Beef and Lamb New Zealand is predicting farmers' income will drop 13 percent to an average of $67,000 this season.
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The Beef and Lamb New Zealand New Season Outlook 2016-17 sets the scene for a tough year and says farmers will tightly control expenditure and focus on what can be optimised behind the farm gate.
Its chief operating officer, Cros Spooner, said the high New Zealand dollar wasn't helping, because 90 percent of production was exported.
Mr Spooner said it had not been easy on farm.
"It's pretty tough going, especially if you're a sheep farmer, this will be the fourth year where we've seen returns go backwards. It's a difficult situation for them.
"The only positive is that for most parts of the country we are looking at a good climate over the spring and summer period."
A number of factors are behind the predicted drop in income, said Mr Spooner.
"Particularly for sheep farmers with the pound, clearly there's a lot of volatility built in there and that's reflecting straight back into the farmgate price."
Mr Spooner said facial eczema has been especially bad this year.
"We've had reports from farms, it's obviously having an impact on ewes and ewe survivals. We're certainly expecting lamb numbers to be slightly back in the North Island."
He said expenses will drop in response to farmers being hit in pockets by low returns. .
"This season, New Zealand's 11,300 commercial sheep and beef farmers will spend a total of $4.2 billion on fertiliser, interest, repairs and maintenance and general farm operating items, down $80 million on last year (2 percent)."
The predicted profit drop is a result of several markets, Mr Spooner said.
"Much of the profit decline is the result of a fall in wool (11 percent), lamb and sheep revenue (2.4 percent) and dairy grazing revenue (11 percent)."
He said international demand is expected to remain reasonable for beef this year, while tight sheepmeat supplies in Australia and New Zealand have potential to support prices with the unknown factor firmly centred on the exchange rate trend for 2016-17.
"In this context, any improvement in export prices is primarily expected to come from a weaker New Zealand dollar, but there is considerable uncertainty whether that will happen."
Beef and Lamb New Zealand says export lamb production is forecast to drop by 1.6 per cent this season, with the UK which accounting for 20 percent, the rest of EU accounting for 18 percent and China 32 percent.