Wine Industry Outlook - January 2008

Photo: Grape Vines, Margaret River, WA

Regional Australia has benefited enormously from the growth of the Australian wine industry. Driven over time by people such as Len Evans, the expanding wine industry has created direct and indirect jobs while enriching local life.

As an industry, wine making has proved especially attractive to city professionals attracted by the combination of tax benefits with the romance attached to the sector. This, together with commercial plantings, has driven enormous expansion.

The Australian wine industry has always been marked by a history of glut and then boom. Back in the late 1960s, for example, the Australian Government was paying grape growers to pull vines out.

Most recently, we have had boom followed by a huge wine glut in 2006 into 2007 as major plantings came to full fruit. Great for people like me who love wine, but hard on producers. How quickly things change.

In 2007, the drought in Southern Australia reduced yield because of its effects on bud formation. Then came the irrigation cut-backs in the Murray-Darling Basin. By September last year, the Federal Government's Wine and Brandy Corporation was forecasting a grape harvest as low as 800,000 tonnes as compared to the average of 1.9 million tonnes. This was disaster territory.

Things have improved with subsequent rains, with the harvest now projected at 1.2 million tonnes. Better, but the Australian industry will still need to import bulk wine from overseas to fill orders.

This is not the only problem faced by the industry.

The rising value of the Australian dollar is squeezing export margins, making imports cheaper. The previous spread of New Zealand wines through Australian bottle shops is now being followed by wines from a variety of countries.

Wine grape growers who might have expected to benefit from significant increases in grape prices are not getting the benefits they expected from reduced supply because of growing concentration in the wine industry.

The Australian wine industry is really a story of two industries.

At the big end of town, there has been increasing concentration. The number of listed wine makers has shrunk from 13 at the end of 1998 to 6 today. These bigger entities have the capacity to squeeze grape producers on one side, to contend to some degree with the buying power of supermarkets on the other.

Then there are the thousands of smaller boutique wine producers. Generally unable to access supermarket shelves, these have to rely on other sales and distribution methods including cellar door, other local sales and mail order. A number of moved into related tourism activities.

Wine remains an emotionally attractive option for many city professionals. However, they need a very clear business idea together with the capacity to ride through fluctuations if they are to succeed.