Vineyard Plague: The Dutch Disease

As if things weren’t bad enough in Australia, now there’s this: the Dutch Disease. No, it isn’t a fungus spread when you plant tulip bulbs in the vineyard or something you saw on the television series House MD. It’s much more serious than that. And it’s hitting South Africa, too. Look out!

Australia’s Perfect Storm

I’ve written several times about Australia’s continuing wine crisis. It seems like everything that could go wrong has gone wrong. Too much heat, too little water, excess capacity, collapsing demand — even smoke-tainted grapes caused by runaway brush fires. Yikes!

Now there is more bad news and it’s the result of too much good news? Good news is bad news? Yes. Read on.

The Dutch Disease is the name economists give to the problem of too much good news in one industry and its negative impact on the rest of the economy. If one sector of the economy gets hot on global markets (think oil exports, for example) one effect can be that export sales increase the demand for the country’s currency, causing it to appreciate in real terms. The rising currency value makes all the nation’s other products more expensive on foreign markets, sending them into a tail-spin.

The Good News the Bad News

That’s how good news in one part of the economy can backfire. The Economist magazine apparently invented the term to describe the dilemma of the Netherlands after a big gas field was found there in 1959.

The good news / bad news in Australia is clearly the fact that China’s economy is growing rapidly and sucking in the natural resources that Australia has in considerable abundance. But big purchases of the Australian dollar needed to pay for these products has pushed the currency up, making Australian wines more expensive here in the U.S.

This helps explain why off-premises sales of Australian wines are still falling here even though many other segments of the wine market are recovering. Recent Nielsen retail data show the U.S. wine market growing by 4.3 percent in the period ending in August, but sales of Australian wine fell by 7.5 percent (data from the November issue of Wine Business Monthly).

As the chart above shows, the Australian dollar has continued to appreciate since these data were compiled, magnifying both the Dutch Disease problem and the sense of crisis in the Australian wine industry.

South Africa Also Hit

South Africa seems to be experiencing the Dutch Disease as well. There are many factors that have contributed to the sharp rise of the Rand against the dollar, but surely the surge in gold prices must be the most important one. As speculators and investors who have worried about inflation turn to gold, their purchases have driven up the value of South Africa’s currency as well.

This helps explain why sales of South African wine in the U.S. have been in a bad slump. Nielsen data indicate that South African wine sales fell by 8.3 percent in August and by 9.4 percent in the last year.

The U.S. dollar’s rapid recent fall will affect all countries that depend on our huge markets for exports, but inevitably some will be hit more than others.  Those like Australian and South Africa who suffer the Dutch Disease will be challenged the most.

We’ve entered an era of extremely unstable currencies, reflecting both the inherent instability of international financial flows and the increasingly cut-throat battles in the global currency wars. Inevitably many industries — including wine — will get caught in the cross-fire.

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The Wine Economist 200

This is The Wine Economist’s 200th post since it began a little more than three years ago under the name “Grape Expectations” —  a good opportunity to reflect briefly on readership trends, just as I did when we passed milepost 100.

Not that kind of list!

Milepost 200

The Wine Economist has an unusually broad readership given its focus (wine economics), content (no wine reviews, no ratings) and style (most posts are way longer than is typical for weblogs).

I never expected to get millions of visitors like Dr. Vino or Gary V. and other popular wine critic sites, so I’m surprised by how many people have found this page and come back to read and re-read.

About 200,000 visitors have clicked on these links, sometimes with surprising intensity. The Wine Economist has been ranked as high as #6 in the big “Food”  category where wine blogs are filed in Technorati‘s daily ratings and as high as the top 30 in the even broader “Living” group.

Reader Favorites

The most-read articles of the last few days are always listed in the right-hand column on this page, so it is easy to see track reader behavior. I thought you might be interested in readership trends since the blog began. Here are the top ten Wine Economist articles of all time.

