As the sun sets on the holiday period, its decision time for the winemakers of the northern hemisphere

As the sun sets on the holiday period, it's decision time for the winemakers of the northern hemisphere

Winegrowers in the northern hemisphere will be coming to the end of their holidays any day now, and returning to their vineyards. Here's hoping their breaks were relaxing, because, according to Chris Losh, they've some deep soul-searching ahead of them.

September is fast approaching and, as vignerons, viticultori and bodegueros return to work after the holidays they have bigger decisions to make beyond, “do I pick now or next week”.

Namely: “Next year, should I pick at all?”

The end of September marks the deadline for Europe’s growers to apply for this year’s EU grub-up subsidies. Paying money to growers to pull up their uneconomic vineyards is part of a wide-ranging series of measures brought in by Commissioner Mariann Fischer-Boel in 2007; a reorganisation that will, by 2013, see the end of crisis distillation payments. The EU’s thinking will be along the lines of: “Don’t produce it unless you can sell it, because we won’t bail you out any more.”

But, if growers are considering taking the handouts for pulling up their vines, they’d be advised to get a move on, because the amount being put aside by Brussels is reducing year by year. This year’s EUR276m (US$355.2m) is just over half that allocated in 2008/9, and will drop to around EUR60m in the final year.

Any growers who are still undecided could do worse than take a look at the half-year Rabobank report into the economics of the wine market that landed in my inbox over the summer. It’s not exactly pessimistic, but it’s certainly an exercise in caution.

It’s bad enough that, according to Wine Intelligence, of the five main wine markets, only the US is in major growth. But, Rabobank is cautious about the 10% growth in the off-trade this year compared to 2009, believing that a fair bit of this rise has come from consumers migrating from the on-trade.

Moreover, the Rabobank report points out that the equivalent period last year was so economically dreadful that it would have been a miracle were there not to be an improvement for the first six months of this year. The firm expects the next six months’ figures to be more subdued.

The real issue, though, is not so much whether Americans are buying wine, but whether the wine industry is making any money from selling it – much of the recent growth, after all, has been driven by price promoting. Spain, for instance, saw volumes jump by 16% in the US last year, but value sales were up by only 6%. Australia sold 7% more wine, but saw value actually fall by 5%. The growth for these countries was in cheap, bulk or non-DO wine.

This is not simply because the public have less money and are looking for deals; it’s because, as Rabobank points out, it’s a buyers’ market: “The excess supply constantly available in the market has made it difficult to build solid brands with strong pricing power, creating headwinds for profitability in the sector,” the financial firm says.

In terms of oversupply, Europe and Australia are the worst offenders, particularly France, Italy and Spain. And, though the EU took out 74,000 hectares last year and is aiming for a further 54,000ha this year, this needs to be put in context. France alone has some 850,000ha under vine and, even after two years of grubbing up vineyards, the OIV (Office International du Vin et de la Vigne) estimates that 9% more wine was produced than was sold for both 2007 and 2008. With the fall-off in demand, the figures for 2009 will probably be even worse. No coincidence, then, that last year Muscadet producers had to distil 70,000hl of unsold wine from the 2008 vintage.

All in all, there is a lot of unwanted wine slooshing around – a situation not helped by reports that growers have been slow to go for the grub-up option.

As one French vigneron told me last year: “It’s not just that we haven’t seen much take-up in Bordeaux, it’s that the wrong people are taking the money. Old guys with good land are using the subsidy to fund their retirement, while the poor vineyards stay planted.”

I should imagine that producers of uneconomic vineyards who refused the grub-up subsidies in the hope of a hand-out will simply go to the wall once the crisis distillation subsidy stops in 2013. Because one thing is for sure: they will not be able to rely on the domestic market to bail them out.

According to Wine Intelligence, the Italian market is flat, while France, Germany, Spain and Portugal are all in decline. Such growth as there is, is to be found in export markets like the UK (just), US, China and Nordic countries. But, even here, producers are looking at a lot of work for slow, painfully small returns.

It's little wonder that bigger companies are starting to question their long-term relationship with wine.

There have been sales of assets, ‘sale and leaseback’ agreements (the equivalent of a trial separation) and, most significantly, the announcement by Fosters of its plans to demerge its wine division – A case of “I love you, but I’m not in love with you...”.

Rabobank casts a marvellously phlegmatic eye over this disintegration. “Capital employed in the wine sector,” it says as drily as a 20-year-old clog, “can be much more profitably employed by major beverage companies in beer or spirits.”

If the economic turbulence has done one thing, it’s made the world get real about the economics of wine and, for the most part, the findings have not been pretty. Wine and big business have begun, metaphorically, not just to argue about whose turn it is to do the washing up, but to question whether they even want to be together.

Something, perhaps, for the vignerons, viticultori and bodegueros to think about as the end of the month approaches...