Screw Thy Neighbour and Screw Thyself

For the wine industry to prosper, it needs a healthy viticultural industry in which growers can produce premium grapes and gain a reasonable return for investment.

Countless times you will have heard the old adage “great wine is made in the vineyard” and it is oh, so true. As a generality, most wine-lovers will agree that vines at the peak of their life cycle and older, produce the best grapes. You can get a few good vintages from young vines but usually the top producers prefer to work with established, older vineyards.

Due to the tax breaks allowed with there has been an exponential increase in grape planting over the last decade or so but it will take years for most of these planting to reach their full potential. In recent times, there has been a glut of grapes in the good vintages like 2002 and especially 2004. In fact, the industry reached its 2025 production target in 2002! Working on the very reasonable law of supply and demand has meant that many growers have felt the financial squeeze when trying to sell their grapes. Indeed, some varieties were at give-away prices last year and some growers got not much more than it cost them to harvest the grapes.

In September 2004, grape growers won a court battle against BRL Hardy over grape prices paid by BRLH stemming from the 2002 vintage. In essence, BRLH did not honour the “advertised” or agreed price. Constellation, which now owns Hardys’ is the world’s largest wine company, (it has just got even bigger with the acquisition of Robert Mondavi Corporation) and like the next biggest three or four producers in Australia has very limited vineyard capacity and buys in a large percentage of their grape crush.

From their perspective, it makes economic sense as they do not want massive capital tied up in land and the associated expense of permanent staff to manage and work the vineyards.

As well as the court battle, or possibly because of it, there are all sorts of rumblings about “growers being screwed by the large companies” so I did some research to get the facts and who better to provide them than the largest viticulturalist in McLaren Vale, David Paxton of Paxton Vineyards which owns about two hundred acres of vines and manages many hundreds more.  

According to David, “The increased plantings have hurt many growers, both large and small but it is not just a simple case of supply and demand. The root of the other problem is that some of the fruit produced against contracts in 2004 was not up to scratch; the quality simply was not there. The low quality has come about from:-

• viticultural inexperience

• incorrect varieties planted

• planting in the wrong place

In the process, a lot of genuine quality growers, both large and small, have been hurt as the large companies have lashed out to minimise their exposure to contracts which they see as onerous. In many cases the large companies have a respectable argument and whilst there has been fault on both sides, there has been an element of bad behaviour from the buyers who have gone in wielding a big stick.”

When I asked David if, under those circumstances the buyers have been playing fair, he said, “No, they have been playing extreme hard ball and have been using unnecessary ‘tugs’.”    

Being realistic, the large companies have one over-riding objective, to achieve the highest possible return to their shareholders and in many large companies the senior staff have part of their remuneration package based on the quarterly (or annual) profit the company achieves. Frequently, there are also share options attached to the senior executive packages which are geared to the share price too. This manifests itself as “bean-counter mentality” where short-term profit over-rides most other considerations. As a result, if in the short term the accountants can save the company a few bucks on grape prices, they will do so. Many readers will think that situation is purely market forces at work and if there is a glut of grapes why shouldn’t the wine producers (both large and small) screw the growers for the lowest price? The answer to that question is simple, if you screw the grower, in the long term you wind up screwing yourself.

Reid Bosward of Kaesler Wines explains why. “A low grape price encourages increased production and quality suffers. Why do I say this? If they are established growers, they are used to a certain level of income, and if they are newer growers, they have a certain level of expense which needs to be met, or they will go out of business. If growers are not achieving a reasonable return per ton, they will simply use more water, grow more grapes on the same land/vines and quality will suffer.

The way it works now is: the large companies pay a base price per ton and a bonus if the grapes are at an acceptable level of quality, but there is no defined rational basis to measure that quality level. How do the growers know if they should get the bonus or not? They don’t, because under this system, they are at the mercy of the buyers.”