  1. Costco and Global Wine — about America’s #1 wine retailer, Costco.
  2. Wine’s Future: It’s in the Bag (in the Bag in the Box) — why “box wine” should be taken seriously.
  3. The World’s Best Wine Magazine? Is it Decanter?
  4. [Yellow Tail] Tales or how business professors explain Yellow Tail’s success.
  5. Olive Garden and the Future of American Wine or how Olive Garden came to be #1 in American restaurant wine sales.
  6. Australia at the Tipping Point — one of many posts about the continuing crisis in Oz.
  7. No Wine Before Its Time explains the difference between fine wine and a flat-pack  antique finish Ikea Aspelund bedside table.
  8. How will the Economic Crisis affect Wine — one of many posts on wine and the recession. Can you believe that some people said that wine sales would rise?
  9. Wine Distribution Bottleneck — damned three tier system!
  10. Curse of the Blue Nun or the rise and fall and rise again of German wine.

As you can see, it is a pretty eclectic mix of topics reflecting, I think, both the quite diverse interests of wine enthusiasts and wine’s inherently complex nature.

My Back Pages

What are my favorite posts? Unsurprisingly, they are columns that connected most directly to people. Wine is a relationship business; building and honoring relationships is what it is all about.

KW’s report on the wine scene in Kabul, Afghanistan has to be near the top of my personal list, for example. I am looking forward to following this friend’s exploits in and out of wine for many years to come. (Afghan authorities found KW’s report so threatening that they blocked access to The Wine Economist in that country!)

Matt Ferchen and Steve Burkhalter (both former students of mine now based in China) reported on Portugal’s efforts to break into the wine market there. The commentaries by Matt, Steve and KW received a lot of attention inside the wine trade, but their thoughtful, fresh approaches also drew links, re-posts and readers from the far corners of the web world.

Looking back, I think my favorite post was probably the very first one, a report on my experiences working with the all-volunteer  bottling crew at Fielding Hills winery. I learned a lot that day about the real world of wine and I continue to benefit from my association with Mike and Karen Wade (and their daughter, Robin, another former student) who have taught me a lot about wine, wine making and wine markets.

Look for another report like this when The Wine Economist turns 300. Cheers!

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Thanks to everyone who’s helped me in various ways with these first 200 posts. I couldn’t have done it without you! (Special thanks to Sue, my #1 research assistant!)

Good News & Bad News from Oz

Sometimes the good news is that the bad news could be much worse. At least that’s how it seemed to me when the wine economists met at UC Davis last week to discuss the continuing Australian wine crisis.

Kym Anderson, a leading expert, spoke about the problems in Oz at the symposium on “Outlook and Issues for the World Wine Market” and I thought his assessment of the “challenges” Australia faces was pretty grim.  Big oversupply. Falling grape prices. More and more quality grapes sold off at fire-sale prices in the bulk market (40% this year compared to 15% in the past).

The best selling white wine type in Australia isn’t from Australia any more — it’s Marlborough Sauvignon Blanc. Even the Australians are tired of “Brand Australia” Chardonnay!

Maybe, Baby

Professor Anderson looked for a light at the end of the tunnel and was able to point to some potential sources of relief. Maybe water reforms could be implemented. Maybe R&D to help the industry deal with climate change would produce results. Maybe the new export strategy to promote Australia’s regional diversity and wine families would catch on. Maybe the China market will open wider and drink up the surplus.

Since the bad news was so compellingly concrete and the hopeful notes so speculative, I took the overall forecast to be very dark indeed. Imagine my surprise, then, when I attended a talk by another Australian expert the next day who described  Anderson’s presentation as optimistic! When the good news is this bad, the bad news must be really bad.

Bad News, Bad News

Sure enough more bad news arrived shortly thereafter in the form of a Wine Spectator article, “Aussie Wine Company Faces Angry Creditor,” concerning the financial problems of The Grateful Palate group, which exports many hot brands to the U.S. market including the unlikely-named Luchador Shiraz shown here.

Trouble is brewing in Australia. The Grateful Palate’s Australian affiliates, which produce wine under labels such as Bitch Grenache, Evil Cabernet Sauvignon and Marquis Philips for American importer Dan Philips, are in receivership and face the danger of possible bankruptcy. Growers and other creditors for the South Australia-based affiliates of the company received notice on June 18. Many growers, already facing tough times, worry that they’ll never get paid for fruit they sold Philips.

