Production instability has been rightly regarded as one of the key problems of Australian agriculture. Campbell has emphasised that little attention has been focussed on reducing fluctuations in output as a means of cushioning income variations, although a great deal of interest has been taken in various measures designed to stabilize price. (l) An attempt is made in this paper to split up total variability of aggregate wool income into two components: the first corresponding to production uncertainty, and the second to price uncertainty. It is only by this sort of approach that we are in a position to gauge the possible effectiveness of any scheme designed to stabilize aggregate income, whether such a scheme act through price or output. This analysis suggests that over the last thirty years production instability has been of very much less significance than shifts in overseas demand in accounting for fluctuations in aggregate wool income, (2) confirming the views taken by Blau, (3) McMillan( 4) and Lewis. (5) It also highlights the critical dependence of Australian export income on overseas demand conditions.