AUSTRALIAN chardonnay is a perennial favourite. A medium to light wine with moderate acidity, citrus and melon notes and for many grape growers, a distinct lack of profitability.
The Winemaker’s Federation of Australia’s Outlook conference, which starts in Adelaide on Wednesday, will hear that prices for chardonnay grapes delivered to the distiller dropped as low as $80 per tonne this year.
This level is well below profitability and is a symptom of the ongoing oversupply issues in the Australian wine market.
While WFA chief executive Paul Evans stresses the $80 per tonne figure was the absolute lowest price in the market, it is indicative of the profitability issues the industry faces.
The WFA’s vintage report is to be released this Thursday, and while Mr Evans says production was down, there is still a long way to go to bring production and sales back to equilibrium.
The industry has been grappling with oversupply for many years.
Since 2000-01 the production of Australian wine has sat above one billion litres per year with only one exception.
Despite a desire to reduce production, it has actually increased for the past three years and in 2012-13 gross wine production was 1.245 billion litres.
And in the year ended June 2014, total Australian wine exports declined by 2 per cent to 684 million litres valued at $1.78 billion.
“The average value of exports declined marginally to $2.60 per litre due
mainly to a continuing shift towards shipping branded wine in bulk containers (which naturally has a lower price without its packaging). This offset a 6 per cent increase in the average value of bottled exports to $4.77 per litre.’’
The wine industry has faced a number of challenges in recent years. The stubbornly strong Australian dollar has significantly reduced returns to exporters. The oversupply issue is a worldwide phenomenon, and Australia is also competing with other so-called New World producers such as New Zealand for a slice of the extremely competitive wine market. In the Chinese market, seen as a huge opportunity for Australian producers, government austerity measures have slowed wine sales, especially at the higher end.
Realising that the industry needed to take charge of its own destiny, the WFA last December released an action plan, including 43 actions it plans to work on from 2014-16, with the aim to return the broader industry to profitability.
Mr Evans, who will open tomorrow’s conference, says the conference theme: Taking Charge of Our Future, is the core message.
“We cannot continue to look to market conditions to improve. We’ve got to take proactive steps, and in that regard we can be positive, but if those steps aren’t taken then the industry will continue to face challenging times around all parts of the supply chain,’’ Mr Evans says
“This vintage will help because it’s down, but when you consider that C-grade chardonnay grapes were selling for $80 per tonne there’s a lot of work to do.
“It’s not about waiting for China to fall in our lap, it’s not about waiting for the Australian dollar to go down to US80c or waiting for the US market to come back online, it’s about working with government to promote our wine overseas through the new statutory authority.’’
One of the key planks in the WFA plan is to work with the Federal Government to reshape the Wine Equalisation Tax Rebate.
The rebate is a tax concession which is intended to give money back to small producers with the intent of supporting industry development in regional areas.
In practice the rebate’s structure makes it vulnerable to rorting and exploitation by virtual winemakers and others in a way which can serve to perpetuate unprofitable production.
The WFA has previously identified $25 million in rebates going to New Zealand producers, which clearly does not benefit the Australian industry.
Mr Evans said the WFA was working with PricewaterhouseCoopers and other experts to put a submission to the review of the Australian taxation system, which is due by the end of the year.
The WFA’s previously stated desire is that money saved through WET Rebate reform be pumped back into marketing of the industry.
While Australian product is top shelf, in terms of marketing spend we are currently a minnow.
“Italy and France have tens and tens of millions of euros available for marketing,’’ Mr Evans says.
“We’re asking for $25 million over four years, all of which can be funded by, for example taking the rebate off New Zealand.
“The Italians got over 100 million euros in government support back in 2012, We currently have $12 million and that’s in industry funds. That’s down from $16 million. Our plan is to build it back up to where it was to give ourselves a fighting chance.
“The timing’s right for that. We are likely to see a structural shift down in the Australian dollar, we are seeing the US rise from its slumber, and there are pending FTAs for example with China, which could be transformational, so it’s the right time, but if we miss that opportunity we are more than likely to see the industry continue to struggle.’’
Success in this mission is critical to the Australian industry, but particularly to SA, which is the nation’s largest wine producing state.