Philips, the company’s founder and owner, confirmed that he is in negotiations with his top creditor, Dutch lender Rabobank, but declined further comment. The bank initiated the action to put Grateful Palate International Pty Ltd and several related Australian companies into receivership. The most prominent is R Wines, a partnership with winemaker Chris Ringland, but 3 Rings, a joint venture involving Philips, Ringland and grower David Hickinbotham, is also part of it.

This is bad news, of course, but bad news is no longer a surprise to those of us who are following the Australian wine scene. Perhaps it is really good news of a sort — an indication that the necessary industry shake out is gaining speed. Hard to tell good news from bad.

Darker or Brighter?

The same situation applies to the Foster’s de-merger situation. Foster’s, the Australian beer giant, bought into the wine business at the top of the market, paying an estimated $7 billion for an international portfolio of about 50 top brands including Penfolds, Wolf Blass and  Beringer. The investment may be worth as little as $1.5 billion in today’s market.

Foster’s beer business is an attractive target for global giants like SABMiller, but not with the wine portfolio attached. So Foster’s announced a de-merger to allow the beer group to move ahead independently of the wine group. What will happen to the wine business?  Who will buy these assets in today’s depressed environment?

When I posed this question to an Australian winemaker several weeks ago the answer came back quickly: China! Everyone in Australia is paranoid about the Chinese buying up our natural resources, and so we are convinced that they will buy up Foster’s wine business, too.

Interesting idea, I thought at the time. No multinational wine firm (Constellation Brands? Gallo?) would want to go bigger right now. But maybe a Chinese firm that wants to break into the global markets would take the bait. Might make sense. Maybe.

Bright Idea

Sure enough, the Bright Food Group. (Mission: “To build the company into a leading enterprises group in the national food industry, with famous brands, advanced technology, strong competitive power and deep influence in the world by the end of 2015.”)  recently signed a three-way memorandum of understanding with the New South Wales government and the China Development Bank to explore opportunities for the Bright Group to invest in the sugar, dairy and wine industries.

A Financial Times article reports that  the company is interested in “global top ten players in wine, sugar, food packaging, commodities and healthcare sectors.” Bright Food is currently studying both wine and beer assets in Australia, but has not decided to buy either yet according to the FT.

Many Australians no doubt consider the potential sale of yet another natural resource business to Chinese buyers bad news in terms of their economic sovereignty, but that bad news might actually be the best news they can expect given the sorry condition of the global wine market today.

Trickle Down [Wine] Economics Jitters

The stock market has the jitters these days and one of the causes is the fear that, even with massive fiscal and monetary stimulus, we may be experiencing a jobless recovery. Things looks OK from the outside (some of the numbers are pretty good), but bad things are still happening deep down where it counts.

A Wine-Free Recovery?

There is some concern that the wine economy is suffering a similar fate. Not a wine-free recover, but just not the big turnaround everyone was hoping for. Although retail sales numbers are cheerfully positive, with overall sales rising at close to double-digit rates and increases even in the $25+ “death zone” range, there’s still enough disturbing news around to give anyone the jitters.

Are jitters justified? I decided to do some fieldwork to see what I could learn about conditions on the ground in my local wine market. An upscale supermarket down the street has recently undergone a major remodel and is have a grand re-opening. One of the areas that seems to have received a lot of attention is the wine wall. Since the supermarket chain is known to do very thorough market research I wanted to see what the redesign would tell me about state of the wine economy today.

First Impressions

My initial impression was very positive. The wine wall is substantially increased in terms of the number of square feet of display space. The quality of the space is much improved, too, with the old industrial shelving replaced in part by the sort of dark wood cases and racks that you see at fine wine shops. Good news! A big investment like this suggests optimism about the future of the wine market.

A second glance provided more information. The wine wall is large enough to need directional signs to help customers find their “comfort zone” area.  Some of the signs were what you would expect: “France/Italy,” Australia” and so on. Just what you’d expect. But other signs pointed to continued “trading down.”

I found areas marked “premium 1.5 liter,” “value wines” and “box wines” and one that said simply “White Zinfandel.” It’s obvious that the marketing and design people knew that many of their customers would be looking for low cost or basic wines and they wanted to help them find them.

