Despite heavy rain in Roxburgh on Sunday leaving the Central Otago town flooded and damaged, Mr Steel said yesterday the risk of drought in New Zealand was rising.
''This might seem a strange thing to say when right through winter and early spring there was far too much rain. Back then, grass growth was restricted by saturated soils.''
Now, conditions had changed and the soil was drying out - rapidly, he said.
It had got to the point where many parts of the country had bigger soil moisture deficits compared with what was normal for this time of the year, according to Niwa.
The deficits were most pronounced in western areas, understandable as weather indicators got close to La Nina thresholds.
La Nina or not, it was already getting dry and that raised concerns, Mr Steel said.
Dry conditions were a risk to pastoral agriculture, hydroelectric power generation, and the wider economy.
Grass growth had already slowed. It was of ''particular concern'' conditions were getting dry so early in the season, even before summer had started.
Some gentle widespread rain was required, not the localised thunderstorms and very heavy rain causing flash flooding in parts of Central Otago, he said.
The BNZ had not adjusted its economic forecasts because of the spreading dry. But it was a risk worth highlighting, especially with near-term weather forecasts showing little rain on the horizon.
''If dry conditions persist for too long, we would expect GDP to be lower than currently expected.''
Milk production could fall short of present expectations of about 1% growth on the previous season. October's production was 2.9% higher than a year ago, although drier conditions were putting a question mark over the rest of the season, Mr Steel said.
Moreover, dry conditions tended to bring added costs such as for supplementary feed.
Some consolation was that if New Zealand milk production was to stall or fall from here, it would offer some support to dairy prices - although it was not the best way to achieve that.
There was no sign of any New Zealand milk supply concern at the latest GlobalDairyTrade auction when prices fell for the fourth consecutive auction.
Lamb markets were showing signs it was getting dry through reports of some pull-back in store lamb pricing and more new season lambs being sent for processing as feed conditions tightened.
If dry conditions extended, lower kill weights and prices were expected.
Weather indicators were approaching La Nina thresholds, Mr Steel said.
Niwa had indicated if La Nina conditions did develop, they were likely to be weak and short-lived.
In isolation, a weak La Nina weather pattern often brought some optimism because New Zealand agriculture, as a whole, often performed well during those conditions. The typically more-than-usual rain in eastern areas increased grass growth and agricultural production in the region by more than the drier-than-usual conditions hurt production in western areas.
Every La Nina was different and some could hurt, Mr Steel said.
The 2008 La Nina caused a drought in Waikato. New Zealand milk production fell 3.5% in the season, helping tip New Zealand into recession ahead of the Global Financial Crisis.
''That episode alone suggests it is worth keeping an eye on the skies this time around to monitor the risks, even if forecasts into Christmas and January contain good chances of rainfall being at least normal for large chunks of the country.''
