The Australian Wine Industry - Part III: Production

To coincide with the London International Wine Fair, this month's management briefing is for all you wine companies out there, particularly those with Australian leanings. Richard Woodard offers an in-depth look at Australia's wine industry in this four-part briefing for May 2011. In part three, Woodard turns his attention to the thorny subject of production.

For years, Australia went a bit crazy with the planting of new vineyards, encouraged by tax breaks and cushioned by continuous double-digit gains in export sales. The result, once the boom slackened, was a dire oversupply situation only partially resolved by a number of small harvests brought about by vintage conditions and unpicked grapes.

The big question throughout the 5-7 years of the glut was simple: how long will it last? After another small-ish and weather-hit harvest in 2011, answering that question is still extremely problematic.

De Bortoli’s Mark Wilson believes the rain-hit 2011 vintage has “gone a long way” to addressing the problem, but a spokesperson for Pernod Ricard’s Orlando Wines is less convinced. “We are some years off [balance between supply and demand]," he says, "although this vintage should assist in bringing this closer to a reality.”

Justin Knock, wine buying manager at Treasury Wine Estates, adds a little extra detail. “This year is likely to see a slight softening of both supply and demand – a situation balanced on one hand by the likely reduction in wine available out of the rain-affected 2011 vintage, and on the other by the headwinds of an extremely strong Australian dollar versus currencies in major export markets,” he believes.

“An overall position of balance is difficult to predict, but certainly the situation is currently better now than at this time last year, and will likely be better again this time next year, as reduced 2011 vintage inventories begin to take hold.”

Thus market conditions – and the strength of the Australian dollar in particular – are not helping matters at the moment. But what about the plan, unveiled in 2009, to rip out about 20,000 hectares of Australian vineyards? Surely this would resolve much of the oversupply problem at a stroke?

The programme has seen slow progress to date. Roughly one-third of that 20,000ha figure has so far been removed, reflecting the innate determination of many growers to ride out the current storm until the good times return.

Wilson characterises the situation as “chicken and egg”, saying: “Government subsidies (as in the EU) help and these are not on the table; eventual economies will result in the inevitable.” In other words, growers will rip out vineyards only when they have no other option.

Knock believes growers should continue to be left to make the final decision, but admits: “These actions are often coloured by emotional sentiments, and decisions to delay removal of unprofitable vines can take years to complete, particularly where the vineyard owner does not rely on the vineyard as a source of principal income.

“Growers are by nature resilient, resourceful and determined to take a long-term view and, furthermore, a ripped out vineyard is not easily phased back into production if and when market conditions improve.”

The long-term answer, he believes, is a more diverse and complex supply base, linked to the discovery and creation of new markets while adjusting supply – not just the blunt measure of grubbing up vines.

The prevalent industry view appears to be that warmer, inland areas have so far borne the brunt of vineyard removals, reflecting not just industry conditions but pressure on water resources after years of drought.

However, Wine Australia figures suggest a different truth, with CEO Andrew Cheesman claiming a net reduction of 3,558ha in warm inland areas such as Riverland, Riverina and Murray Darling-Swan Hill, and an only slightly lower net reduction of 3,200ha in cool and temperate regions.

Nor is he quite so sure that the future lies entirely with premium, cooler-climate areas, pointing to “exciting” trials in areas like Riverland with drought-tolerant grape varieties such as Vermentino.

Indeed, Knock hints at potential problems here. “Demand for volume-driven commercial wines continues to be firm in some key markets, and this in turn drives demand for grapes from warm, irrigated regions,” he says.

“Growers in some warm climate regions are getting close to breaking point in terms of profitability, and a likely increase in industry exits over the coming 12 to 18 months suggests that the supply-demand balance for warm climate grapes will adjust quite quickly.”

Cool-climate wines might tend to win “intellectual favour”, he argues, but it’s harder for them to meet demand for volume and lower price points; and, cool-climate growers tend to have alternative sources of income, making them more likely to try to ride out the glut.

He concludes: “These two factors suggest that the supply/demand balance for cool-climate regions will take longer to be resolved. Efforts by cool-climate producers to win consumers and critics to their styles or meet the demands of these groups has the potential to improve this balance more quickly than waiting for vines to be removed.”

The result of all these issues is continued and, in many cases, increased pressure on grape growers, plus simmering resentment at what they see as cripplingly low prices and poor treatment by big purchasers – in other words, big brand owners and BOB suppliers.

“We are now close to the bottom of the cycle, where the situation is as bad as can realistically be imagined,” argues Knock. “The reduced 2011 vintage will be the last act for many growers, but will be the making of those that survive.”

Meanwhile, Wine Australia CEO Cheesman sounds a diplomatic note. “Nothing will be achieved by any blame games – we need to work together to develop a production base aligned to market needs and opportunities, and sustainable returns. The worst result is to do nothing and expect things to change – Wine Australia will try and assist this dialogue within the wine community.”

And Knock concludes on an optimistic note. “The bright side is that a decade-long drought has broken across the vast majority of the country, and vineyards are in as good a health as they have been this century.

“The large vineyard plantings of the ‘90s are now reaching maturity and I would expect to see a big step-up in quality from Australia this decade. It is just a question of whether the rest of the world can afford to support it.”