Box wine sales surged in the “trading down” wine economy that wine people like to think is over, but apparently isn’t.  There were a number of quality bag-in-box wines for sale in this section, which was conveniently located adjacent to the expanded take-out  delicatessen and bakery areas.

The White Zin section held both the expected Sutter Home and Beringer products plus a limited range of inexpensive domestic rosé wines and a small selection of fruit wine and fruit-flavored wines. My wine snob friends are probably shocked to learn that White Zin, the wine they love to hate  is so popular that it has its own part of the wine wall.  That would be trading down in both price and quality, they say.

Unexpected Discoveries

Now it was time to study the main section of the wine wall carefully. I was impressed by the large selection, of course. Lots of wines. Lots of brands. But some of the wines had unfamiliar labels that I think may be part of a “dumping” strategy where big producers sell off surplus wine under an ersatz value brand to avoid weakening the price position of established brands.

This is a very common practice in Australia, where the wines are sold with very generic labels. They call them “cleanskins” and I guess they are selling like hotcakes. The surplus wine, some of which could be very good, may be trickling down into a sort of  branded cleanskins market here in the U.S. But there’s another trickle down effect that got my attention.

As I surveyed the wine wall I was struck by a small number of hard-to-find or impossible-to-buy wines that were sitting quietly waiting to be found — fine wine that I suspect didn’t find a home in the usual wine club / fine wine shop / restaurant supply chain.

Since we’ve recently returned from a Napa Valley research trip, I was especially struck by the presence of two wines from Stag’s Leap Wine Cellars – their  Fay Vineyard Cabernet and the famous Cask 23. The Fay sold for $87 or $79 for buyers with the store loyalty card. Buy a case and get a further 10 percent discount. The Cask 23’s price was $164.

You can buy Opus One for $209 ($179 with your loyalty card) or Sassicaia for $245 ($213). The Chimney Rock SLV Cab that I liked a lot when I tasted it in California was a bargain at $60 ($48 with your card).

Pétrus at the 7-Eleven?

It’s hard to believe that these great wines can be found on neighborhood supermarket shelves. I could be wrong, but I suspect that they would not be found there during good economic times. But bad times drives good wines down the supply chain. That’s trickle down [wine] economics.

What’s next? Pétrus at the 7-Eleven? No, although 7-Eleven does have an own wine brand called Yosemite Road.

I’m glad there is finally good news about wine sales in the U.S., but while trading down may have stabilized I don’t think the sour economy’s effects will soon disappear. And so the trickle down effect continues. No wonder everyone’s got the jitters.

Australia: Back to Square One

I’ve written a lot about Australia’s wine crisis and for a long time I felt like Chicken Little. The sky is falling, I’d say, but Australia seemed somehow to muddle through.

There is a strong sense now, however that Australia’s crisis has arrived. (I was going to write something about Australia’s Chicken Littles coming home to roost, but it was too awful even for me.)

Sales of Australian wine are down here in the U.S., dragging down sales of Syrah/Shiraz from all places with it. It’s worse in Great Britain, Australia’s number one export market, I’m told.

Charles Gent’s article “The Writing on the Wall,” posted today on Inside Story, provides an excellent overview of the situation and is required reading for anyone interested in Australia’s wine future.

I find a number of parallels between the Australian wine crisis as explained in Gent’s article and the global financial crisis that I wrote about in my recent book Globaloney 2.0.

First, this isn’t the first wine crisis in Australia’s history. Gent writes that

Visiting an ageing Hunter Valley winery in the late 1950s, wine aficionado Max Lake was struck by a faded notice on the door, apparently dating from the Great Depression. Beneath the forbidding heading “Warning to Growers,” it read: “Owing to the dangerous position arising from Overproduction, Growers are warned against any further planting of Wine Grapes.” Beneath the text was the name of Herbert Kay, chairman of the Australian Wine Board.

Two months ago, the Wine Board’s modern equivalents slapped a similar notice on Australia’s wine producers. Issued jointly by the Winemakers’ Federation of Australia, Wine Grape Growers’ Australia, the Australian Wine and Brandy Corporation and the Grape and Wine Research and Development Corporation, the statement is more wordy than the 1930s edict, but equally blunt in its message. It states that Australia is producing twenty to forty million more cases of wine than it can sell each year, and that the current surplus stockpile, calculated at more than 100 million cases, will double in two years if current levels of production and demand persist.

