Dairy expansion has made further inroads into sheepmeat and beef production, and the biggest loss has been in the South Island.
In its December forecast, Beef & Lamb New Zealand's Economic Service predicted the export lamb kill would rise by a million for the 2009-10 season.
It now predicts a kill of 21.5 million, two million below its earlier forecast.
It's also expecting a 10% drop in the export mutton slaughter and a fall of almost 4% for beef, in line with earlier predictions.
The service's executive director, Rob Davison, says the single biggest cause for the decline is the further expansion of dairy farming, especially in the South Island - a trend he expects to continue.
The national growth in dairy herds has been greater than expected - 140,000 more cows - and there are also 480,000 fewer breeding ewes.
Bearing on Silver Fern Farms' decision
Mr Davison says that nearly 70% of the drop in the number of breeding ewes and almost all the increase in the number of dairy cows occurred in the South Island.
That has had a bearing, he says, on the recent decision by the biggest processor, Silver Fern Farms, to close more lamb processing facilities in Canterbury.
Silver Fern chief executive Keith Cooper says that, as well as hitting profitability, the bigger than expected drop in lamb supply will threaten companies' ability to supply their customers.
But he thinks it will also force the meat industry to take another look at marketing arrangements and again prompt calls for consolidation.
Consolidation advocate moves to dairying
One farmer who sold his sheep and moved to an entirely dairy operation is John Gregan, who chaired the Meat Industry Action Group that led the farmer campaign two years ago to merge Silver Fern and Alliance.
Mr Gregan, who has been running a dairy operation next door to his South Canterbury sheep and beef farm for two years, says frustration as well as economics drove him to move wholesale into dairying.
He says he was getting despondent over the lack of progress towards consolidation of the meat industry.