KEY POINTS:
Falling lamb prices could further dampen rural sector spending, but there is hope the drop will not hit sheep farmers' incomes too badly compared with last year.
Lamb meat sales, a major export earner, were worth more than $2 billion in the year to June 2006.
But prices have fallen by $1 a kg in the past four weeks, the equivalent of about $17 an animal for the average weight of lamb expected to be produced this season.
The fall is being attributed to softer international markets and the strength of the New Zealand dollar.
Prices are now similar to a year ago, despite predictions of a 6-7 per cent hike in this year's average lamb price compared with last season.
The ASB Bank weekly commodities report said market prices for most export products were strong except for lamb with international prices lower than a year ago.
BNZ chief economist Tony Alexander said falling prices could prompt farmers in sheep-reliant regions such as Otago and Southland to be more cautious with spending.
"I think it will reinforce caution among farmers."
Many sheep and beef farmers were addressing their expenditure after several prosperous years.
Even if the dollar fell 10c, their spending would be constrained because of rising interest rates, fuel and labour costs and the high exchange rate.
However, Meat and Wool New Zealand senior economist Con Williams said he did not expect a $1/kg drop to have a major impact on sheep farm incomes compared with last season.
Williams said the average price paid to farmers per lamb last year was $56 and until December the prediction for this season was $61.35 and this was now under review.
That forecast was nearly $3 lower than pre-season predictions and based on a New Zealand dollar exchange rate of US63c, €0.50 and UK34p. Last week the relative cross rates were around US69c, €0.52 and UK35p.
Williams noted that although the kiwi was strong against the US dollar, 53 per cent of lamb sold in the year to September was paid for in euros and sterling and their cross rates were significantly lower than in December 2005. This, he said, would support the ability of meat companies to pay stronger prices for New Zealand lamb.
However, Alliance Group chief executive Grant Cuff said he had been forced to cut prices since the middle of December when demand and international prices started to soften and exchange rates started to work against exporters.
Cuff said there was no immediate hint of conditions improving between now and the season's end.
At current trends and forecasts, Cuff said lamb prices could be similar to last year although farmers who supplied lambs at higher pre-Christmas prices might be ahead.
Last season prices dropped sharply in December and January and Cuff said there was still a hangover from that, with importers placing short-term orders since Christmas rather than committing themselves too far ahead.
Also, when combined against the US dollar, euro and sterling, the kiwi was higher than at the same time last year.
Unless those rates eased, Cuff said lamb prices for the peak of the season in February and March would not be higher than last year when exchange rates fell boosting late season prices.
The Australian drought had compounded international market problems, with farmers off loading lamb at low prices.
"In the short term there is more product available at cheap prices."