A second feature is that the wine bubble (because that is what it was) had all the main features of a financial bubble including the fact that anyone who looked at it objectively would have recognized it as such. But these Chicken Littles could not compete with those with an interest in keeping the bubble growing.

The massive plantings were seen by many industry figures as a desirable and necessary corollary of the soaring offshore demand, and traditional grape growers who expressed misgivings about the rate of expansion got short shrift. As president of the Winemakers’ Federation in 1999, Brian Croser described their concerns as a “Luddite viewpoint” and called the tax scheme plantings “a great resource.”

Finally, to keep this post reasonably brief, it isn’t enough to just pull out a few vines and go back to business as usual. More fundamental reform is needed.

To go forward, it seems the industry first has to take a step backward. In other words, says Strahan, “We have to get rid of the oversupply as quickly as possible to start bringing some margin back into the business, and to start getting a connection with the consumer that is not defined by price.”

That’s not quite back to square one, but it’s close.

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Update 1/5/2010.

Decanter.com reports that Constellation Brands has cancelled 300 grower contracts in South Australia, another sign of the rapid consolidation of the wine industry down under. Decanter reports that …

Australia’s biggest buyer of wine grapes advised growers just before the New Year that they would see their contracts end after the 2012 vintage.

The company had previously given three years’ notice to more than 200 other contracted growers in December 2008.

The decision has come at a time when growers in the region are facing plummeting wine grape prices.

In some cases growers are being offered up to 50 per cent less for their grapes than in 2008, according to figures released by Constellation and other major wineries in December.

Anatomy of Australia’s Wine Crisis

Australia’s wine bubble seems about to burst (as I reported in my last post) and a number of observers have jokingly compared it to the global economic crisis.  You have too much wine? Ha! We have too much bad debt! Shall we swap problems?

Since I’ve just written a book about about the financial crisis (Globaloney 2.0 — it will be out in December 2009), I started to wonder if I could learn anything by seriously comparing the two crises. Here’s a first draft of my report.

This Time is Different

One of the arguments I make in Globaloney 2.0 is that financial investors and speculators convinced themselves that their risky, highly leveraged holdings were really “safe as houses” (irony intended).  Although they saw the bubble building and realized that bubbles often burst, they convinced themselves that “this time is different.” (They always do this, as a new book by Carmen Reinhart and Ken Rogoff makes clear.) It’s what I call Financial Globaloney.

Their false assessment of risk (which created  moral hazard, which encouraged even riskier behavior) combined with leverage and liquidity to produce the boom and bust we are living through just now. Booms and busts are a persistent feature of financial markets and we shouldn’t be surprised when they come ’round again. This time is not necessarily different. Is the same true for wine?

The Twenty Year Wine Boom

Everyone knows about Australia’s recent wine boom and its imminent bust, but it is important to put these events into a broader context, to understand that the present crisis is nothing new. University of Adelaide Professor Kym Anderson’s 2004 book World Wine Markets: Globalization at Work tells the story.

The current Aussie wine boom began in the mid 1980s. Wine production had closely tracked slowly growing domestic demand for the forty years after World War II (Australia was a net importer during this period), but began to rise dramatically after 1987.

Changes in retail sales laws in the UK transformed the wine market there (I wrote about this in an earlier post). Supermarket chains became mass market wine sellers that searched the world for good value product to fill their shelves and own-brand bottles. Australia stood ready to answer this call. Wine was identified as a key potential export industry. Private and public resources were organized to support and expand it. Vineyards and cellars started to grow to meet rising export demand.

A number of factors contributed to the boom, including liberal trade laws, increased international investment flows and of course the French Paradox findings that made red wine popular for reasons of health. Here in the US the partnership between the Casella family of Australian winemakers and the Deutsch marketing/distribution family firm produced the Yellow Tail phenomenon, which helped create what we now call Brand Australia. The high ratings that Robert Parker and others gave to Australian fine wine didn’t hurt demand, either.

