Too Much Wine Bad For Market
Sydney Morning Herald
Monday April 22, 2002
Overproduction is turning grape growers into whinemakers, writes Brian Robins.
The Australian wine industry may pride itself on how Americans and the English are lapping up our fine wines. But what it won't tell you is that the strongest growth is actually in exports of bulk wine, as the industry struggles to cope with a surfeit of grapes.
A huge increase in plantings has led to a surplus in the vintage now being harvested a surplus which will equal nearly twice the annual output of the Hunter Valley, according to some.
At the same time, in the important US market, its big wine makers are moving to counter the threat from new suppliers with Australian producers firmly in their sights.
Concerns over the latest harvest, tougher competition in the US and also the emergence of product discounting in the domestic market has put the share prices of big producers such as Southcorp and BRL Hardy on the skids. Southcorp is down 20 per cent since its December half earnings were released, finishing Friday off another 45c at $5.82, and BRL Hardy is down 16 per cent, closing at $9.75, shedding 15c on Friday.
Southcorp came under further pressure late last week, as it guided analysts' estimates of its earnings lower, due to a poor vintage, and prompted a suspension of its shares from trading on the ASX.
In contrast, BRL Hardy continues to target 15 per cent compound growth, with firm trading seen in the first quarter of the financial year.
Share prices of the leading wine companies have been among the best sharemarket performers over the past decade, although the best may be behind them.
After exponential growth since the mid-1980s, the industry is struggling to keep abreast of the surge in grape production, with falling grape prices forcing an increasing number of growers to leave product to rot on the vine. The Australian Wine and Brandy Council, for example, forecasts that a wine surplus of 124 million litres of wine is prospective for 2010, a massive wine lake which may only be averted by curtailing new plantings. To put that looming surplus into perspective, it almost equals the present level of white wine exports.
As domestic wine production has expanded, imports have been largely squeezed out. There is little scope to boost wine stocks, already at high levels, and little choice but to cut back on grape purchases and ship more bulk wines offshore.
The wine industry may have played a prime role in revitalising large areas of rural Australia over the past few decades but the easy runs are over, with clear implications for the rash of professionals sinking money into hobby farms over the past few years.
Not surprisingly, the downturn in wine grape prices and the deteriorating near-term outlook for the industry's prospects is encouraging growers to bale out, with a rising number of wineries being put on the market.
``We are getting a lot more inquiries from people thinking of selling," says Phillip Shaw of Colin Gaetjens & Shaw, an agency which specialises in wineries for sale. ``We have more for sale than we have ever had and buyers are more discerning."
The wine industry can't keep up with the surge in production, argues Rhett Marlowe of the Winegrape Growers Council of Australia.
``There is not enough investment in processing and storage," he says. ``They have argued that this year's crop came in all in a rush, therefore the vintage has been contracted, creating processing problems."
As this year's harvest has proven to be only an average year, what will happen in a bumper year, he asks.
An unseasonally poor end to the 2002 season, with a cool summer in several regions combined with excessive rain in February, prompted estimates for the vintage size to be trimmed to 1.42 million tonnes from 1.5 million. But in recent weeks, estimates have been edging higher, back towards 1.5 million tonnes.
Marlowe, and others within the industry, argue that tax concessions provided to grape growers have resulted in marginal producers entering the industry, adding to the size of the glut at the worst part of the cycle.
As a result, growers without contracts or those whose contracts are at an end are finding it impossible to sell their grapes. This, coupled with lower prices, is forcing more producers to leave product on the vine and to consider quitting the industry.
``Three to four years ago, wine makers told growers to plant what you can our problem is a shortage of product. Now it has caught up," Marlowe says.
The industry thinks that it will be a one- or two-year hump but some are not so sure.
The drop in grape prices is occurring not just in Australia. Pressures are also emerging in the US, which is witnessing tougher competition in the $US6 to $US7 a bottle range the key market segment for many Australian exporters.
The drop in US grape prices has fed quickly through to a fall-off in plantings. This may see a deficit emerge later this decade, opening the way for further sales of Australian wine if local producers survive the emerging competition.
Clearly, trading conditions in the US are likely to get a lot tougher, with question marks over whether all of the big Australian groups will survive intact.
US wine industry majors such as Mondavi are stepping up promotional activities in the $US6 to $US7 a bottle range, with rivals such as Beringer, now owned by Foster's, in its sights.
This rising competition will result in discounting, which will hurt Southcorp's Lindemans brand along with BRL Hardy's Banrock Station. Both are yet to achieve much traction in the US market with these labels.
The big Australian producers such as Southcorp and BRL Hardy have bought their own distributors in the US to ensure they can get their product on to shelves, with mid-sized players such as WA's Evan's & Tate following suit with its recent purchase of Scott Street Portfolio.
Overall, the US wine market has shown only minor growth in recent years, although imports have surged much of it from Australia which is pressuring product from France and Chile.
``The American wine market was 16 per cent imports, and is now 22 per cent imports," says one observer. The big US wine makers will fight back.
© 2002 Sydney Morning Herald