At auctions held on the last day of May more than $28 million worth of wool was sold.

The wool market is measured via the success of weekly auctions held in Sydney, Melbourne and Fremantle through the Eastern Market Indicator, which also closed at a record 2027 cents a kilogram of wool.

It's unchartered territory for wool growers and brokers, who have watched the price of the fleece break record after record over the past two years.

This season, supply is tight as farmers struggle with on-going dry conditions across northern and western New South Wales, a key production region for wool.

The buyers — mills in China and Italy that process the raw wool into everything from the superfine fabric required for high-end suits, to the coarser wool used in military uniforms — have been mostly happy to pay the higher prices, but now they are increasingly feeling the pressure.

While a weaker Australian dollar has cushioned the rise to an extent, the US dollar price is still on an upward trend.

"It's a concern, for us and for our partners along the supply chain," Diyang Merino Textile director George Chen said.

Fast-fashion giants

Mr Shen's company, founded in east China in 2008, is a vertically integrated wool production house.

It does everything from knitting, dying and finishing fabric, through to actually making garments for clients.

"The key issue question for us is, can the final consumer accept an increase of the final garment price," Mr Chen said.

In today's retail environment, the answer is most likely no.

The financial success of the fast-fashion giants like H&M and Zara now dominating the landscape has been built on a supply-chain model with tiny margins that leave workers open to exploitation, sees tonnes of unwanted clothes filling landfill and damages the environment.

As wool prices have soared the cost of Japanese brand Uniqlo's merino sweater has sat at $40 for the past three autumn/winter seasons.

Mr Shen said smaller labels were using less wool as the prices rose or blending finer wools with coarser ones.

"I know a famous wool company in Australia — in the past few years they always used 50 per cent merino, 50 per cent polyester.

"When I was in Melbourne, recently, I went to their shop and they had changed to 70/30. So this is a common mood among the brands," Mr Chen said..

Marketing material for Norwegian outdoor clothing company Ulvang shows explorers climbing icy mountains, with the tag line "we are wool".

"Right now the prices are very high, and about to reach a limit," brand director Lars Thronsen said.

"If the price rises a lot more, I think that will affect the volume of wool we buy."

Mr Thronsen said the retail environment was tough.

"That's my biggest challenge, the buyer and the chains are mostly concerned about margins, so far, they seem to still prefer the cheap brands, and they're not willing to pay the extra costs for transparency."

Ethical shoppers

Alan Pitcher says a $20 a kilogram price for wool is generating healthy returns for producers. ( ABC: Clint Jasper )

Victorian farmer Alan Pitcher was one of the first farmers to phase out mulesing on his property near Skipton, 170 kilometres west of Melbourne.

Through a combination of cultural practises and careful breeding, his sheep no longer need the surgical procedure that removes the skin on a sheep's rear, to prevent deadly flystrike.

"There is quite a large percentage above what the market price is, I think there is a real bonus to be had for unmulesed wool."

The wool he's about to shear in a fortnight is ultimately processed through Mr Shen's factories, and ends up in Mr Thronsen's garments.

Sourcing unmulesed wool in today's market is even tougher than usual, according to Mr Thronsen.

"It's very time consuming, and very expensive for us, but to Ulvang, we have no options, we must have that guarantee that we know the farmers at the end really care about their animals, and they are treating them well."

Industry stalwart Jimmy Jackson is a former director at industry body Australian Wool Innovation, who now helps brand like Ulvang map out and open their supply chains up to consumers.

"More and more of our customers, brands in Europe and the USA, want to do traceability stories.

"You can't do that today unless the wool is unmulesed."

Italian buyers have previously told the ABC they're fed up with the difficulty in sourcing more unmulesed wool.

But a booming demand from China's middle class for woollen garments is expected to keep demand for all types of wool high.