Sheep and beef farming could all but disappear in New Zealand if "structural issues" causing profits to drop are allowed to continue, says Federated Farmers, as new figures show profits have dropped again.

Bruce Wills, meat and fibre chairman for the organisation, said sheep and beef farmers were converting to dairying and forestry in droves, mostly because of falling profits.

"The New Zealand meat industry is broken and it needs to be fixed," said Wills. "If it's not fixed we're going to have a country covered by dairy cows and pine trees."

His comments come on the back of a Ministry of Agriculture report which says that - despite record lambing in spring last year - the average lamb price fell by $8.43 in 2009/10 compared with the previous year.

MAF's Christchurch regional team leader, John Greer, said drought in Northland and many parts of the South Island caused reduced production and early sales of stock.

Farm surplus for reinvestment on sheep and beef farms fell 37 per cent to $19,300 in the 2009/10 season, while cash surplus dropped to $6900, according to the report.

Greer said the figures highlighted the challenges faced by the "commodity-driven model" in the sheep and beef sectors.

Wills said that even with New Zealand meat fetching record prices in Europe - its most important market - farmers were still suffering.

After meat processing and marketing firms, as well as supermarkets, took their margins only "crumbs" were left over for farmers, he said. "We've got too many meat companies chasing too few lambs."

Wills said the main problem in the meat industry was its structure.

The meat industry could learn a lot from how Fonterra operated in the dairying sector, he said. "You've got 92 per cent of dairy farmers putting their milk through one outfit ... [Fonterra's] got size and it's got clout when it comes to negotiating prices."

He pointed out, however, that the situation in the meat industry - with many different ownership structures operating - was far more complex than how the dairying sector operated in the pre-Fonterra days.

Beef prices were holding up slightly better than lamb, Wills said, although prices had not increased significantly over the past 10 years, despite ever increasing production costs.

He said Federated Farmers was "champing at the bit" to contribute to the Meat Industry Strategy Initiative, launched last month by Beef and Lamb NZ and the Meat Industry Association. One of its aims is to improve profitability in the meat sector.

Beef and Lamb New Zealand chairman Mike Petersen said last month that the strategy would have a five-to-10 year outlook, although immediate opportunities "within the value chain" would be identified.

But Wills said with hundreds of sheep and beef farmers leaving or converting their land each year, something needed to happen before it was too late.