By Lucy Craymer 

Wool isn't just for winter wear anymore, and its use in everything from shoes to underwear briefs is pushing prices of merino, the most popular type of wool fiber for clothes, to near-record highs.

Wool sneakers popular in Silicon Valley from startup Allbirds Inc. helped kick off a global trend. Brands from Adidas to Lululemon and Under Armour are selling wool apparel, touting the fiber's soft feel and odor-resisting properties. Merino wool, named for a breed of sheep, is even being woven into shorts, tank tops and short-sleeve T-shirts.

Demand has helped drive up merino wool prices at a time when the sheep population in Australia and New Zealand, the world's largest wool exporters, is near a 100-year low. Many sheep farmers here invested in converting their operations to dairy farming or higher-yielding crops after prices of wool collapsed in the 1990s.

In Australia, which produces the bulk of merino wool used by major clothing brands, benchmark wool prices were recently around $14 a kilogram in U.S. dollar terms, up 56% from 2016. Prices last peaked in 2011, when the Australian dollar was more valuable than the U.S. dollar. Now, the Australian dollar is weaker than the greenback, indicating that demand is the primary force driving merino prices higher.

Some manufacturers say the limited supply of high-quality wool is creating sourcing challenges.

"It's a natural material so you can't just crank up machines and produce more," said Nicola Simpson, chief operating officer at Icebreaker, a clothing brand that recently agreed to be acquired by VF Corp., the Greensboro, N.C., apparel company, for undisclosed terms.

Icebreaker uses a merino fiber of a particular diameter, and Ms. Simpson said even on farms already producing fine merino wool it could take seven years of breeding to get sheep producing the desired wool.

Since its founding in 1995, Icebreaker, based in New Zealand, has sourced its merino wool from farms across the country. Last year, as prices climbed, the company offered 10-year contracts to some farmers to lock in supply. It is also buying wool in Australia and considering sourcing some from as far away as South Africa, Ms. Simpson said.

Smartwool, another VF-owned brand that makes merino socks, hats and other apparel, also is trying to lock in multiyear supply contracts.

Driving demand for wool is a shift in consumer attitudes toward the fiber and efforts to market and promote it as breathable, moisture-wicking and environmentally sustainable compared with synthetic materials like polyester and nylon, which are derived from petrochemicals. Recent developments in technology have produced wool garments that don't shrink after washing.

And then there are those wool sneakers. "Everyone in my office wears them; it's kind of part of the uniform," said Christine O'Brien, who works at a San Francisco tech company and owns several pairs of Allbirds wool shoes.

Kristoffer Ulriksen, category managing director at Norwegian sports brand Helly Hansen, said when the company outfitted the Spanish sailing team Mapfre for the current round-the-world Volvo Ocean Race, the sailors demanded merino. "It's the only thing that doesn't smell after two weeks at sea," Mr. Ulriksen said.

Many brands that charge a significant premium for wool products say they are absorbing higher wool costs for now.

German sports-apparel giant Adidas AG has increased the number of wool items it sells fivefold in five years, even as it has cut the total number of products it sells, according to Craig Vanderoef, the company's senior director of running apparel and customization.

"What is surprising is how willing people are to accept wool as 'new,'" he said.

A long-sleeve Adidas wool T-shirt retails for 20% more than a comparable one made from polyester, mainly because merino is costlier, Mr. Vanderoef said. He said Adidas has no plans to raise prices.

There isn't enough wool in New Zealand to meet all the new demand, and some buyers are being turned away, said John Brackenridge, chief executive at New Zealand Merino Co., a farmer-owned entity responsible for the sale of around 70% of the country's fine wool. More than 50% of New Zealand's fine wool is now sold by longer-term contracts, compared with around 35% five years ago, he said.

U.S. clothing brand Brooks Brothers Group, which sells some collared shirts and suits made from wool, has seen its cost of the material rise between 25% and 30% in the past two years. Gianluca Tanzi, chief operating officer, said the company had increased efficiencies elsewhere, which allowed them to absorb the costs.

Ercole Botto, chief executive of Italian textile manufacturer Reda, said higher wool prices are hurting.

"We are in the difficult place in the pipeline," he said, "because the growers have increased the price because the market has increased demand, but our buyers do not want us to increase the price."

"We are fighting," Mr. Botto said. The family-owned company, which has been producing textiles for 150 years, has increased the average cost of its fabrics by around 20% in the past year. "I'm absorbing some costs. It's making me poorer," he said.

Some companies are strengthening connections with wool producers. Tim Brown, a New Zealander and co-founder of San Francisco shoe manufacturer Allbirds, recently traveled back home to meet with sheep farmers. He took some farmers out for beers at a local pub and showed them the sneakers their merino was used to make.

Wool "has been de-commoditized," said Joey Zwillinger, Allbirds's other co-founder. He declined to disclose revenue or profit numbers, but said Allbirds's sales have risen 450% from a year ago.

Write to Lucy Craymer at Lucy.Craymer@wsj.com

(END) Dow Jones Newswires

February 23, 2018 10:14 ET (15:14 GMT)