PROCESSORS are paying the highest prices ever for mutton as they scramble to secure sheep from a shrinking supply.

Mutton continues to rewrite the record books as indicators head into unheard of territory.

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The Eastern States Indicator for mutton, which includes markets in South Australia, Victoria and NSW, reached 411c/kg on Monday.

Meat and Livestock Australia sheep meat analyst Kara Tighe said the falling supply was the biggest factor in the continuing price rise, but some markets seem prepared to pay for mutton.

"Overall, mutton exports have dropped 27 per cent this year to date, but exports to the Middle East have only dropped 5 per cent and have actually grown 3 per cent to the United Arab Emirates," Ms Tighe said.

"There is a consumer preference in the Middle East for mutton and strong consumer demand there, and so the price is determined by Australian supply."

Middle East customers this year have been paying 31 per cent more for mutton.

At Bendigo on Monday, wethers sold to $140 and ewes to $142.20, with one line of crossbred ewes selling up to 476c/kg dressed weight.

The Victorian saleyard mutton indicator last week closed at 435c/kg dressed weight, 58 per cent higher than last year.

The NSW saleyard indicator of 402c/kg dressed weight was 57 per cent higher than a year ago.

The gap between the Victorian indicators for heavy lamb and mutton has narrowed to less than 60c/kg dressed weight.

A year ago, the gap was more than 200c/kg dressed weight.

Ms Tighe said processors were operating in a "tough trade environment", with both domestic and export operators hurting.

"It is a tough situation for processors, who need to source sheep to keep their chains running," she said.

"But they are operating in an environment where the season is better in much of eastern Australia, which means producers are keener to keep on stock and creating more of a shortfall.

But high mutton prices could be a double-edged sword for producers. Higher mutton values would push up prices of all sheep for restockers, making it a "tough time to rebuild", Ms Tighe said.