Some high country farmers will struggle to remain viable if they have to pay higher pastoral lease rents proposed by the Government.
Cam Dykes, a director of the Alexandra accountancy firm Ibbotson Cooney, said the reality was that very few merino farmers were making money and those that were had scale and little debt.
Added to rising fuel and interest costs was the need for some to apply 1080 poison this winter to control rabbits after a bumper breeding season.
Some high country farms potentially face huge rent increases due to rising land values and the decision by Lands Minister David Parker to factor in a charge for amenity values, such as lake and mountain views.
Two Central Otago farms reportedly face rent increases from $30,000 to $300,000 and $400,000. and the proposed new rent for a Canterbury property is rumoured to exceed its gross income.
Pastoral lessees will appealing those rents at a hearing in Dunedin later this year.
A Ministry of Agriculture and Forestry report this year said the higher rents, combined with steady wool prices, would threaten the viability of some farmers.
Mr Dykes said high country farmers with access to irrigation could intensify their business, but for those running dry hill country, the options were few.
If they introduced terminal sires to a merino flock to improve prime lamb production, they risked destroying genetics and degrading their wool.
In some areas of Central Otago, Perendales and other breeds had replaced merinos as farmers sought to earn more income, a trend Mr Dykes said was likely to continue.
High country farms had enjoyed rising equity, but Mr Dykes said some recent sales had failed to meet price expectations, raising questions about the true value of properties and their future as a farming entity.
There was also a trend for prestigious high country properties to be sold to foreign owners or to business people, taking them out of family ownership and changing the culture of the sector.
Rob Davison, the executive director of Meat and Wool New Zealand's Economic Service, said the biggest impact on merino sheep numbers was from tenure review, a voluntary process which allowed farmers to freehold parts of their property.
Department of Conservation statistics show the area of the South Island under its management grew from 39% in October 2003 to 42% in October 2007, an increase of about 400,000 ha, most of it acquired through tenure review.
The process usually resulted in the loss of high altitude country suitable for wethers.
When farmers no longer needed wethers, they could - and many did - change their ewe breed.
Mr Davison said fluctuations in the merino flock were not new.
In 1989 the former Soviet Union stopped buying New Zealand wool, and sales of fine and crossbred wool to that market fell from 267,000 tonnes to 7800 tonnes in 1990-91, and to 800 tonnes in 1994-95.
Merino numbers rose from 1.4 million in 1984 to a peak of 3.3 million in 1996 but fell to 2.7 million in 2003 and 2.2 million in 2006.
Part of that decline was due to improved prime lamb prices in the late 1990s, which saw merinos replaced by better lamb producing breeds.
The Maf pastoral monitoring report found a typical South Island merino farm had recorded four successive years of cash losses, with a fifth expected for 2006-07.
While land prices were rising, sale prices did not reflect farm viability and the report said farmers faced uncertainty from tenure review and rising rents.