According to David Paxton, “When looking at this picture, the market trends needs to be examined as it is having a big impact on grape prices. We are fortunate in Australia that the US has been taking so much of our production but since 9/11 what is happening at the bottom end of the market is scary. With the success of Yellow Tail, most of the Australian-based major producers are trying to jump into the bottom end of the market in a big way. Producers who are supplying the bottom end of the market are doing OK. Likewise those with niche markets are also surviving. Cool climate wines are suffering. The finished super-premiums wines are currently harder to sell (especially overseas) and there is currently a short term problem with oversupply of these grapes which has lowered grape prices. Don’t get me wrong, the demand for these super premium grapes is still strong but the fruit must be top notch.”

The drive by the major producers for market share at the low end of the market is a concern, especially if it causes a loss of focus at the higher end of the market and I fear, for a number of reasons this will happen. However, assuming the major players still wish to succeed in producing top-end wines, then in the longer term they may find it difficult.

Simply put, the current oversupply of top end grapes is a temporary one. There is a finite and limited amount of top quality older material available and in the long term, the large companies are going to have difficulties in obtaining top quality fruit from older vines.

How many times have you seen a new label or brand that pops out of the woodwork that no one has every heard of and it becomes the darling of the wine press? I have lost count of the number I have written up. In many cases, these new boutique hits have been produced by long term growers that are now holding back some of their best fruit from mature vines and making their own wine. As their brands take off, they will not renew their contracts with the people they were supplying, in most cases, the major grape buyers.

In my travels, I keep hearing well-respected, small producers raving about the latest win they have achieved in gaining access to old vine fruit that used to go to one of the major companies. If the major producers keep losing access to this fruit, in the long run they may find it increasingly difficult to make great wine.

The growers of this old vine material have something very special; by definition it has a finite quantity and continuity of supply from the same vineyards is required if the winery wishes to make consistent great wine year in and year out. (On the other hand, if all you want to produce is “manufactured ordinary wine” than access to this material is not necessary.)

In the words of Reid Bosward, “The best wines are from people who grow for themselves but not everyone can do that so the next best alternative is to mimic that relationship. Treat people the way you would like them to treat you. The way we do it is to negotiate and agree on a long term flat price. In some years it is good for us and in some years it is not so good but over ten years it balances out and it encourages stabilised, quality production.

Have a look at the likes of Rockford, Melton and Lehmann who all have fantastic long term relationships with their growers. Even if a many of these growers were offered say, $10,000 a ton for their grapes because they were going into Grange, most would decline the offer and remain loyal to maintain their long term relationship. Torbreck is even more extreme in the prices they pay but Dave Powell demands top quality fruit and does not want vintage variation affecting the quality of his wine.”

Dave Paxton expressed similar sentiments but went on to explain further. “Currently, there is a vague strengthening of the market. There will be a shortage of top grapes within four or five years and now is the time to build fantastic alliances and relationships. It could be easily done by saying for example, ‘we can’t pay you as much as you would like now, but how about a situation where prices increase by a fixed percentage over time?’

The big companies have trouble with relationships. In some cases the decisions about grapes are made by a person sitting in a corporate office in another country and that does not foster relationship building. The big companies are terrified to commit themselves.”

On this point, Reid agrees. “It’s not surprising they are shit-scared to commit themselves to relationships with growers when you see the financial mess some of them have got themselves into. Growers have long memories and will kick back hard when the pendulum swings the other way.”

Dave then went onto talk about the future too. “There are fantastic opportunities for some of the smaller players to move up, the likes of d’Arenberg are doing it beautifully and believe in strong relationships with their growers.

The majority of growers are heroes, absolute heroes. It is the zeroes that are the problem, the ones who are overextended, have no contracts or contracts that were written in absolute desperate need.”  

The viability of growers is essential to the wine producers and there is a symbiotic relationship that must exist between the two. If the grower gets screwed in the process then one of two things will be the result; either or both of them will result in the producers winding up screwing themselves. Either a significant quantity of the grapes produced and offered for sale will be of a lower quality and/or in time, the buyers will find it increasingly expensive and difficult to obtain good fruit. Screw your grower and screw thyself!