EXCLUSIVE: AUSTRALIA'S sheep identification system is in crisis.

A scathing new report shows the current system is failing and any modifications would come at a big cost to the industry.

The report, commissioned by the Victorian Department of Primary Industries and conducted by PricewaterhouseCoopers, said changes currently being considered by the industry would be expensive and would fail in an animal-health scare.

It said the current system still cannot meet national traceability performance standards, a fault that first showed up almost three years ago.

Livestock Saleyards Association of Victoria executive officer David Pollock said the system's failure was clearly demonstrated last month when one producer allegedly sent 400 sheep to a processing centre with their National Livestock Identification System tags in an accompanying plastic bag.

"Producers are just not taking the risks seriously of not doing the right thing with NLIS (sheep and goats)," Mr Pollock said.

The NLIS sheep and goat system has again come under the spotlight in the past fortnight as inspectors from the European Union checked abattoirs and animal tracking systems.

The inspectors will release their findings later this year.

In the past two audits of the system by the EU, the NLIS sheep and goats system was found wanting.

While Mr Pollock said the EU was not a huge customer for Australian sheepmeat, other countries looked to it to take a lead on animal health and food safety issues.

"A lot of customers rely on what the EU is doing as their guidance on what to do," he said.

Mr Pollock said the NLIS sheep and goat advisory committee, of which he is a member, had been looking at changes to the system for two years.

But he believed the committee was "fiddling while Rome burned" and described the current system as "chaotic".

"The current system is a hotch-potch which achieves nothing and has achieved nothing," he said. "The only thing that can offer true traceback for biosecurity and market access is radio frequency identification devices (electronic tags)."

The Pricewaterhouse Coopers report showed that even with a revamped system, being discussed by industry, only about 80 per cent of sheep could be traced, compared with 100 per cent with electronic tags.

DPI animal standards manager Dr Tony Britt said there was another report on the NLIS sheep and goat system due by the middle of this year.

"In late 2009, Animal Health Australia engaged consultants to review options for fixing issues with the NLIS (sheep and goats) to ensure that it will operate successfully in a disease emergency," he said.

"Victoria is waiting on the consultant's report which is expected to include information on the costs and benefits of trying to fix the current system versus moving progressively to an electronic system."

There is a growing consensus in Victoria that it should adopt a smooth and gradual transition to radio frequency identification, but some sectors of the national industry are determined to try to fix the current system.

One of the proposals being considered by the advisory committee recommends agents check 5 per cent of tags of sheep sent into yards to ensure they match the national vendor declaration.

Under the plan, planned for August, agents will have to fix any problems before selling.

But this tag-checking cannot be done by agents, its peak body, the Australian Livestock and Property Agents Association, says.

ALPA chief executive officer Andy Madigan said the organisation was "objecting strongly" to any move in this direction.

"The proposal is to check 5 per cent of every mob but the chances are we would have to check all the sheep because if you find one non-compliant sheep in the mob, you need to check the lot," he said.

"It must be made very clear to all of industry that the vendor is paying the agent to market, present and sell livestock on their behalf, not to carry on compliance checks on the prescribed system."

Sheepmeat Council of Australia executive director Ron Cullen has defended the sheep NLIS system and said everyone needed to work together.