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Australia at the Crossroads

Photo by: David Yellen

Posted: May 7, 2007 12:22pm ET

When I was in Australia last month, everyone in the wine industry was talking about three things: the current drought, forecasts for global climate change and the strength of the Aussie dollar. How it will all play out remains to be seen. My guess? Australia will never be the same again.

The government announced recently that it would turn off the tap on all Murray River irrigation if it doesn't rain buckets in the next few weeks. But even if Mother Nature gives Australia a reprieve this year, a growing population and diminishing water resources from global warming will certainly create another crisis. If the big growers in Riverland, Riverina and Murray-Darling (Australia's equivalent to California's "central valley") can't count on irrigation, there would be no more vineyards growing 10 to 20 tons of grapes to the acre, no more cheap fruit, no more under-$10 wines.

That would re-define the Australian wine industry. Like Oregon's or Washington's, Australia's would have to focus on making better wine, and less of the cheap stuff. It should put out of business a significant number of underperforming wineries and vineyards.

By the latest estimates, the 2007 grape harvest has shrunk to 1.3 million tons, down from 1.9 million last year. Spring frosts and severe drought conditions did the most damage, but bush fires also caused extensive smoke taint in some areas. The drought also has dire implications for the next vintage. Preliminary analysis of the incipient buds for next year's growth shows that the vines at best could equal this year's output. That means no chance for a normal harvest until 2009.

In the short run, this must exert some upward pressure on prices. Worse, the Aussie dollar was at 84 cents in late April, up from 78 cents on a couple of months ago, less than 72 cents about a year ago. That's not good for exports to the U.S.

I see some silver linings. Based on what I tasted in the past couple of weeks in fermentation tanks and barrels, every indication is that the quality of the 2007 harvest is very good to outstanding. That continues a string of excellent vintages that stretches back to 2001.

So they can soften the impact of exchange rate fluctuations, smart importers and exporters buy money futures. But let's face it: most Australian wine has been undervalued on the U.S. market for several years. Even at somewhat higher prices, enough Australian wines are good enough to represent fair value.

Last year, Australians were worrying about a huge surplus, the result of significant overplanting, often in bad locations. As a result, bad Australian wine has been flooding the U.S. market for a couple of years now, mainly from unfamiliar labels that fill their bottles with whatever they can find on the bulk market.

That was a significant change from the way it was only a few years ago, when you could pluck almost any Oz bottle off the shelf and expect it to be worth the price. That's partly because Australia's reputation for good cheap wine rests on the big wine companies, which at least know how to put sound wine in the bottle, and experienced exporters and importers who knew what they were doing. Too many newcomers don't, and the country's image has suffered in the U.S. as a result, even as it floods the market with more cases of wine than ever.

Between the frost, the drought and the exchange rate, those bad wines will go away. Not right away, though. It will take a year or two for the bulge to work its way through the python.

Meanwhile, get a second opinion on unfamiliar wines before you buy. I'm tasting as fast as I can to help.

Gary Fritzhand
Houston, Texas —  May 12, 2007 7:15pm ET
I can't believe that you are crediting global warming with the future improvement of Aussie wines.
Harvey Steiman
San Francisco, CA —  May 13, 2007 12:23pm ET
Persistent drought and inherent water shortages already exist. An increasing population and agricultural pressure on limited water supplies exacerbates the effect of any kind of a warming trend. But even without global warming, Australia has severe limits on water. If global warming makes water less available, cheap wine becomes less viable, and the industry will have to focus on cooler areas and better wine.

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