Wool is classified based on measurement of the fiber diameter in microns. Different grades of wool suit different purposes. Merino is amongst the finest of wools – it has the smallest diameter fibers, usually less than 20 microns or so. That’s called “garment” merino. It’s also uniformly white, which is desirable because it can be dyed easily. There are very, very few black merino sheep. They've been selectively bred OUT.
Merino wool is a global commodity and is traded internationally. It has a very complicated and international production chain. Most garment merino comes from Australia (75%) with South Africa and Argentina the next biggest producers (about 10% each). New Zealand produces a lot of wool (3rd in the world) but most of it is not merino. Only about 3% of the world’s garment merino comes from New Zealand. China produces as much wool as Australia, but again, it’s not merino. An amazing fact: about half of the sheep on the planet are merino and most of them live in Australia!
Merino sheep originated in Spain in the 1300’s. Spain became famous for its fine wool and actually outlawed export of Merino’s until about the mid 1700’s, keeping a tight lock on their monopoly. The Napoleonic wars around 1800 destroyed the Spanish merino industry and the scene shifted to the few places where merino’s had been exported, which included Australia. Sheep flourished there and by 1830, Australia had millions of sheep. Of course now it has become a huge industry there. Sheep ranches or "stations" are very large – running herds of thousands of sheep, with your nearest neighbor 100 km away – and life is very isolated.
Merino sheep are commonly "mulesed", because the parasitic fly that causes "flystrike" is endemic in Australia. It is possible to find non-mulesed merino, typically it will be from South Africa or Argentina, but it's a "specialty" product that you have to hunt for.
The largest importers of merino fleece are the EU and Turkey, where high-tech processing mills turn the fine wool into fine fabrics, meant for luxury suits. Merino is also popular as a "blending" fiber, used together with even finer fibers like cashmere, qiviut, silk, possum and alpaca to make those easier to process (and cheaper!). Only a tiny portion of the wool "clip" ("harvest") is processed into knitting yarn. Processing for knitting yarns is not as exacting as producing weaving yarns: China, Italy, and Turkey are the countries where most craft yarns are processed. Chances are, if you are knitting with a European-label merino yarn, it'll have come from an Ozzie sheep, processed in Italy or Turkey, and then shipped to a dyer. North American yarns tend to be the same Ozzie sheep, but processed in China. Independent dyers get their yarn "bases" from a rather small group of distributors; you can learn to recognize these bases if you do enough comparison shopping. It isn't easy to figure out where yarn comes from as many producers are tight-lipped about their sources.
The invention and development of synthetic fibers has caused a huge decline in the market for wool. In North America, we wear far more cotton and synthetics than wool. This means that most large-scale sheep farmers in North America long ago switched to dual-purpose breed so they make money on the meat, and sell wool only to offset the costs of shearing (which is an annual requirement, just like vaccinations and hoof-care). Of course these dual-purpose breeds are not fine-wool sheep. Because of this, the smaller mills that you find in North America are typically not set up to handle fine wools (they are aimed at the much more common local "medium wool" clip). This is why it is very difficult to get “locally sourced” merino yarn if you live in North America, and why, even if you can find it, it will not be spun to the same standard of fineness as what comes from the big mills.
Merino is a lovely soft wool. Spun carefully (not over-twisted), it’s fantastic for next-to-skin garments, scarves, hats, and luxury/heirloom items that aren't worn a lot. It is not hard to find, and many independent yarn dyers use it. It has poor abrasion resistance, though, and does tend to pill fairly quickly. It also has very nice "drape"; in other words, it isn't "crisp" and the knitting tends to sag over time, especially on larger items like sweaters and especially with today's standard large-gauge knitting. All those beautiful garments knit in old Europe – think Scandinavian sweaters, Arans, Guernseys, Fair-Isles, Bavarian twisted-stitch sweaters – none of them were knit in merino. To get that crisp look and the longevity, you have to use a different breed – one that isn’t quite so soft! And, of course, you need to knit at a tighter gauge (with thinner yarn) than is commonly done today.
Since I've been spinning, I'm becoming a fiber snob and I am not really a fan of merino anymore, especially if spun loosely for sock yarn (yes, I'm lookin' at you, Stroll!). It just reminds me a bit too much of wonderbread; you know, white, fluffy,....substanceless...it also strikes me that the merino industrial complex is simply expanding its own market by relentlessly pushing softness as the most important quality of any wool garment. And, by adding nylon to the blend, the market for merino can be expanded to higher-abrasion applications. Yes! The world needs more merino sheep! Huh.