Fine Merino wool makes up only a small portion of all wool produced, but it is useful to understand the overall wool category. Each year, the global wool industry produces approximately 1.3 million metric tons of wool. Approximately 25 percent of that comes from Australia, 18 percent from China, 11 percent from New Zealand, 3 percent from Argentina, and 1 percent from South Africa. A handful of other countries produce small amounts of the world’s total. Approximately 60 percent of the wool produced globally is used to make apparel each year.

Historically, wool has been sold as a commodity (in fact, by some accounts, it was the first commodity to be traded internationally). Commodities are products used in the production of other goods that are sold by many different companies with little perceived variation in the quality of those products across suppliers - for example, gold, wheat, and oil. In general, the price of a commodity is determined by the market as a whole (i.e., supply, demand, and events in the external environment that affect these factors). For instance, in a recent industry publication Rabobank, a leading international bank specializing in food and agriculture, noted that wool was one of the agricultural commodities that was hardest-hit by the global credit crisis. According to the report, the discretionary nature of demand for woollen products means that wool consumption (and its price) remains closely aligned with global economic activity. Another key factor affecting demand for wool has been the introduction and widespread adoption of synthetic fibers as a substitute.

Global Merino production

As the demand for wool has declined, so too has its production. A dramatic decline in the price of wool also played a role in driving farmers from the industry. In late 1966, the commodity price of wool dropped a startling 40 percent. Since then, the price has generally continued to trend downward. As farmers found it increasingly difficult to profitably produce and sell their wool, they began switching to other agricultural pursuits, such as raising sheep for meat. In the early 1900s, selling wool was the most profitable way for a farmer to make a living from a sheep operation. Today, many farmers are finding meat and dairy operations to be substantially more lucrative.

Some farmers who continue to grow wool have been able to improve their financial position by shifting into the production of finer wool, which can be used to create softer, lighter-weight, premium products. For instance, the wool from Merino sheep can be sold for up to 10 times more than the wool from other breeds of coarse-fiber sheep. In Australia, the world’s largest producer of Merino wool, this breed comprises more than 85 percent of the country’s flocks.

In turn, the country produces approximately 80 percent of the world’s Merino supply, which is worth well over US$1 billion. South Africa is the second largest producer of Merino, even though it only generates 1 percent of the world’s total wool output. New Zealand is the third largest global Merino supplier. While the country has an estimated 33 million sheep, only about 3 million are Merinos. New Zealand’s Merino wool market is currently valued at approximately US$100 million.

For decades, the majority of wool has been sold via commodity auctions. At auction, the price for strong wool (wool used to make carpets) might be less than US$1 per pound. In the New Zealand Merino industry, forward contracts are becoming increasingly common as a more sustainable alternative to wool auctions (see the section called The Company for more information about such contracts). Yet, approximately 85 percent of Australian wool is still sold via the auction model. In contrast, less than half of all New Zealand Merino wool now changes hands this way.