An 11% drop in sheep numbers is forecast this year because of drought and dairy expansion.
Meat & Wool New Zealand's Economic Service says the biggest decline will be in the South Island, where the sheep population will drop by three million out of a total reduction of 4.3 million.
Executive director Rob Davison says the drought has forced the slaughter of extra capital stock and accounts for 60% of the fall in stock numbers.
He says this year's adult sheep slaughter is up by more than 30% on the previous year - the highest since 1988-89 - a year that was also severely affected by drought.
Dairy farm expansion and the associated growth in dairy support operations, as well as a move to cropping, account for the other 40%.
The figures confirm a grim outlook for the meat industry.
The service predicts the number of lambs slaughtered for export will fall by six million or 23% in the next season.
Export sheep slaughter numbers will fall by more than three million, or 26%.
The expected fall in sheep numbers was a major factor behind a number of processing plant closures and cut backs announced by Silver Fern Farms meat co-operative (formerly PPCS).
The service says beef cattle numbers have also fallen by more than 3% this year.