SUPERMARKETS have defied record saleyard prices by slashing the price of lamb.

Despite stock fetching up to $6.50 a kilogram in saleyards, both Coles and Woolworths last week cut prices for legs of lamb by $5/kg, to just $9/kg.

And the supermarket giants have promised to keep the lamb discounts coming.

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It comes despite maiden Merino ewes - popular prime-lamb mothers - selling for a record $281 at last week's Hay store sheep sale in southern NSW, breaking the previous high of $264 paid at Hillston a fortnight earlier.

Coles last week also cut lamb racks and cutlets by $11 to $24/kg.

Critics said the chains were underwriting a price war by charging more for other items, and claimed the real aim was to win business from butchers.

Livestock industry leaders have warned the discounts could see farmers receive less for their product.

But a Woolworths spokesman said there had been "no change to the market price we pay" for lamb while a Coles spokesman said price cuts were "fully funded by Coles".

Andrew's Choice butchers owner George Vourvahakis said supermarkets were "absolutely" taking aim at butchers .

"We haven't got the power of discount they've got - we offer better quality and service, but we can't do that (discount that heavily)," Mr Vourvahakis said.

"It does hurt."

Rabobank senior analyst Marc Soccio said big retailers would "cut much deeper and harder" on essential items, "anything that can drag someone in the door".

"It's getting harder for butchers and greengrocers to compete," Mr Soccio said.

Mount Gambier MP and sheep farmer Don Pegler said the supermarkets were making their money back by increasing prices on other lines.

"They'll use a product as a loss leader to get people into their shops and lose a couple dollars, but pick up tens of dollars everywhere else," Mr Pegler said.

He warned supermarkets had the power to push down prices paid to producers "for sure".

IBISWorld senior analyst Ian MacGowan said the "discount war" was a response to the significant growth in the wholesale butcher sector over the past five years.

"Milk is the classic example - foot traffic was going to convenience stores for milk and bread, so (supermarkets) have run a discount - it's getting people back into supermarkets."

The lamb price war comes as The Weekly Times has seen data which shows the milk price war has shifted trade directly from corner and convenience stores into supermarkets but has not altered the total volume of milk consumed nationally.

However, supermarket-brand milk sales are up 14 per cent on the September quarter last year.

Overall profit on supermarket brand milk has not increased despite the increased volume of sales.

Victorian Farmers Federation president Andrew Broad said the recent fall in the Australian dollar should have put upward pressure on lamb prices, given lamb prices are set by global demand.

Meanwhile, Australian Bureau of Statistics data shows the retail price of mutton and lamb has risen 100 per cent in the past decade.

The figures show many consumers have switched to chicken as the price of lamb has increased.