Chris Shanahan: Pressure on wine prices ahead of major industry change

In January, with a small vintage predicted, the wine glut appeared to be over. Grape growers along the Murray and Murrumbidgee feared the worst. Winemakers expected supply to fall in line with demand – good news for them. As a consequence, it seemed as if wine drinkers might have to pay a little extra for branded products. And the endless flow of bargain-basement cleanskins would slow to a trickle.

But predictions of a small vintage proved to be dramatically wrong. On Friday 13 June, a press release arrived from the Winemakers Federation (WFA) putting the harvest at 1.83million tonnes.

‘This figure’, said the press release, ‘is significantly larger than estimations made at the start of the growing season, and is in fact almost double some early predictions’.

Shortly after, in his Australian Wine Companion 2009, James Halliday wrote that this ‘explains why Foster’s had to write down the value of its bulk wine stocks, with all the major companies floating in a sea of excess chardonnay’.

So the glut’s back on. And it’s being made worse by a dramatic slowdown in exports combined with a modest decline in domestic consumption.

The Australian Wine and Brand Corporation recently reported that our exports in the year to August 2008, at 703.3million litres, were 103 million litres less than in the year to August 2007.

And Australian Bureau of Statistics figures show that domestic sales declined from 482.1 million litres in the year to June 2007 to 479.7million litres in the year to June 2008.

But that apparently modest decline of 3.6million litres includes imports, which rose by 19 million litres to 53.3million litres – representing what is probably an historic high of 11.1 per cent of domestic sales.

Worryingly for local makers, sales of domestically produced wine declined from 447.8 to 426.4 million litres – mirroring the rise in sales of imports.

While the recent fall of the Aussie dollar should in time boost exports and blunt imports, it’s unlikely to soak up the wine surplus in a hurry – meaning continued pressure on domestic wine prices.

But in the longer term, we may have to pay more for our wines. The WFA sees a major restructuring in the offing with a need to focus more on our regional specialties and less on cheaper products. Its press release expresses ‘concerns regarding the future sustainability of the lower-priced sector or our industry’.

This is largely a reference to the worsening water shortage and its effect on our vast river lands. Increasing costs and declining volumes in these regions will price us out of the lower end of the market.

Restructuring will also mean moving with consumer tastes. For example the inexorable rise of sauvignon blanc, either straight or blended with semillon, means that we probably now have more chardonnay than we need and not enough sauvignon blanc or semillon.

In 2008 we harvested 166 thousands tonnes of the two combined, compared to 444 thousand tonnes of chardonnay. Yet sauvignon blanc and blends now account for 37 per cent of domestic bottled white wine sales compared to chardonnay’s 31 per cent.

To cater for this change winemakers can’t necessarily graft chardonnay vines over to sauvignon blanc. That’s because chardonnay grows just about anywhere, but sauvignon blanc needs a cooler climate (and that means higher production costs) to reveal its distinctive flavour – hence the success of New Zealand in this sector. This variety makes up the majority of its 18.1 million litre exports to Australia.

We’ve got a few regional specialties of our own, too, though it’s a secret to most of the world. But when we’ve sipped our way through the current glut (and it may take a few years) we’ll be hearing lots more about them from a vastly changed wine industry.