Chris Shanahan: Exporting our way out of surplus

Surrounded by cries of doom and gloom and real pain being suffered by many winemakers and grape growers, it’s easy to overlook the huge and continuing success of Australia’s wine industry.

In many ways it’s a model, market-focused, export-driven agricultural industry, delivering, in the main, highly-value-added exports – totalling $2.8 billion dollars in the year to February 2006.

However, our industry faces substantial medium term difficulties as global overproduction drags on export performance and local overproduction squeezes margins in a stagnant domestic market.

Each day we read stories of pain being felt by jilted grape growers. And the stock market bares every detail of Evans & Tate’s struggle for survival; the marked earnings and share price decline of McGuigan Simeon Wines; and scepticism about Foster’s ability to absorb Southcorp Wines.

For wine drinkers, overproduction manifests itself in lower prices, a proliferation of new brands and the rise of the clean skin. These unbranded wines have been around for decades, but the current surplus sees clean skin reds in particular cutting a swathe through popular brands and driving prices down sharply across all quality levels. For some reason whites seem less effected.

The surplus also appears to be finding a home in export markets. And as bulk wine (as opposed to bottled wine) exports gather unprecedented momentum, Australia’s dollar per litre return declines.

In August 1999, winemakers received an average of $4.63 per litre for the 230 million litres exported. In February, 2006 volume had grown to an impressive 711 million litres. But the value had declined alarmingly to $3.93 per litre.

In its February, 2006 report the Australian Wine and Brandy Corporation commented, “Bulk wine shipments dominated growth this year. While still only representing 23% of the total mix, bulk wine shipments grew 40% to reach 165 million litres this year compared to 118 million litres in the previous year. By contrast, bottled shipments grew 3% to reach 531 million litres, up from 516 million litres”.

Much of this may prove to be opportunistic and pass when the current surplus dissipates – and may indeed hasten its end.

Some producers, however, have misgivings about bulk wine exports. One that I spoke to feared that in the UK market – where the average value per litre has fallen from $4.26 in February 2000 to $3.57 in February 2006 – that the arrival of sound but unexciting Australian wine at very low price points creates a perception that we’ve dropped our standards. This, they say, is damaging established brands.

But the other side of the coin is that the surplus has played a part in gaining access to the giant US market – notably through the rampant success of Yellowtail and to Germany, the most price conscious market in the world, where bulk sales have more than doubled but average a return of just $2.10 a litre.

And in the emerging Chinese market, bulk exports grew sixfold to 2.1 million litres while bottled wine sales leapt 62 per cent to 380 thousand litres in the year to February, 2006.

Given the global surplus, it’s not surprising to see our own industry’s bumpy ride. But the fact that sales continue to grow after such a prolonged period of phenomenal expansion – exports grew from 130 million litres worth $471 million in 1996 to 711 million litres worth $2.8 billion dollars in the year to February — suggests that our home grown surplus may come to be seen as a comparatively small, if painful overshoot in productive capacity.