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In the Rabobank Wine Quarterly: Trends and outlook for the international market, food and agribusiness bank Rabobank reports on the Australian wine industry’s current challenges. In the Rabobank Wine Quarterly: Trends and outlook for the international market, food and agribusiness bank Rabobank reports on the Australian wine industry’s current challenges. Report co-author and Rabobank senior analyst Marc Soccio says the Australian wine industry has found itself in a predicament, where, although growers are beginning to remove vineyards from production to ease the situation of oversupply, further adjustment is required for the industry to return to balance. “Furthermore, the pace of vineyard removal in the temperate climate regions where the supply/demand imbalance is most acute, has been particularly slow,” he said. “More is needed, particularly in these regions which are less price-competitive in core markets.” A victim of its own success The report says the Australian wine industry’s value proposition has been steadily diluted over time in global consumer markets. The dramatic increase in local wine production, combined with growing competition from other countries pursuing the Australian export-oriented model, has steadily driven down prices for Australian wine on the international market and made it nearly impossible for ‘Brand Australia’ to transition to higher value price points. The dramatic growth in supply from Australian temperate climate regions with higher production costs unfortunately coincided with a decline in average export prices and left a growing proportion of the industry unable to remain profitable. The Australian domestic market has also shown limited capacity to accommodate industry growth. Evolution of wine commodity markets The report says Australian wine is increasingly becoming commoditised in bulk and popular premium markets. Australian bulk exports to the United States rose 252% in 2009, according to US wine consultancy firm Gomberg-Fredrikson & Associates, as US-based wine companies sought to satisfy the growing demand for inexpensive wines as a result of the recession. The growing commoditisation of popular premium wine pitches Australian suppliers directly against lower-cost foreign competitors, with margins heavily exposed to currency movements. “As only growers with access to irrigation in the warm inland regions can profitably grow grapes for commodity bulk wines, Australia must seek to limit its long-term participation in bulk commodity markets to opportunistic occasions,” Soccio said. Australian production outlook 2010 The report says preliminary estimates are for the Australian 2010 wine grape crush to fall at least 15% on 2009 levels to below 1.5 million tonnes. While this expected decline is likely to take pressure off wine inventories and bulk wine trade flows in 2010–11, average export unit values will continue to be pressured by sluggish consumer discretionary spending and a high Australian dollar in key markets. “The light crop projections for 2010 have failed to improve grape prices for growers which have again declined in step with wine prices in end markets,” Soccio said. “Export prices for Australian wine remain under pressure from continued price sensitivity among consumers and the continued strength of the Australian dollar.” Soccio says while the removal of vineyards is necessary, this action alone will not solve all of the Australian wine sector’s woes. “The need for sustained investment in brand building in the industry is paramount,” he said. “New market opportunities are being explored with greater purpose and going forward; marketing can provide an avenue for renewed industry growth.” International supply The report says Australia’s challenges are felt by the broader global wine market, with 2009 having been a difficult year for nearly all exporters, especially France and Spain. However, Soccio says the entire crop across new world wine producers of the southern hemisphere is looking light, and some pricing pressure could be taken off global markets in 2010–11. “This is particularly timely as we are starting to see some initial signs of life at the higher price points in the US,” he said. “Official results are not yet in for many countries in the southern hemisphere, but for the industry as a whole, this light, good-quality crop should be seen as good news that it may help to address the global supply imbalance.” Rabobank Australia & New Zealand is one of the region’s rural lenders and a provider of business and corporate banking and financial services to the food and agribusiness sector. The bank has 83 branches throughout Australia & New Zealand. Visit www.rabobank.com for more information.