Australia at the Tipping Point

I’ve been writing about Australia’s developing wine crisis for a couple of years now and I’ve often felt like Chicken Little, warning that the sky was falling. The problems kept accumulating, to be sure,  but the ultimate crisis never seemed to come. Was I being too negative, too dismal, exaggerating the woes and ignoring the underlying strength of the industry?

Unfortunately not. It’s just that the tipping point hadn’t been reached. But we’ve arrived there now, at least according to a report called “Wine Restructuring Action Agenda,” which suggests that the crisis is already here and there’s nothing to do but deal with it.

Cold Hard Facts

The report was issued yesterday in the form of a joint statement by four industry groups, the Winemakers’ Federation of Australia, Wine Grape Growers of Australia, the Australian Wine and Brandy Corporation and the Wine Research and Development Corporation. It went out to all winemakers in Australia and will be followed by regional meetings in the coming weeks and months. The statement makes sobering reading.

Structural surpluses of grapes and wine are now so large that they are causing long-term damage to our industry by devaluing the Australian brand, entrenching discounting, undermining profitability, and hampering our ability to pursue the vision and activities set out in the Directions to 2025 industry strategy.

Coupled with inefficient and/or inappropriate vineyard and wine operations, oversupply is amplifying and exacerbating fundamental problems in the industry, notably our decreasing cost competitiveness. As such it is compromising our ability to adopt new pricing structures and market solutions and adapt to changing market conditions.

Comprehensive analysis and consultation suggests at least 20% of bearing vines in Australia are surplus to requirements, with few long-term prospects. On cost of production alone, at least 17% of vineyard capacity is uneconomic. The problems are national – although some regions are more adversely affected – and are not restricted to specific varieties or price points. The industry must restructure both to reduce capacity and to change its product mix to focus on sales that earn viable margins.

Bailouts are not an option and neither governments nor industry bodies should be expected to provide the answers; tough, informed decisions must be made by individual growers and wineries, from as early as the 2010 vintage.

Mountains of Wine

Australia has an accumulated surplus of 100 million cases of wine that will double in the next two years if current trends continue, according to the report. The annual surplus is huge – equal to all UK export sales and there is no clear prospect of finding additional demand, either domestic or foreign, to fill this gap.

New Zealand Sauvignon Blanc, I understand, is now the best-selling white wine in Oz. Not the best selling import, but outselling any category of Australian white wine!

In fact, wine exports have fallen by 8 million cases or more than 20 percent in the last two years, according to the statement, with the largest declines in the high value wines that Aussie winemakers hoped would be their future.

Inexpensive and bulk wine sales have grown, but at prices that are unsustainably low. One of the messages here is that a great deal of the Australian industry is the red, unable to meet operating costs. Even the domestic market is under attack, with falling consumption and rising imports.

The problem is structural, not cyclical or temporary. The surplus won’t be cured by a return to global economic prosperity, for example. The demand is not responsive enough to rising income.

Better weather will make the surplus worse, of course, by increasing supply and not even bad weather will make much of a dent in it. Drought, water shortages, global warming – these factors that continue to plague Australia — would reduce the surplus by 10 percent at best.

Continued over-production will put further pressure on price, the report says, making all the problems worse. There is only one solution: restructuring.

Grubbing Up

So Australian wine producers will be meeting in the coming weeks and months, getting the bad news and hopefully acting on it so that restructuring, including grubbing up uneconomic vines, can begin. Here is the timetable:

• From 23 November 2009, detailed and confidential supply data summaries will be provided to regional associations. These will examine each region in isolation and in relation to the national picture, with a focus on levels and patterns of viability.

• From 30 January 2010, a package of tools will be available to help individual vineyard operators assess their performance and viability. This will include: a checklist; an upgraded Deloitte Ready Reckoner to assess winery profitability by market, channel and price point; and an upgraded Vinebiz program to assess vineyard profitability.

• From early next year, briefings will be held in 14 regional centres (covering all states) to discuss regional data and issues and offer business stress testing to assist with decision making.

The Federal Government has been approached to help facilitate this initiative, and state input is being sought.

• WFA and WGGA will hold discussions with the Federal Government about improved exit packages for growers and small wineries seeking to leave the industry along the lines of drought and small block irrigator exit packages.

Chicken Little Talk

So now we have two of the most important actors in the world wine game committed to restructuring — Australia and the European Union. The EU reached its tipping point a couple of years ago and adopted a restructuring program in the slow, torturous EU policy way.

Many people were disappointed with the final EU reform package – too little, too late. But maybe that’s Chicken Little talk. It will be interesting to see if the Australian producers are more decisive and if they can find a way to pull themselves back from the tipping point.

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9 responses

  1. Move over Chicken Little (Australia)make a little room for Chicken Little (America)!

    I am predicting a wine lake for Napa & Sonoma (and probably much more) beginning 2011. Far too many are still expecting a return “to the way it was” next year. There are factors that no one wants to hear that will make the 2nd half of next year not very good and in 2011 we may be facing another round of tough times here. Unless something unforeseen happens I am confident that we must be prepared for a significant challenge.

    I am very much a “glass if half full” optimist individual but I do believe in facing realities and for being ready for barriers rather than blindly marching forward. Sounds a lot like want you have faced in AU…

    If governments stopped playing games…really let the market be free we might begin to see progress towards a balanced supply and demand curve.

    I would love to think that the crisis around the world will wake people up and that wake up call would be the prelude to progress but I think we have as much chance of that as really seeing the sky fall!

  2. i agree with Mark Norman about america’s little chickens. in addition to the economic factors he mentions there are also potential problems with american wine itself. ripe fruit, agressive wood and high alcohol typify the ‘american style’ of winemaking. there seems to be an increasing backlash not limited to the usual suspects on the east coast. i’m not advocating a particular winemaking style here (i’m a california guy myself so i’ll leave that to those with more refined tastes) but i think napa and sonoma produceres are facing an uphill battle (and watch out argentina & chile too).

  3. Pardon me, but it sounds as if you are advocating coordinated industry action to decrease output. I know nothing about Australian competition law, but in the US this is an illegal conspiracy to restrain trade.

    The “problem” of “too much” wine is of course a boon to consumers: quality wine at low prices. If a lot of winemakers are losing money, well, the answer is that the weaker producers will go bankrupt and exit the market. That’s how markets work.

    • Thanks for your comment.
      It seems to me we have a long history of restricting agricultural output to support prices here in the United States. That’s what “grubbing up” is all about.

      • I agree we have a long history of doing it, but the economic effect of restricting output is the same.

        I’d do away with agricultural price supports and farm subsidies.

  4. I can see how this might become a problem especially when you consider the fixed costs of bottling the wine and the cut that goes to distributors. We do, however, live in a mostly free economy where forces of supply and demand are meant to dictate pricing.

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