Confidence must be maintained within the sheep industry if it is to exploit global demand for British lamb, the National Farmers' Union has said today.Sheep producers have endured a challenging year due to a poor summer, longer finishing period and a marked decrease in lamb prices. But according to Charles Sercombe, NFU livestock board chairman, these are short term factors and it is essential that processors and retailers take a long term view of the market and avoid sending out further negative signals to farmers. "The national flock is showing signs of increasing after many years of declining numbers but producer confidence is finely balanced," said Sercombe. "British lamb is in demand on both home and export markets but farmers need the confidence to invest in the future if we are to exploit these opportunities. "The boom bust cycle of sheep pricing is not in the interests of the farmer, processor or retailer and sending out negative price signals is damaging to the entire sector. The poor summer and rising input costs are continuing to erode farm margins."The Department for Environment, Food and Rural Affairs (Defra) also warned the sector that Schmallenberg virus could return in 2013.Reports from Europe about the effects of the disease in its second year led the National Sheep Association (NSA) to look for ways in which the UK could better equip itself to deal with the midge-borne virus."Anecdotal reports from France and other areas of Europe suggest Schmallenberg may be causing more problems in its second year than expected, possibly because livestock does not develop the level of immunity anticipated" said Phil Stocker, NSA Chief Executive.HSBC Head of Agriculture Allan Wilkinson said the agricultural sector needs to concentrate on 'the basics' in order to preserve margins in 2013.Wilkinson warned that farm incomes are expected to plateau next year, which means farmers must place extra emphasis on costs of production and enterprise margins.UK beef production is unlikely to recover from current low levels in 2013 and the weak economy both in the UK and abroad could dampen prices. "Although home sheep consumption continues to fall, exports are rising and we expect to see growth in sheep flocks next year. However, 2011 may prove to have been the peak in the current profitability cycle" he said.