Improving prospects for sheep and beef farmers may not be enough to stem the flow of farm conversion to dairying.
Meat and Wool New Zealand recently predicted 200 or more sheep and beef farms would be running dairy cows in the spring of 2009, displacing 850,000 sheep and beef stock units.
This was despite forecasts that the average sheep and beef farmer would this year see farm profits more than double from $19,400 in 2007-08 to $53,000 in 2008-09.
The news was even better for farmers in Otago and Southland, with forecasts of gross farm revenue increasing 22% and profits before tax rising to $75,300.
But that might not be enough, as farmers look for other income options.
Meat and Wool New Zealand Economic Service executive director Rob Davison estimated 330 new dairy farms would start milking cows this spring, the second largest number of conversions on record and 70 more than last year.
The greatest number of conversions in one year was 360, in 1996-97.
At 595 cows per farm, the 330 conversions this spring equated to the loss of 1.3 million sheep and beef stock units, Mr Davison said.
He was upbeat on the prospects for lamb and beef in the coming year because of a more sympathetic exchange rate and, more particularly, from improving markets.
Strong farm profits enjoyed in 2002-03 were underpinned by a weak New Zealand dollar, which traded at US55c.
"If a similar New Zealand dollar prevailed in 2007-08, then profits would be higher than 2002-03. This shows that there has been a real lift in offshore prices and both onfarm productivity and export processing.
"The high New Zealand dollar completely masks this advance, to the detriment of New Zealand."
Dampening brighter prospects was a 9.7% increase in input costs last year, the highest annual increase since costs rose 13.2% in 1986-87, with forecasts of a further 10.4% rise in the coming year, fed by a 55% increase in the price of fertiliser, lime and seed.
As a result, the volume of fertiliser used on farms was expected to fall 21.7%.
Farmers have already trimmed costs in the past two years and Mr Davison said there was little room for additional cuts.
For Otago and Southland farmers, he predicts an 8.1% increase in expenditure with shearing and animal costs the only areas not to rise, due to lower sheep numbers.
In addition to fertiliser, lime and seed, Mr Davison predicted significant increases in the cost of fuel, repairs and maintenance, feed and grazing.
Based on a US75c exchange rate, Meat and Wool forecasts returns from fine wool to increase 3.2%, mid-micron 4.2% and strong wool 14.7%.
At US75c it predicts lamb to be worth $73, and $79 at US70c, while beef prices were expected to increase 15% at US75c but lift a further 8% should the exchange rate fall to US70c.