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Industry must unite to address over-supply crisis
Written by Paul Clancy Chairman Wine Grape Council SA
Editorial panel member: The Australian and New Zealand Wine Industry Journal, published by Winetitles.
There is no doubt that the Australian wine industry is facing its most significant challenge since its expansion in the 1990s, when it evolved from a relatively small producer in international terms to its position today as the sixth largest producer and top four exporter in the world.
That challenge is the massive over-supply of winegrapes — of a magnitude of at least 25%. No agricultural industry can prosper with a supply/demand imbalance of that size. It is imperative that all sectors of the industry acknowledge that the massive over-supply is affecting the whole industry — winemakers and growers — and that both must work together to develop strategies to haul in the devastating imbalance.
The Winemakers' Federation of Australia (WFA) has repeatedly stated that the industry requires no more than 1.6 million tones (MT) of winegrapes each year to meet current market demand and projected growth over the next few years.
In 2006 the industry produced 2.1MT. In 2008, despite the impacts of drought and irrigation water restrictions, the industry produced 1.83MT. With significant new plantings over the past four years — and continuing — it is clear that the industry is capable of producing at least 2.2MT, an over-supply of more than 500,000t.
However, for the next two years at least, the situation is actually much worse than this. The larger than expected 2008 vintage has blown out wine stock inventories to an estimated 250m cases. Larry Gandler, an industry analyst at Credit Suisse, estimates total demand, export and domestic is running at about 125m cases per annum and it is generally agreed that an ideal wine stock inventory should be about 1.5 times future sales — or around 195m cases. This means that because of the current high wine stocks, the industry probably only needs around 1.2MT for the next two years. While the drought and water restrictions may deliver such low vintages (I would say that is unlikely), this only further emphasises the size of the problem the industry faces when conditions return to ‘normal’.
The industry is being crushed under the weight of the 500,000t over-supply. A supply/demand imbalance of that proportion has collapsed grape prices and made grapegrowing uneconomic for many growers in almost all regions. The massive grape over-supply is also severely impacting on wine producers because it has anchored the industry at the bottom end of the popular premium wine market sector — the major consumer sector and the only sector large enough for significant growth opportunities for exporters.
The over-supply and the resultant cheap fruit (unsustainably cheap for growers) have meant that Australian wine producers, instead of moving up the price scale of the popular premium market sectors (where it is more profitable) have been anchored at the bottom end. The cheap fruit and the cheap wine made from it, has caused Australian wine producers to cannibalise each other in the market. Some opportunistic wine producers have taken the path of least resistance to market and inhabited the lower end of the price sector. It is easy to sell one-dollar notes for fifty cents.
There is nothing to be gained by the industry — winemakers or grapegrowers — seeking to find scapegoats. In the 1990s boom period, both sectors grossly over-estimated the market opportunities for wine above the popular premium market points. What caused that gross over-estimation, which now blights the entire Australian wine industry, is history and the challenge is not to find who to blame, but for the industry to acknowledge the scale of the crisis it confronts and to develop, in a collaborative way, some strategies and policies to address the crisis.
To the eternal regret of growers, their efforts in 2006 to have the over-supply acknowledged as a grave threat to the industry, requiring immediate action, were ignored. Early in 2006 growers agitated for a national summit on what they believed to be a crisis point for the industry. Eventually the Federal Government convened a summit in July 2006 in Melbourne but it was clear from the outset that it was doomed to failure. The decision of the summit was to do nothing "and let market forces play out". That decision has merely delayed what must now be addressed. Two years have been wasted.
While the Federal Government transition packages, to assist smaller Murray Darling Basin irrigators to exit the industry, will have some impact on the over-supply — certainly the packages are likely to reduce the amount of ‘warm-climate’ fruit on offer — a negative impact may be the exacerbation of the structural imbalance of warm and cool-climate fruit.
I am unsure if the oft-quoted numbers — that cool-climate regions produce 40% of Australia's winegrapes but only 20% of demand in the supply/demand equation — are still accurate (it may have worsened in recent vintages), nevertheless, it is obvious that much of the over-planting has occurred in the so called ‘cool-climate’ regions and grape production in many of those regions is far in excess of demand.
It is known that a number of the larger wine producers entered into contracts of up to three years with cool-climate growers prior to the 2008 vintage as a strategy against what they wrongly assessed as a significantly lower yield in the drought affected warm regions. Clearly, these contracts, for more expensive fruit, are at real risk of not being renewed as conditions improve in the inland areas.
There is little doubt that the over-supply pain, born mostly by warm inland growers in recent years, will be shared more broadly in the years ahead as the reality of where the over-supply actually exists is driven home.
The magnitude of the problem for the industry cannot be overstated. For example, a 500,000t over-supply roughly equates to 95,000 excess acres of vines — one in every four rows of vines is surplus to requirements. It is the equivalent of five Barossa Valleys.All this will be compounded by the flagged reduction in overall wine production by several of the large wine companies that dominate the Australian industry. The industry has become too concentrated at the big end, and decisions taken by one or two companies can now have a profound effect on the whole industry. The consolidation of the industry into a handful of massive wine companies has not necessarily been a healthy development.
While it will rankle, it must be said that the industry currently lacks strong leadership and vision. The Australian wine industry was noted for its innovation and leadership but now it is an industry of followers and functionaries. As people across the industry, wine producers and growers, look up from their bilge pumps and bailing buckets they see no-one on the bridge.
The strong, visionary leaders such as John Pendrigh, Ian Mackley, Brian Croser, Perry Gunner, Stephen Miller and Philip Laffer, who helped steer the industry into its modern evolution as a successful global player in the world wine industry, have mostly gone and seem not to have been succeeded.*
For the industry to extricate itself from the critical factors impacting on its viability, strong, decisive and visible leadership will be required.
Sustainability is not just a buzz-word.
The free market attitude and do nothing resolution of the 2006 summit is no longer acceptable. Today, the community demands a more compassionate and responsible attitude from industry. It expects an industry to adopt the principles of triple bottom line reporting where consideration extends beyond economic return to cover issues of equity, justice and responsibility. The wine industry must accept that reporting on environmental and social impacts as well as economic impacts is now the way of the future.
For example, the amount of our precious water resource, no matter from which source, which is being used to grow a 500,000t surplus of winegrapes which is not required, is environmentally unjustifiable. Equally the social havoc being wreaked in rural communities affected by the over-supply is not acceptable.
The social and environmental effects of the over-supply are immense and the industry must be seen to be taking action to reign it in.
Just how the industry can come to grips with a problem of this size is a question that will require a great deal of consideration before it can be answered.
However, an answer must be found. An over-supply of such proportion will keep the industry anchored in a place it should not be. History has shown that the industry prospers best when there is a slight under-supply.
We are a very long way from that scenario.
* It should be noted that during the period of explosive growth and evolvement of the wine industry over the past 20 years there has been virtually no leadership at all from the grower sector. Growers have been largely unorganised and uncoordinated apart from a relatively brief period when the Wine Grape Council of Australia represented growers Federally. Growers have played little part in whole of industry policy and strategy development. This weakness should not be underestimated in any analysis of the industry's current predicament. Growers have a lot to blame themselves for.
Book your place at the Australian wine industry’s premier conference Outlook 2008 Winetitles is once again pleased to partner with the Winemakers’ Federation of Australia to sponsor the 2008 Outlook Conference, being held in Sydney on 13 November, themed, Striking a sustainable balance.
For Outlook Conference registrations visit www.wfa.org.au
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