The booming dairy industry in the South Island is braced for a body blow that could hammer farm prices and hit many small businesses.

South Canterbury Finance faces receivership in the next 48 hours if it cannot convince the government to back a recapitalisation proposal now sitting before Treasury, sources say. And winding up founder Allan Hubbard's Aorangi Securities would trigger the forced sales of farms and push agricultural contractors and suppliers to the wall.

"It would put quite a dent in Canterbury farming," said Federated Farmers' Mid Canterbury Dairy chairman Frank Peters.

South Canterbury owns a third of New Zealand's biggest dairy farming group, Dairy Holdings, and Aorangi Securities has loans with 25 dairy farms. South Canterbury either owns or finances many Canterbury and Southland dairy farms, which have generated production growth for Fonterra.

Many agricultural contractors, equipment sales firms and other provincial businesses have loans from South Canterbury or Aorangi.

"If you took out a third of those farms it would knock out a fair bit of employment and knock land values down too," Peters said.

Cabinet is expected to consider the issue tomorrow and receivership is likely within the next day without further support from taxpayers.

The Timaru-based finance company has pledged to find a new investor to meet the conditions of a waiver on its trust deed by Tuesday.

South Canterbury's amended prospectus, which was suspended again on Friday, shows it had just $10.6 million on hand on Monday August 23, not enough to repay maturing debentures and interest for more than 10 days.

Standard and Poor's cut South Canterbury's rating to CC this month and a report by statutory manager Grant Thornton into the affairs of owner Allan Hubbard on Friday showed a financial empire in turmoil.

South Canterbury needs at least $200 million and the financial backing of the government, which has guaranteed more than $1.7 billion of debentures owed to more than 20,000 investors.

But the government paying out so much could force ratings agencies Standard and Poor's and Moody's to cut New Zealand's sovereign credit rating outlook.

Government sources have downplayed such a likelihood, given the government has already allowed for losses of up to $900 million from the Deposit Guarantee Scheme.

Companies linked to South Canterbury Finance include fruit packaging and storage company Scales Corp, New Zealand's largest helicopter company HNZ and Dairy Holdings, which supplies more than 1 per cent of Fonterra's production.

Hubbard said he did not believe the Government would come to the rescue.

Treasury was advising against taking responsibility for the company's dud debt, he said.