Australia's 1600 wineries are facing formidable challenges in light of increased global competition, according to the Australian Wine and Brandy Corporation's annual report, released this week.

"Drought and reduced demand for some grape varieties in some regions has caused problems for many grapegrowers while increased competition and retail consolidation in a stagnant domestic market has had an adverse effect on a number of small producers," AWBC's Chairman David Brownhill said.

"Larger producers have not been immune, with many experiencing difficult trading conditions as a result of a rise in the Australian dollar, increased competition and discounting in some major export markets.

However the report went on that continued marketing and product innovation and the maintenance of the nation's quality promise will help producers weather the current downturn.

"Many small, medium and large wineries managed to prosper through innovation and determination. Export volumes continue to grow, albeit at a lower average value, new markets continue to emerge and Australia is now one of the leading wine exporting nations even hosting the headquarters of the world's largest wine business."

Brownhill said it was during such times of difficulty that the industry must be particularly vigilant to ensure that quality standards continue to improve and integrity is not compromised.

"The Corporation has responded to this changing environment by bolstering overseas promotional activities, including the restructure of the European operations, and becoming increasingly vigilant in our regulatory responsibilities," he said.

Brownhill said the Corporation reported a surplus of $473,757 without compromising its level of service.

"As the Corporation derives most of its funds from industry, this surplus provides a necessary financial reserve for the future," he said.