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McKenzie, Strachan respond to Australian winegrape harvest forecasts

In today’s service, Daily Wine News presents the comments regarding the current 2009 Australian winegrape harvest forecasts from Wine Grape Growers’ Australia executive officer, Mark McKenzie, and Winemakers’ Federation of Australia chief executive, Stephen Strachan, in response to the Friday Forum published on 10 October.

Stephen Strachan: Market forces a major factor in winegrape supply needs

I concur with the majority of the views expressed by Paul Clancy. Australia's vineyard capacity significantly exceeds market demand for established, viable brands. The drought, and in particular the reduced water availability along the Murray-Darling Basin have given the industry some welcome respite (though not for the growers affected), and winery stock levels are not at the debilitating levels being experienced up until 2006. However, if we do not see our industry's vineyard area diminish substantially, we run the risk of returning to those excessive stock levels quickly.

Whilst everybody is grappling for solutions, I think it would be unwise to reject the important role the market will play in the eventual outcome. Don't forget that market forces means a radically higher price for irrigation water. And it means that wine companies will reduce their exposure to low profit sales, which we know has happened this year for all of the major companies. There are some radical changes happening in the market right now, and they will put substantial pressure on viability for many grapegrowers (and wineries that don't adjust). I think that the adjustment will happen, but that it will be slow and difficult.

Mark McKenzie: Too early to predict vintage outcomes and over-supply

It is true that the Australian wine industry is capable of producing 2.2MT if all vineyards currently in the ground produced high yields. However, it needs to be acknowledged that the likelihood of that figure being realised in the near future is very uncertain given the various challenges currently confronting the nation’s grapegrowers — not least of which is the ongoing drought and the supply of water for irrigation in the two major production zones. It is simply too early to make definitive predictions of the size of the 2009 vintage or following vintages, and their impact on the wine stock position and grape prices. The early predictions of a very low 2008 crop are proof of the inaccuracy of recent predictions. For that reason, Wine Grape Growers’ Australia (WGGA) believes those wineries already predicting a massive vintage as a means to push down grape prices are being less than honest with their growers.

This season, water supplies in both the Riverland and the Victorian side of the Murray Valley — which accounts for two-thirds of that region’s production — are worse than they were last year. Given the ongoing drought conditions occurring in south-eastern Australia, we’re unlikely to see a return to ‘normal’ water supplies in these areas beyond 2009 which will keep a cap on their production potential.

The 2008 vintage was larger than expected, primarily because the industry did not predict the extent to which growers in the Riverland and Murray Valley would purchase extra water – across both regions, at least $75m, most of it borrowed, was spent on buying 120GL. Clearly, wineries don’t want another large vintage in 2009 so are not likely to give an early indication of their prices for the coming vintage because it will encourage growers to buy additional water, as they did last year. Growers reliant on banks and other financial institutions to finance water purchases are unlikely to be successful in their loan applications without indicative grape prices. The production capacity of these growers will, therefore, be significantly curtailed without access to additional water to produce a commercial crop.

Furthermore, it appears there are a large number of growers who have exhausted their financial resources to buy additional water. This is supported by the fact that 50% of growers in Riverland and Murray Valley did not purchase any carryover water at the end of last season. These growers will therefore be reliant on their limited water allocations and the ability of these growers to produce commercial crops is, again, very uncertain. What is likely is that when faced with putting valuable water on Chardonnay or a more desirable red variety, growers will minimise their Chardonnay production. With 40% of Murray Valley and 30% of Riverland plantings being Chardonnay, this could have a marked impact on regional yields.

We still have a long way to go before we see the real potential of the 2009 vintage. What will be the effect of the above average temperatures predicted for this summer by the Bureau of Meteorology? Will the signs of a good start across many regions produce average crops if the weather stays dry and turns unseasonably hot?

For all these reasons, we must be careful not to overstate the potential for over-supply in the Australian wine industry, even though we acknowledge that our vineyard infrastructure could have the potential to produce 500,000t more grapes than we currently need if water availability and seasonal conditions align – based on a required vintage of 1.6MT to replace the current level of annual sales. What the effect of the dramatic fall in the Australian dollar will be on export markets, how consumer spending may be affected by worldwide financial turmoil, or how rapidly Australian wine exports may bounce back are all unknowns. Like the size of coming vintages, it is just too early to predict.

WGGA acknowledges that there are structural issues within the industry at present resulting in an over-supply of some cool climate fruit and Chardonnay. But in general terms the overall supply/demand position remains relatively balanced, as the 2008–12 Australian Winegrape Outlook paper, released earlier this year and subsequent revised estimates based on the higher vintage 2008 production, have confirmed. Industry stocks are still in the comfortable overall range – and are nowhere near the high levels we saw in 2006 – albeit white stocks have been pushed up to a less comfortable position by the extra Chardonnay taken last vintage and sales slowdowns.

WGGA’s response is to closely monitor and advise the winegrape sector on the supply/demand position for 2009 as it becomes clearer, and refer the very important issue of structural imbalances and future strategic production planning for the industry to the new WGGA/WFA Peak Industry Policy Council.

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