The report "Australian Lamb: Financial performance of slaughter lamb farms 2005-6 to 2007-8" was released this week.

It found that in 2006-7 production of slaughter lambs was adversley affected by drought and a reduction in irrigation water availability.

With farm output constrained and costs rising, slaughter lamb producers of all scales recorded their largest farm business losses in real terms since ABARE started collecting figures on slaughter lamb production.

Improved seasonabl conditiuons in the past year should result in many producers realising a significant improvement in farm cash income, as receipts rebound and costs fall.

ABARE acting executive director Karen Schneider said in recent years the slaughter lamb industry has undergone a period of significant new investments in capital, particularly land, pland and machinery.

"This, combined with high equity levels, will enable most producers to finance their recovery and expansion," she said.

However Ms Schneider cautioned that many producers' high equity levels have been driven by a steady increase in land values in recent years.

She said producers' capacity to borrow additional short term funds is dependent on land values remaining high.