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News Analysis |
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| February 15th 2007 |
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| Is bad luck good in Australia? |
by James Halliday
After years of unparalleled success, nature has thrown a curve ball at Australian producers already reeling from overproduction, falling prices and declining margins. But is the cure worse than the disease?
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 Australia has long been called the Lucky Country. How, then, has the express export train been derailed after a high speed ten-year trip taking it from nowhere to the fourth-largest wine exporter by value in the world? Even more, how can it possibly be that a combination of the worst drought, devastating large-scale bushfires in New South Wales, Victoria and Tasmania, and widespread severe frosts in many instances without parallel since records began might help put the train back on the rails far earlier than expected? Add in the sauce of the long-feared arrival of phylloxera in the Yarra Valley, and you might be tempted to cross out ‘lucky’ and substitute ‘unlucky’.
The primary cause of derailment was the increase of 1 billion litres (230 per cent) in production between 1990 and 2004 against the steady decline in world wine consumption. Nor was Australia alone: wine production in the US increased by 845 million litres (53 per cent) and in Chile by 260 million litres (65 per cent) over the same time frame. Indeed, while vineyard area in France, Italy and Spain fell by 17 per cent from 3.3 million hectares to 2.76 million hectares over that period, new world plantings increased by 44 per cent from 539,000 hectares to 796,000 hectares. These changes have profoundly affected the dynamics of the international wine market.
It is well-known that the Australian industry has a wine lake of its own making, following three consecutive harvests of around 1.9 million tonnes from 2004 to 2006, with as much as 50,000 to 75,000 tonnes left unpicked in the last two vintages. But the devil is in the detail: while the Australian Bureau of Agricultural Resource Economics (ABARE) produces excellent forecasts across many Australian industries, its studies of the grape and wine industry have been hampered to a degree by lack of reliable information from producers. A major cooperative effort by a ‘heads of government’ type committee is working to provide far better information on actual plantings, planting and removal intentions by variety, wine stocks held currently a matter of particular uncertainty and forward projections of production and sales.
Wine stocks are the most immediate matter of concern. In 2006 estimates of wine on hand ranged between 1.9 and 2.3 years of sales, based on depletions in 2005 and preceding vintages. The industry’s preferred level is 1.5 years, which is already higher than most countries because of longer maturation periods for red wines. The consequence is an excess of over half a year’s sales. But how much of an excess, we simply don’t know. The result has been a surge in bulk wine sales, which have been responsible for all the volume growth and for much of the dramatic falls in the FOB price per litre.
Lengthy forecasts by ABARE were published in June 2006 in the Australian Wine Grape Production Projections to 2007-2008, and in October 2006 in Australian Wine Industry: Challenges for the Future. These forecasts are |
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News Analysis |
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Page 2 of 2 |
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all interesting given the havoc nature has created since they were published.
A look at the numbers of crush by varietal in Australia shows the extent of the dominance of the big three varieties, which together account for two-thirds of total production. It has been pointed out that with the qualified exception of shiraz, where Australia has an unchallengeable legacy of vines up to 150 years old, these are precisely the varieties of its New World competitors and that New World and Old World alike have been quick to copy the Australian style. Add merlot and sauvignon blanc, and the one-size-fits-all model is frighteningly close, with points of difference diminishing. Moreover, by 2007 chardonnay will have again taken the lead from shiraz, which it relinquished in 2000.
Regardless of the varietal compo-sition of upcoming vintages, the wild cards dealt by nature have radically changed the stock-to-sales ratio. Using a baseline scenario, where growth in domestic and export wine sales are assumed to be maintained, the wine stocks-to-sales ratio is estimated by ABARE to remain above the industry’s preferred ratio of 1.5 until 2009-2010. But its sensitivity analysis came up with some very different figures once high and low yields were taken into account, as Table 2 clearly shows.
Forecasters are not savants, and even at the end of December 2006, the full extent of the loss to the 2007 crop is uncertain. While the Riverland and Riverina regions did not experience frost damage, cold and dry winter conditions impacted adversely on bunch numbers and berry sizes. That much is known, but as each day passes water restrictions become more draconian. As from January 1st, Melbournians have not been allowed to wash their cars or water their lawns.
The water allocations for irrigation are also being continuously reduced, and the engine room of Australian grape production is under serious threat. So the most recent guesstimates of 1.5 million tonnes may be too high for 2007, and in November the Australian Wine and Brandy Corporation suggested there could be a similarly reduced vintage in 2008. And what if the drought becomes the rule and not the exception? Climate change adherents would have us believe this will be the case. Today’s surplus may be tomorrow’s shortage.
“As wine-grape growing and wine- making businesses strive to boost their competitiveness, they will need to continue to deal with the vagaries of Australia\\\'s uncertain climate, sometimes volatile commodity prices, fluctuating exchange rates, and export markets distorted to some extent by the regulatory and market interventions of competitors such as the European ‘old world’ producers,” write the analysts at ABARE in their October report. “Movements in the Australian dollar affect the competitiveness of Australian wines in the global market, the industry’s ability to compete against imports, and the revenues flowing from export sales.”
Government intervention to even out the impact of excessively high or excessively low vintages is out of the question: the industry does not want it. Supply and demand will come back into a measure of balance.
The short-term cure of the 2007 and 2008 vintages may in the longer term be seen to be worse than the illness. But the golden years from 1990 until the French woke up from a prolonged slumber and found the Barbarians were well past the gate, and New World competitors watched and learnt how to do it, are gone forever.
As ABARE concludes, the challenge for the Australian wine industry will be to identify and embrace new market opportunities and to drive competitiveness through innovation in production and processing, enhanced efficiency, improved economics of scale, attracting greater returns through better understanding of markets and changing consumer needs, as well as differentiating and developing specialised products.
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