Given that drought and frost have all but eliminated Australia's wine glut, it is tempting to regard this natural intervention as good news for the wine industry but, writes Chris Losh, in reality the adverse weather conditions have created greater problems at both ends of the price spectrum.

Get them off the record ten years ago and many European winemakers would have expressed a grudging envy for their Australian counterparts: plenty of freedom, plenty of sun, no problems with rain around harvest; just stick the grapes in the ground, irrigate and wait for the supermarkets to come knocking.

That envy turned to resentment as the country's glut wine crashed onto global markets in the 21st century, distorting prices from Trader Joe's to Tesco. But could 2007 be the year when (whisper it) the world starts to feel a pang of sympathy for the men down under?

Australia is facing a huge drop in wine production over the next few months. Brutal frosts have crippled some cooler areas, while the long-standing drought is finally starting to bite, lowering yield levels in the vast irrigated deserts of Riverland and Riverina.

The Australian Wine and Brandy Corporation reckons that the harvest will be down 20% from the 1.9m tonnes of the last few years to around 1.56m tonnes in 2007, but there are plenty of observers who think it could go even lower than that.

Given that the combined effect of frost and drought has almost instantly taken Australia from vast overproduction to a near-perfect sales/production balance (something that wasn't predicted to take place until 2009 at the earliest), it is tempting to see the vicissitudes of nature as being largely beneficial. But the reality is less encouraging.

Let's take the drought first. Even allowing for improvements in irrigation technology, it still takes around 1,000 litres of water to make one litre of wine in places like the Riverina.

But five years of drought have created a situation so severe that even a couple of good winters of rainfall will not solve the problem. Water allocations have already been cut by up to 60%, and the expectation is that the New Year could well see further reductions. Less water means less wine, both in the short and medium term.

"The Murray Darling basin is running on empty," says Stephen Couche, managing director of Orlando Wines. "We think that vintage 2008 is going to be down again due to reduced water and also reduced vine vigour."

The effect of these shorter years on the market is obvious: fewer promotions and, almost certainly, an end to the never-ending swarm of 'mayfly brands' that appear out of nowhere on half-price discount and disappear two weeks later. The trade in markets like the UK has long railed against these fake BOGOFs, and, outside the offices of supermarket buyers, their passing is unlikely to be the cause of too many tears.

But the implications for the mass-market end of the Australian wine industry are serious.

While some brands have been good at eschewing over-promotion, others seem to have spent most of the last five years on double-digit discount. When the juice is no longer available - or too expensive - to fund such activity, brands will be left to stand or fall on the reputation they have forged for themselves with the consumer. And research currently suggests that for Australian brands loyalty increasingly stretches no further than how far the price has been cut.

In other words, once the discounts dry up, brand managers of the more promo-enthusiastic wines can expect their sales to tumble, taking Australian market share with it.

So much for the drought. The frost is a different matter entirely. It hit the cooler climate regions, rather than the mass-production areas. The Yarra, Limestone Coast, Tasmania and Coonawarra have been worst hit, but even the Barossa and Langhorne Creek have been affected. The worst areas are predicting 60% to 80% reductions for 2007. Moreover, with the vine's second and third growths affected too, the impact of the spring frosts of 2006 will be felt at least until 2009.

It's not just bad news for the growers involved, but also for anyone who has got behind the Australian 'regionality' campaign, which relies on wines from places such as these to tickle the interest of restaurateurs and educated consumers looking to step up within the Australian category.

How the producers go about eking out their stocks to cover what could be a two or three year gap is anybody's guess, but we'll soon find out which markets are seen as a priority and which are expendable. The most positive spin is that wineries may take the opportunity to stop talking about developing small-volume, slow-burn channels such as the on-trade and actually do it, but this is pretty scant comfort.

Either way, Australia's wine industry is bracing itself for a painful couple of years. The strategies that it has been following at both the upper and lower ends of the market have been put at serious risk, and the medium-term future looks uncertain.

The country's cricket team may have regained the Ashes, but if Aussies are looking for wine to toast their team's success, they might just be better off shipping it in from somewhere else.