Move to dairy slows as meat prices, conversion costs rise

The rate at which farmers have been changing from sheep farming to dairying appears to be slowing.

The prospect of improved sheep and beef returns and rising construction costs have led to planned dairy conversions being cancelled, although exact numbers are hard to confirm.

Planned conversions in Canterbury and Southland have been cancelled, the result of building costs for dairy units having risen from $120,000 to $150,000 over the past year, making the price of existing dairy farms comparable with the cost of converting.

PGG Wrightson Southland rural real estate manager Andrew Patterson said there were now two to three times the number of dairy farms on the market than at the same time last year, with many vendors owners of several farms choosing to reduce their workload by selling one.

Mr Patterson said prospects of improved returns for lamb, beef and venison, higher conversion costs and a lower milk price had made converting less viable.

"We would've seen a lot more if there had been a continuation of last year's payout and the prices for sheep and beef that they were getting last year were still coming through."

Environment Southland dairy liaison manager Russell Winter said he had heard rumours 20 to 30 farm conversions had been cancelled, but he believed the figure was closer to one or two.

Last year, between 80 and 85 sheep and beef farms (depending on the timing of the conversion) were converted in Southland, but this year it would be closer to 70, he said.

"There have been one or two pull the pin, but not very many."

Meat companies forecast up to $30 a head more for lamb this season and Fonterra has pulled back its forecast payout from $7.90 a kg of milk solids (with 24c a kg of that retained earnings) to $6.60 for the coming season.

Fonterra has also made changes to its contracted supply to protect its balance sheet.

It now restricted the availability of contracted milk supply to milk from new conversions or increased supply from existing farmers and was moving to stop shareholders surrendering or cashing in shares to supply under contract.

The price of contract milk this season would be 2c a kg of milk solids (kg ms) below the milk price, but next season it would be 10c a kg ms below the milk price.

About 4% of milk processed by Fonterra was contracted supply.

Fonterra chairman Henry van der Heyden said the move was designed to protect the company's balance sheet.

"In a tightening credit market, this is about protecting our shareholders from the risk of significant expansion of contract supply and the resulting surrender of shares.

"While we need to encourage new milk into the co-operative and growth from our existing farmers, in the current environment too much milk not backed by share capital will, over time, weaken our balance sheet and place unnecessary financial burden on Fonterra's capital structure," he said.