Australian wool's market research arm identified North Korea as a potential export option despite harsh trade sanctions against the oppressive dictatorship.
Australian Wool Innovation, which is funded half through farmers' levies and half by taxpayers, has come under fire for naming the rogue state in an export market strategy.
Department of Foreign Affairs and Trade secretary Frances Adamson said she struggled to believe her staff were consulted about the document.
"Not in our lifetimes have we been considering North Korea in that light," she told a Senate estimates committee on Thursday.
"I think an error was made."
Australia's sanctions against North Korea prevent almost all exports to the secretive nation with explicit mention of textiles and fabrics.
AWI's strategy also identified Bangladesh, Bhutan, Cambodia, Laos, Myanmar and Sri Lanka as emerging markets for Australian wool.
"The North Korean market creates high interest in terms of the potential of textiles but is ridden with political and sovereign risk," the document said.
Nationals senator Bridget McKenzie grilled AWI chief executive Stuart McCullough about the bizarre strategy.
Mr McCullough promised to change the list to make advice about North Korea clearer.
"If you had to rank those countries out of optimistic versus realistic, I think North Korea is at the bottom of the list," he said.
Agriculture department boss Andrew Metcalfe recommended that AWI consult closely with DFAT about its export strategy.
Liberal senator Concetta Fierravanti-Wells said the wool industry had spent too much time focusing on China and neglected other markets.
"Now the chickens have come home to roost," she told parliament.
AWI has come under pressure in recent years for using a two-way mirror to watch focus group participants and sending Mr McCullough on a $67,000 six-week business course in the US.