Australia's woolgrowers are about to hit a milestone many thought was unthinkable even a few years ago, with prices set to burst through $20 a kilogram.

Key points: Wool's benchmark Eastern Market Indicator is expected to hit a record $20/kg at next week's auction

Wool's benchmark Eastern Market Indicator is expected to hit a record $20/kg at next week's auction High demand from China and flat supplies will keep the price high for some time.

High demand from China and flat supplies will keep the price high for some time. Concerns are mounting the price is approaching a tipping point for foreign buyers

A combination of high demand from Chinese mills and flat supplies of wool at auction has seen prices rise 10 per cent since Easter and roughly double over the past 5 years.

Another frantic week of bidding drove the key market benchmark, the Eastern Market Indicator (EMI) up again to just 9 cents short of the $20 level.

Records have been broken virtually on a daily basis and most grades of wool have never been more expensive.

Over the year to date, the EMI this season has averaged 1,695 cents ($16.95/kg).

The highest average in the late 1980s boom was 1,003 cents in 1987/88.

Wool prices have doubled in the past five years and have surged 10 per cent since Easter. (Red line EMI in $US) ( Supplied: Australian Council of Wool Exporters and Processors )

More sustainable this time

The Australian Council of Wool Exporters and Processors executive director Peter Morgan said the current boom, now into its third year, looks more sustainable this time around.

"In the past, a period of good prices rarely went beyond a couple of years, this looks a bit different," Dr Morgan said.

Dr Morgan has just returned from an International Wool and Textile Organisation meeting in Hong Kong and said processors were philosophical about the prices they have to currently pay.

"There appeared to be little concern compared to what we've seen in recent years," he said.

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Around 80 per cent of the Australian clip is destined for Chinese mills.

Dr Morgan said it was unlikely prices would continue to rise at their almost exponential rate, but stable production and wool's increasing popularity in active sportswear, as well baby clothes, is keeping demand high.

"Wool is an incredibly healthy product and there is growing demand for next-to-skin garments for babies with eczema," he said.

On the supply side, the size of the Australian flock has dropped by 90 per cent since its heyday.

Big investments in cropping land and the high price of meat has also kept wool production low.

Tipping point

On average, these wool bales are valued at $2000 with 80 per cent of them to be shipped to China. ( Photo: David Cussons, ABC Rural. )

Wool grower and processor Peter Small is one of few in the industry who predicted the possibility of the $20 level, although he though it would take a couple more years to get there.

Woolgrower and processor Peter Small worries if the price rises too much more, it could kill demand in China. ( Supplied: Terry Sim, Sheep Central )

"$20, it's a nice round number," Mr Small said.

While he said the current price was a reward for growers who stuck out tough times, he was worried about the longer-term consequences.

"Once it goes through 2,000 cents [$20 per kilogram] it is going to cause a problem, everyone has a limit," he said.

Mr Small is in the unusual position of not only being a grower at Gritjurk near Coleraine, in Victoria's Western District, he is also a partner in a processing business in China.

"As a garment manufacturer, selling into the Australian market, I formed a view [in 2010] we could cope with a doubling of prices," he said.

"I wouldn't like it, but if I could do that [as a manufacturer], others could live with it."

However Mr Small believes the price is approaching a tipping point for many processors.

"It could kill the whole thing if it goes too high."

Dry conditions causing supply crunch

There is little wool warehoused in sheds or with brokers at current prices. ( ABC North and West SA: eloisesa )

The other factor supporting the price hike is the parched conditions across much of Australia's best pastoral lands.

"It's rain first, price second", Andrew Woods, a wool industry consultant from Reimann based in Wagga Wagga, said.

"It [the prolonged dry] has caused a supply crunch in many of the broader lines of wool," Mr Woods said.

"There won't be much of a supply response if it doesn't rain.

"Brokers have very little stock on hand, there's not a lot in the sheds, basically it is going overseas as soon as it is sold."

Back in the Western Districts, Mr Small said the merino ewe base had dwindled to such a low level, and given the dry conditions, it could take years to build up again.

He said the industry, and its research and promotion body Australian Wool Innovation, had missed a golden opportunity to make wool growing more sustainable in recent years.

"We need to lift production," he said.

"We should have increased spending in on-farm productivity, rather than all the money we have spent on promotion."