13, which ends in May.

Furthermore, with the dry weather encouraging early cow slaughter ahead of the seasonal low point in output, "the impact on milk supply over the remaining three months of the season will be irreversible", the bank said.

New Zealand milk production typically tails off to a nadir in June, with the last three months of last season responsible for some 20% of annual supplies.