Prices for both fine and medium wools have rebounded in recent weeks, which should be a good sign so early in the season. However, exporters say overseas markets are unsettled and buyers are increasingly resistant to higher prices.

Some of the problem centres on the increasing volatility of the New Zealand dollar, especially against the US currency. Over the past fortnight, this cross rate bounced between US57.5 cents and US59 cents, creating increasing headaches for traders.

At the same time there are worries over the likely quantity and quality of Australian fine wools. These have been hit by drought that has left both the sheep and their wool in poor condition. It is generally believed that there will be considerable quantities of poor Australian wool.

However it is likely the quality will be highly variable. Some regions and states including Tasmania were not affected by drought and this wool will be in good condition.

Peter Whiteman of Masurel Fils says New Zealand merino farmers are likely to benefit. "The price differential that saw these farmers get more than the Australians has narrowed and virtually disappeared in recent years."

"However, this season New Zealand merinos should again fetch the higher prices as the climate has been so good and our sheep are in good condition," Mr Whiteman says.

He says there should be no reason why prices for New Zealand merinos should fall over the next couple of months – though "people aren''t happy paying the prices".

The fine wool indicator has risen from $11.14 on July 31, the first major sale of the season, to $12.61 last week.

In its latest report, the Agriculture and Forestry Ministry forecast that this season, returns on its model South Island merino farm would fall by eight per cent, from $9.15kg to $8.39kg.