NATIONAL sheep numbers must lift by about 20 million head to ensure the lamb industry keeps growing at its current rate.

This is the stark warning from outgoing Sheepmeat Council of Australia president Chris Groves.

Mr Groves said national sheep flock numbers were beginning to bite the lamb sector and warned the problem must be addressed to foster growth and ensure continuity of supply to key markets.

A sheep and cattle producer from Cowra in central NSW, Mr Groves stepped down as SCA president last week after two years at the helm. He was replaced by Victorian Kate Joseph.

Mr Groves said the size of the national flock was a worry and more must be done to ensure a "critical mass" was retained.

"Because if the sheepmeat industry gets to the stage of becoming a cottage industry we're going to lose that critical mass, we're going to lose that momentum that has enabled us to have such great gains over the last 10 to 15 years," he said.

Latest figures from the Australian Bureau of Statistics indicate sheep and lamb numbers dropped almost 12 million in the past two years to 79.2 million at the end of June this year. It means the flock is the smallest since the 1920s.

Mr Groves said this was not the direction the industry needed to be heading in.

"We've got to get the sheep flock back around 100 million (head) . . . to maintain that sustainability," he said.

Mr Groves said tight flock numbers was an issue common to other sheepmeat-producing nations such as New Zealand, and was driven by profitability relative to other agricultural commodities.

Despite the ongoing decline in numbers, the lamb industry has made huge productivity gains and lifted production in recent years.

Last financial year, lamb exports were valued at $824 million, up from $778 million in 2006-07 and $636.5 million in 2003-04.

But the latest figures from Meat and Livestock Australia indicate the market has taken a turn for the worse.

Exports during October dropped 9 per cent on the same month last year, to 16,131 tonnes.

Easing demand from the US, China and Mexico are being blamed for the fall.

However, MLA said there was strong demand from the European Union and the Middle East.

Exports to the EU jumped 41 per cent year-on-year, to 2323 tonnes, while shipments to the Middle East rose 14 per cent, to 2498 tonnes.

Last week's eastern states restocker lamb indicator finished 9c/kg dearer at 322c/kg.

Trade-weight lambs were unchanged at 339c/kg while heavy lambs were 1c/kg cheaper at an average 347c/kg.