LAMB slaughter, exports and production are all forecast to fall during the second half of 2019 as the drought hits flocks hard in the eastern states.
Meat and Livestock Australia's June Sheep Industry Projections Update paint a bleak picture for the nation's flock size and producers' ability to keep pace with the growing demand for lamb and sheep meat overseas.
The national sheep flock, which was expected to fall to 65.8 million head by June 2019, was down 6.8 per cent year-on-year and an 8.7pc fall since 2017, the MLA report released this week said.
"The fall represents the largest year-on-year decline since 2008, when the Australian sheep industry was still undergoing a transition away from a Merino-based flock," the report said.
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Despite drought conditions, the expected lamb carcase weights this year remain unchanged from 2018 levels, at 22.5 kilograms (carcase weight).
MLA suggested the high prices for finished lambs were encouraging producers and feedlots to supplementary feed lambs to maintain weights, despite poor pasture availability and high grain prices.
"The amendment to the definition of lamb, expected to come into effect on July 1, will be a factor that could encourage further increases in average carcase weights in the future," MLA said.
The new definition, allowing lambs to have permanent incisor teeth erupted but not in wear, will give producers an estimated 30 extra days to finish lambs.
This would provide producers with greater confidence to extend feeding and finish lambs to heavier weights.
The unprecedented global demand for lamb has certainly helped support domestic prices for lamb during the drought.
Sheepmeat exports have grown year-on-year across most markets during the first four months of 2019.
MLA said despite sheepmeat exports from New Zealand also recording a strong start to the year, global markets have proved willing buyers and soaked up surplus supply without lowering prices.
"Australia and New Zealand exported unprecedented first quarter lamb volumes in 2019 with prices recording the strongest start to the year on record. Currently exports simply cannot keep pace with global demand, a divergence that will become particularly acute as seasonal lamb supplies begin to dry up in Australia and New Zealand over winter," MLA said.
Despite an elevated start to the year, exports are forecast to contract throughout the remainder of the year as the "handbrake" is applied to supply.
MLA said lamb exports were forecast to finish the year 6pc below 2018 levels, at 254,000 tonnes (shipped weight).
From a price perspective, MLA said the forecast drop in sheepmeat production in 2019 should keep lamb prices historically high throughout the year, with additional upside possible if improved seasonal conditions spark restocker activity.
"The national saleyard trade lamb indicator opened the year at 657c/kg and has since advanced to 888c/kg, 40pc above year-ago levels," MLA said.
