More than one-sixth of Australia's vineyards are unprofitable and the country's wine supply exceeds demand by more than 20 percent, according to a frank new report from the nation's leading wine-trade organizations. Drastic action is needed, the groups conclude.
After decades of industry growth, Australian wine is now facing some of the same oversupply issues as European producers. The groups’ report, the “Wine Restructuring Action Agenda,” suggests that the industry is suffering through its toughest period in two decades. Released to winemakers and grapegrowers in November, it was compiled jointly by the Winemakers' Federation of Australia, Wine Grape Growers' Australia, the Australian Wine and Brandy Corporation and the Grape and Wine Research and Development Corporation.
The report highlights the country's annual surplus of more than 100 million cases of wine, suggesting that this will more than double in two years at current rates of production. That excess is equivalent to the country's total sales to the U.K., Australia's second-largest export market after the U.S., or to the production of between 50,000 and 100,000 acres of vines.
"Surpluses of grapes and wine are now so large that they are causing long-term damage to our industry by devaluing the Australian brand, entrenching discounting and undermining profitability," the report says. The result is that Australian wine is seen as cheap and simple by most consumers, driving down its price.
The report also warns that hopes for ambitious sales growth are not expected to absorb more than one-quarter of the excess, and natural decline in production due to drought, water shortages and climate change will probably provide only 10 percent of the reduction the authors believe the industry needs.
But pulling up vines isn't the only answer, the authors warn. "It's not as simple as saying that we have 20 percent oversupply so therefore 20 percent of vineyards must come out," said Stephen Strachan, chief executive of the Winemaker's Federation of Australia. "This report is more about structuring the industry for the coming decades in order to get out of the cycle of excess fruit ending up as cheap wine."
High costs in many regions have led to fruit selling for less than it cost to grow. "The industry must restructure both to reduce capacity and to change its product mix to focus on sales that earn viable margins," the report states. For some growers, this will mean changing varieties, reducing costs or increasing fruit quality. Others may need to remove unprofitable vineyards or leave the industry altogether.
The impact will hit some regions harder than others. "For the Barossa, it's not like we have a large oversupply," said Sam Holmes, CEO of the Barossa Grape and Wine Association. But he estimates that 20 percent of Barossa fruit is sold at unprofitable prices. "If you're growing low grade fruit in the Barossa you're just not going to survive. We need to respond by working with unsustainable growers to decrease their cost of production or increase the quality and price of their fruit."
Others are less convinced of the merits of the report. "Even if we removed 20,000 hectares [50,000 acres] of vines tomorrow, we're not going to fix the global oversupply," said Shay McQuade, general manager of the Riverland Wine Industry Development Council, which oversees 25 percent of the nation's wine production in a region known for low-cost wines. "If we reduced the global oversupply by 1 percent, Chile or Argentina could reverse that in no time."
For McQuade, the solution is to grow sales by changing the attitude of the market. The Riverland council has recently developed its own "Strategic Plan for Wine Industry Development," which focuses on marketing to increase demand rather than cutting supply.
The various trade bodies are planning to talk with regional associations and individual growers over the coming months to assess regional data and examine the viability of particular vineyards. "We're not telling anyone what to do," said Strachan. "We're here to offer one-on-one support for wineries and growers, to help them with ongoing decision making."
But he emphasizes that this is not simply a matter of increasing market demand. "We are concerned about building a sustainable future for regions like the Riverland, who face real challenges such as an increasing cost of water. Grapes that end up as 'three bottles for nine quid' in the U.K. are not profitable. Someone in the value chain is losing money and at the moment, that's the grapegrower."
Alongside increasing water prices, the report highlights a number of factors that are weakening the outlook for Australia's long-term global competitiveness, including unfavorable exchange rates and increasing labor costs. It also suggests that Australian wine producers are likely to face higher costs for carbon emissions than their international commodity wine competitors. The release of the report coincides with vigorous debate in the Australian senate over Prime Minister Kevin Rudd's carbon emissions trading plan, as wine producers brace themselves for increased costs associated with environmental sustainability.
In the short-term, Strachan estimates that Australia's 2010 vintage will be smaller than 2009 in spite of higher yield projections. "A number of larger wineries have indicated that they are lowering their requirements, so there are growers out there who produce grapes that won't be processed," he said. "Many growers are faced with some tough decisions."