Australian wool producers are among the first to experience the full pain of the US-China trade war.

Key points: Wool prices are down around a quarter from their February peak

Wool prices are down around a quarter from their February peak Chinese wool processing plants are reducing output amid concerns about US tariffs

Chinese wool processing plants are reducing output amid concerns about US tariffs Drought is compounding the fall in prices with declining flocks and record low wool production volumes

Farmers have told PM the industry is in crisis.

Figures from the Bureau of Statistics show wool farm production has dropped to its lowest level in history.

"Receivals [bales from the grower after shearing] for the June 2019 quarter are the lowest on record," the bureau said.

Many Merino sheep farmers are reeling from a horror drought, which industry analysts say has created some of the worst conditions ever seen.

"Vast areas of Australia's wool production are in Central New South Wales and they're facing some of the toughest seasonal conditions," Rabobank's Agribusiness Analyst Angus Gidley-Baird said.

"Some of them [farmers], depending on who you talk to, say it's been some of the driest periods on record.

"And a number of guys are feeding constantly just to make sure they continue to maintain their flock numbers."

Sixty-three-year-old Robert Ingram is a sixth generation Merino farmer in Delegate, Southern New South Wales.

NSW wool grower Robert Ingram is struggling with the drought as well as falling prices. ( Supplied: Robert Ingram )

He normally runs 4,000 sheep, but the drought has seen Mr Ingram cut about a thousand from his flock.

He has also recently lost some lambs, or weaners.

Sheep suffer through drought, and the quality of the wool falls as a result.

"So the yield we're getting out of our wool which is, on average, around about 65 per cent, some of the wools coming from the pastoral areas of particularly western New South Wales are yielding as low as 30 per cent," Mr Ingram told PM.

"It must be still worth shearing because they're still shearing them … [but] it's a hard grind."

Price crash compounds drought

On top of the drought, the trade war between the US and China has led to a crash in the wool price.

Last week the Australian Wool Exchange (AWEX) Eastern Market Indicator (EMI) lost 78 cents, or 4.5 per cent, to $16.76 per clean kilogram.

Wool prices have tumbled throughout the year as global trade tensions have increased. ( Source: Australian Wool Industries Secretariat, Dr Peter Morgan )

The price is now down 24 per cent since its February peak.

Mr Ingram's income has been slashed.

"Our income was reduced by between 30 and 35 per cent," he said.

Shearers are still clipping sheep, but Australia's wool production is at the lowest level on record. ( Supplied: Robert Ingram )

Normally, a drought leads to a big fall in supply, helping to provide a floor for prices and some respite for farmers.

But the US-China trade war, and Donald Trump's pledge to put a tariff on woollen clothing made in China, is creating an enormous amount of uncertainty for Chinese wool processing plants.

Rabobank's Angus Gidley-Baird said those processing plants are responding by scaling back production, and that means they are asking for less Australian wool.

"We are starting to see a reduction in the volume of Australian product going to China," he observed.

"At the moment that's probably the main reason for that drop in price.

"From a supply point of view, Australia's wool production — our sheep flocks — are at some of the lowest levels we've seen in 20 years.

"Economics 101 would suggest that prices should go up, but prices are coming down. So that reduced demand out of China is having a big influence."

Yesterday Chinese officials released a broad range of economic data providing a snapshot of the health the world's second biggest economy. The figures were not encouraging.

Among the data were figures showing China's manufacturing sector output slowed to a crawl last month, up just 0.2 of a per cent.

That suggests Chinese demand for wool and its price, along with other key Australian exports, could fall even further.

Rabobank analyst Angus Gidley-Baird said that new earlier this week that Donald Trump will hold off imposing the latest round of tariffs on Chinese imports until mid-December gives a little hope to some Australian exporters.

"If they could resolve that problem then the market could go back to go back to understanding what might happen with a bit more certainty," he said.

"We might see the prices level out.

"But where they are with that uncertainty and volatility in the market it does mean that potentially we could see prices drop further."

Many farmers have cut the size of their flocks due to severe drought conditions. ( Supplied: Robert Ingram )

That is what is keeping Merino farmer Robert Ingram up at night.

"We sit here today waiting to see what the wool market does this week," he said.

"I would suspect the Chinese orders for the next couple of weeks to be unclear."

When the ABC asked Mr Ingram how he copes with that level of uncertainty he said, "we've got no control over that, so you wear it fair in the wallet."