If You Think Making Wine Is Tough in the Sahara, Try Siberia

It seems like every second newspaper article is predicting doom and gloom for the Australian wine industry in general and the growers in particular, especially over the next eighteen months. Although these comments have been made for ages, in the last couple of months they seem to have become more prolific. Add in the current vintage and predictions are that by the end of the 2006 harvest, there could be as much as 1,000,000,000 (that’s one billion) litres of wine sitting idle in tanks.

By anyone's standards, that's one heck of a lot of wine that needs to be sold and it's not going to be easy! Over the last five years, wine consumption in the rapidly growing US export market has increased by 31%; we may have knocked off the French and control 20% of the all-important UK market, and over the past 12 months local consumption has increased, but only about 2- 3%:  unfortunately these factors are not going to come within a bull's roar of solving the oversupply problem. In fact export growth is slowing down. Three years ago export growth was 24% and although it was almost 15% last financial year, this year it is predicted to be around 9%. Although Australia has a massive problem, and in many ways our own making, we are not the only ones with problems. French wine prices are collapsing in its export markets, and they have their own hurdles to overcome.

How we managed to get ourselves into this position is very simple. In the 1990s, in an endeavour to increase plantings, which would eventually assist exports, the government provided a tax break to people planting vineyards. No one's wildest dreams anticipated the phenomenal take-up of this scheme, which has now become many a grower's worst nightmare.

In the 1980s, and that was only 20 years ago, overproduction was so bad in the wine business, the government was paying people to pull out their grape vines. In the 90s they were subsidising them by way of tax breaks to plant more vines and now, there are calls to go full cycle and sponsor another vine pull scheme. Things are so bad in the Riverland, that to grow and harvest one tonne of grapes in the region costs about $350, but winemakers were forecasting being paid as little as $100 a tonne this coming vintage. Although many pundits feel the oversupply problem will start to reduce in 18 months, growers in the Riverland anticipate that at least 25% of the growers are running unsustainable businesses, and the situation will continue to be that way for five years.

To try and alleviate the problem, all sorts of suggestions are being bandied about. The latest suggestion is to turn excess wine (alcohol) into ethanol. I'm sure the sugar cane farmers, and those who are involved in the ethanol industry, who are desperately trying to gain acceptance for their product, would be turning hand-stands over the suggestion: throwing up would be more like it, as there is not a shortage of raw material for ethanol, the problem is with the acceptance of the product. The ethanol industry has even more problems in the wine industry! Talk about piling on disaster upon disaster!

Let's make no mistake about it; growers are the ones who are in serious trouble here. Some wineries, notably McGuigan-Simeon have been walking away from contracts and leaving growers with a massive hangover. It is possible that legal action will be taken against McGuigan-Simeon and this part of the saga could continue for some time. One thing for sure, this particular company has received lots of bad press, but has it engendered even more bad feeling amongst growers. Eventually the tables will turn full circle again, and when there is a grape shortage, the boot will be on the other foot, and McGuigan-Simeon may find the said boot firmly planted in their corporate backside, with the compliments of many growers.

When there is oversupply prices fall, and it is not just the growers that feel the pain. Wine producers will also be hit and according to recent news reports, many of the $20 price point wines are expected to drop to $15, whilst $15 wines will cascade to $10 a bottle. Seventy percent of wine sold in Australia today cost less than $10 a bottle already.

Whilst the information above applies to all Australian wine regions, many of the press links are referencing the Riverland, which is the heartland of the Australian wine industry. So why the emphasis on the Riverland? Simply, the Riverland represents 60% of South Australia's total wine production, which equates to approximately 30% of the country's total production; and here is a statistic that is even more astounding: when you add in the other two hot, irrigated winegrowing areas of the Riverina and Sunrasia, the big three (heartland regions) account for approximately 62% of the total wine production in Australia today.

According to the South Australian Wine Industry Association, the greatest growth in sales is in the generic sector, i.e. wines that retail in Australia for less than $10 a bottle. Most importantly winemakers have a preference for fruit from the hot heartland regions as it meets the price point and flavour profiles they are looking for.

The local market is not the only area where the low end of the market dominates. Five years ago, 65% of our exports were for wine that cost less than $5.00 a litre f.o.b. Last year, that number had grown to 75%. At the very bottom end, wine that costs less than $2.50 a litre f.o.b. has grown from representing 16% of our exports in 2000 to a staggering 23% in 2005, that's almost 50% growth in that, the lowest sector.

Whilst we are looking at exports, in 2002 we exported 164 million litres of wine in the above five dollar a litre f.o.b. category. That number increased to 179 million litres in 2003 but frighteningly, by 2005 the number had dropped down to 163 million litres.

The dominance of the low-end of the market is incredible when you consider these statistics and the effects do not stop there. Bear in mind, approximately 60% of our wine grape production comes from the heartland regions and the other 40% from the warm to cooler regions. Here is a frightening statistic. Although the premium, warm to cooler regions represents 40% of production, they are currently only accounting for an estimated 20% of retail/export sales.  The balance of this production is either sold locally, unsold, or being sold at very low prices, to be blended in with the heartland style wines that retail for $10 a bottle or less.

So whilst the premium growing areas, like Margaret River, Coonawarra, the Barossa, the Yarra Valley, the Hunter etc are growing 40% of the grapes, only half of those grapes are being sold as premium wines. The following chart details the latest industry estimates of wine sales relative to production.

 

	Three Heartland Regions	Warm to Cool Climate Regions
2004-5 (in millions of litres)
Production	869	464
Disposed - sold etc	800	263
To stock	69	201

As a percentage of production, the heartland regions look like being able to dispose of 92% of their production whilst the premium growing, warm to cool areas will only managed to shift 56% of their production.

(It should be noted there is still a requirement for top end wines and whilst this represents a very tiny percent of the market, the biggest problem in this sector is obtaining grapes of sufficient quality.)

Relatively speaking, the bottom end of the market is faring much better than the premium end, although if you read the press reports, much of the "complaining" is from growers in the heartland regions, which appear to be the least affected. Possibly this complaint is because they are losing some business to the premium growers, who have been forced to provide higher quality grapes at a ridiculously low price, because it's better to get something than to get nothing. Alternatively, their complaints may be because all grape prices are depressed.

The cost of producing grapes in the premium, warm to cool regions is higher than the heartland regions, so naturally producers in the premium areas need a higher return for their produce. Whilst domestic consumption rises by around 3%, and exports increase by 9%, the problem facing growers and producers will remain for some years, especially in the premium grape districts.

Is it any wonder that you see reports like this one that state half of the wineries in the Adelaide Hills region lost money in the 2004-05 financial year.

So if the growers in the hot irrigated heartland think its tough, they are lucky by comparison to those trying to grow grapes in the cooler regions.

(What can be done about this problem? That could be the subject of another very long story, and many minds far greater than mine are working trying to solve it.)