An increasing number of conversions of sheep and beef land to forestry is expected to reduce lamb supply over the coming few years.

While not necessarily a good thing for the sheep industry, those conversions would underpin lamb prices for an extended period, ASB senior rural economist Nathan Penny said in ASB's latest Commodities Weekly.

Lamb prices had risen 80c/kg since their low for the year in March and were now identical to the level in mid-June 2018. Prices were on track to crack $8/kg again in spring.

"Previously, we had thought that prices would top out in the high $7s. Now, we expect prices to top $8kg over the spring," Penny said.

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Other factors driving prices higher included African Swine Flu which had ripped through the Chinese pork industry. There were reports of up to 250 million pigs being slaughtered and Chinese consumers have had to switch to other proteins such as lamb.

ASB senior rural economist Nathan Penny. Photo / Supplied
ASB senior rural economist Nathan Penny. Photo / Supplied

The latest Situation and Outlook for Primary Industries report said livestock numbers were forecast to trend lower over the outlook period, despite high on-farm profitability, strong red meat prices and recent growth in beef and deer numbers.

The main driver for that was the decreased availability of land used for drystock farming in favour of alternative land uses, including afforestation and urbanisation.

Lamb production was forecast to be 370,000 tonnes in the year ended June 2019, only slightly higher than the previous year, due to a 3.3 per cent fall in the number of breeding ewes, to 17.2 million.

Breeding ewes and overall sheep numbers were forecast to continue to fall over the outlook period. As a result, the potential for future lamb production growth will only be possible with higher lambing percentages and carcass weights.

New Zealand and Australia combined for 76 per cent of worldwide sheep meat export revenue, and global supplies remained constrained by falling breeding ewe numbers in New Zealand and drought in Australia.

Farmers had been destocking as a result of the drought and high supplementary feed costs which have reduced profitability, resulting in lower sheep meat production and higher prices.

That has had a significant effect on Australia's national sheep flock, the report said.