Landcorp has put a hold on converting further forestry land to dairying in the central North Island, because of penalties in the new Emissions Trading legislation.
Under the new law, passed just before Parliament wound up for the election, land cleared of trees and not replanted incurs a carbon tax.
The State-owned farmer has already converted about 12,000 hectares of former forestry land between Lakes Taupo and Rotorua into dairy farms.
The land is owned by Wairakei Holdings, which has sold the cutting rights and is leasing the blocks back to Landcorp for farm conversion as they're cleared.
But under current conditions, Landcorp's chief executive Chris Kelly says it's not economic to continue that process in the meantime.
He says Landcorp hopes that offsetting will be allowed from 2012, so that forests can be replanted on other land without incurring carbon taxes.