State-owned Landcorp said volatile dairy prices had played a part in its decision to scale back its plans to convert former forestry land near Wairakei, in the central North Island, to dairy.

The move will save $25 million to $35 million in development costs for the company, which has forecast an $8 to $12 million loss for the June financial year due mostly to the slump in dairy prices.

Landcorp said it would "significantly reduce" dairy's footprint from the original plans and instead include alternative uses for the 14,500ha of former forestry land it leases from Wairakei Pastoral.

"It's not just the low dairy price, it's just that the dairy price is going to be increasingly volatile - big ups and big downs," Landcorp chief executive Steven Carden said. "For a business such as ours, it [the dairy price] puts a lot of stress on our farm operations, so we are looking at ways in which we can take that volatility and remove that risk," he said.

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"We didn't think that it was sustainable, or the right course of action to take at this stage, so now we are looking at a collection of dairy farms, dairy support sheep milking and a range of other land uses." The decision means that estate will still be a substantial dairy operation.

The original plan was for almost all the estate to be converted to dairy. Under the scaled back version, about 9000ha will be in dairy farms and 2500ha in dairy support. About 1300ha will be in sheep milk and about 1000ha will be used for other land uses still being developed, Carden said.

Finance Minister Bill English said specific investment decisions were up to Landcorp to make.

"There is a lot of uncertainty about the forward path for milk prices," he said through a spokesman. "As a result the dairy industry is thinking about structural adjustments - reducing production costs and adapting to capital scarcity - rather than simply waiting for prices to bounce back."

Landcorp has the land on a 45 year lease - which started in 2004 - from Wairakei Pastoral, which is owned by NBR Rich Listers Ross Green, Mark Wyborn and Trevor Farmer.

Carden, pointing to the success of specialised dairy companies - Australia's Bellamy's Organic and dual listed A2 Milk - said the dairy story remained a very strong one.

"But it's all about niche and differentiation so that's where we want to take the business over time, and to be not solely reliant of a milk price that can go up and down at any time," he said.

Carden said decision would take some pressure off the Landcorp's balance sheet.

An early economic assessment for the estate was based on milk prices of $7 per kg of milk solids. Since then, Fonterra is forecasting a payout of $4.15/kgMS this season compared with a Dairy NZ breakeven estimate of $5.25 kg.

Landcorp's move to exit a management deal with China's Shanghai Pengxin would also free up capital from the conclusion of the deal in June 2017.

In yesterday's statement, Landcorp said the land-use changes would reduce the risk of phosphate and sediment loss and bacterial contamination and should result in a significant drop in the levels of nitrogen leachate from the estate, which is 15km from Taupo.

Scaling back

* State-owned Landcorp winds back plans for Wairakei Estate, near Taupo
* Estate comprises 13 dairy farms with 17,000 cows
* Eventual number of dairy farms to be significantly reduced from the 39 originally planned.
* Landcorp expects to save $25 million to $35 million