Vineyard area doubled then doubled again over the 20 boom years (see brief data appendix below). Since domestic demand did not increase nearly this fast exports had to rise, and they did. It must have seemed that the global markets could and would absorb any amount of wine, an attitude that encouraged further investment. This belief in infinite world wine markets gave investors confidence to make what might otherwise (or with hindsight) be seen as quite risky investments. Thus a classic bubble was born. Parallels between the wine bubble and the mortgage credit bubble are easy to see here.

The level of output was unsustainably high given modest Australian consumption, rising production costs, realistic limits to global market growth and increasing international competition. Recent problems such as drought and recession-induced collapse in demand for high priced wine may have triggered current crisis talk, Australian wine was already at the tipping point,

Not So Different: Australia’s Wine Bubble History

This is not the first time that Australia has experienced wine boom and bust. In fact, according to Professor Anderson, this is the fifth time Australian wine has experienced a wine boom.

The first boom (1854-1871) was driven increased domestic demand and ended when over-production caused prices to collapse. A gold rush brought lots of thirsty prospectors and business people to Australia (as happened in California a few years before), inflating a wine bubble. Protectionism abroad and high shipping costs limited export potential so when domestic demand stopped growing the over-sold market tumbled.

The second boom (1881-1896) like the current one was more export driven. Wine exports increased by 23 percent per year due to a combination of factors including liberal trade regimes abroad and preferential access to the key British market.

The third boom (1915-1925) was, like the first, internally driven but with an emphasis on supply over demand. Government policies and incentives combined with irrigation-generated high yields contributed to over supply. Wine production rose 12.7 percent year year during this decade — hard to support that kind of compound growth.

The fourth boom (1968-75) was mild by comparison and followed 20 years of much slower postwar growth. A number of factors contributed to the rising market including income growth, changing consumer preferences and improved wine marketing programs. As in all the other cases, the market soared until the momentum ran out and then slumped as prices fall back to earth.

So wine booms are nothing new for the Australian wine industry. Each boom was different in the details, of course — so “this time is different” is not entirely a lie —  but similar in the overall pattern and final result. No wonder, writing in 2004, Professor Anderson asked “… the obvious question of whether Australia’s current wine boom is to be followed by yet another crash. at least in wine grape prices if not in wine production and export volumes.”

Past as Prologue

Re-reading Kym Anderson’s essay today, five years after its publication, I am impressed by his foresight.  Anderson found several hopeful factors in the current boom — reasons why this time might be different — but everything about the essay is really a warning not to ignore the lessons of history.

Anderson’s concludes with a rather serious analysis what Australia needed to do to make its growth sustainable. The analysis was wise in 2004 and still looks very much on the mark today, although the problem is obviously deeper now. It is recommended reading for wine people in Australia and everywhere else, I think.

Wine and finance are very different economic sectors, but there are some parallels — cycles of boom and bust, for example, and a tendency to assume “this time is different.” I hope both industries take advantage of the opportunity the current crises present to rethink, relearn and restructure. If they don’t — if they simply reload —  then I think the next crisis won’t be far away.

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Here’s a bit of data to flesh out the story, taken from The Global Wine Statistical Compendium 1969-2005. Data are for Australia in 1995 and 2005.

  • Total vineyard area increased from 73,000 hectares to 153,000 hectares. Vineyard area roughly doubled between 1985 and 1995 as well.
  • Grape yield rose from 10.5 tonnes per hectare to 13.2 t/h.
  • Wine grape production rose from 577,000 tonnes to 1.8 million tonnes due to the combination of greater vineyard area and higher yields.
  • Per capita production rose from 27 liters per capita to 71 l/c.
  • Per capita consumption rose from 18 liters per capita to 22.5 l/c. That leaves nearly 50 l/c for export markets.
  • Total value of exports increased from USD 301 million to USD 2.129 billion. All that increased production had to go somewhere.
  • Average unit value of bottled wine exports rose from USD 3.04 per liter to USD 3.65.  New Zealand was getting more than USD 6.50, however.
  • Average unit value of bulk wine exports fell from USD 1.12 per liter to USD 1.04.

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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