The much debated oversupply in the Australian wine industry is now a reality and growers are already feeling the financial burden. As  David Robertson reports the squeeze is unlikely to stop there, as winemakers big and small look more vulnerable than at any point in recent history.

This should be a boom time for Australian wine makers as their exports continue to grow at impressive rates but forecasts predict a doom-laden year in 2002 as growers are forced to leave grapes on the vines.

There has been a massive increase in the area under vine plantation in Australia over the past decade - due in part to tax breaks from the government. Huge parts of southern Australia from the Margaret River near Perth to the Murray River and Barossa Valley have suddenly sprouted vines, which pushed grape production to a record 1.42 million tonnes last year. This was up 26% on 2000 and production is expected to rise by another 6% this year and 11% next.

Most of the growth has been in red grapes with Cabernet Sauvignon increasing from 56,000 tonnes in 1994 to over 168,000 tonnes last year. Australia also produced 238,000 tonnes of Shiraz last year as production of red grapes overtook white for the first time.

But there is simply not enough demand to swallow this huge increase in grape production. Domestic demand will always be limited by the country's relatively small population of less than 20m. And while exports continue to grow (up 17% to A$1.78bn in the year to the end of February) they cannot save the industry from a nasty dose of overproduction.

Vic Patrick of the South Australian Wine and Brandy Corporation has admitted there will be an oversupply this year, particularly of Cabernet Sauvignon. A reduction in price is the inevitable outcome, he added.

One of the larger wine producers, Simeon Wines (which creates much of the content for Orlando Wyndham's Jacob Creek), is only paying its grape suppliers A$350 a tonne with the best grapes fetching only A$500 a tonne. Last year the company was averaging a price A$725.

While Cabernet Sauvignon is likely to be the hardest hit this year Merlot and Ruby Cabernet are also considered troubled varietals.

With the oversupply of reds there has come a slight shortage of white grapes and growers are being encouraged to switch to Chardonnay. Some companies are even paying their suppliers to leave grapes unpicked: Cranswick Wines is offering Cabernet Sauvignon growers A$100 a tonne to leave their grapes.

The large Australian wine companies from Southcorp and Mildara Blass down are all scuttling to bargain the price of grapes as low as possible to make sure they are not left with mountains of grapes nobody wants. This inevitably is squeezing the smaller producers, many of whom are reliant on selling their stock to the big international brands. Analysts believe that by the end of the year a number of smaller companies will begin to struggle and unless there is a grape price improvement in 2003 some will go to the wall.

One of the consequences of the glut has been to encourage foreign winemakers to snap up Australian production for their domestic markets. US companies have been particularly keen to take advantage of lower grape prices and the weak Australian dollar, prompting BRL Hardy's managing director Stephen Millar to warn that Australian companies will have to tackle this problem or risk being driven out of the US market.

BRL's US partner Constellation Brands makes the fifth largest selling "Australian" brand in the US, Alice White. Kendall Jackson is another US company buying Australian grapes for its own "Australian" brand Yangarra Park. It bought the 170 hectare Eringa Park in South Australia last year to guarantee supply.

The Wine Group is also launching an Australian label for the US market after buying significant quantities of Aussie grapes and Brown-Forman owns the McPherson "Australian" brand. Not all these US incursions have been successful with E&J Gallo recently scrapping its Walkabout brand because of low demand.

While control of the US export market may worry the likes of Southcorp and BRL Hardy, it will be of little concern to Australia's multitude of small growers who have much larger problems looming on their balance sheets. With so many grapes now on the vines in Australia, it appears that supply has finally overtaken demand and it is only a matter of time before there are casualties. Unless there is a sudden jump in demand for wine, analysts believe there will need to be a 20% drop in red grape production to bring the industry back into equilibrium.