AUSTRALIAN sheep producers are capable of posing a significant threat to UK farmers if the World Trade Organisation allows free trade at world prices.

Mr Christopher Lloyd, commercial manager of the National Sheep Association, reached this conclusion after studying the sheep industy in South Africa, New Zealand and Australia on a Nuffield farming scholarship, sponsored by Dalgety.

He wanted to see what could be learnt from producers who already farmed without subsidies and what a free market might imply for UK sheep farmers.

"The WTO objective of removing market access quotas, which limit the entry of cheaper imported products, will leave European producers extremely vulnerable," said Mr Lloyd.

"All three countries I visited have the potential to produce lamb for the European market at below our cost of production, but it is the Australian sheep industry which could do us most harm.

"Historically their industry was built on wool production, which prospered until the market collapsed at the end of the 1980s. Sheep numbers fell from 170m to 115m, and many farmers left the industry.

"The more progressive and farsighted producers in the grass growing areas are turning to lamb production. Until now, they have been restricted by lack of markets and had little incentive to produce quality meat, but recent success in developing new markets, in America and in the Middle East, is changing this."

Australian production was 16pc lower than the UK and we had a third of the ewe numbers, because of Australia's strong focus on wool and the Merino breed, but there was a shift to more meat-related genetics, supported by sophisticated recording and breed improvement schemes.

The New Zealand industry woud continue to be a threat to European producers, owing to the favourable climate and the drive for cost efficiency since the removal of all support measures in 1984/85.

In ten years, sheep numbers fell by 30pc, but total output per ewe wintered increased by 52pc through improved lambing percentages and carcass weights.

The development of chilled lamb exports alongside the established frozen trade meant New Zealand would continue to be a serious competitor once the WTO negotiations took effect.

While South Africa had the potential to produce high quality lamb products, it was finding it hard to cope with the massive social and structural challenges following political changes in 1994.

Since then, a third of the flock has been lost, largely through stock theft and predators. The country now imports 1m live sheep from Namibia, and 42,000 tonnes of carcasses from Australia, each year. While the European market is attractive, its domestic market could absorb any foreseeable rise in production.

"Europe has been a protected and welcoming market for UK lamb over the past 27 years, and this may have made us too complacent," Mr Lloyd admits.

"We have to calculate our production costs, so we know what price we can accept, and then look very hard at keeping these costs down.

"We also need to remove the blinkers that surround our thinking on export markets, and broaden our horizons - perhaps to the US, or the rapidly developing and westernising Asian market."