Deloitte Agribusiness on wine and gold in the hills

Stacy’s balancing act

Deloitte has released its Agribusiness Bulletin on the Australian 2016 vintage. Most of what it says has been covered by TKR before, and in greater detail, or has been in general media articles. One part that was interesting concerned supply and demand. As can be seen in the graph below, sales and production are aligned and inventory is in balance.


The paper was written by Jake Stacy, senior analyst, financial advisory, and SA Wine Industry group member. Stacy points out that oversupply peaked at almost 2 billion litres in 2005-06. He goes on to mention the talk (and there was a lot of talk) about the Wine Restructuring Action Agenda,

“which identified an urgent need to reduce wine inventories and production capacity in order to rebalance supply and demand, and made recommendations on how best to achieve this”.

Total vineyard area has been significantly reduced, Stacy says. This implies it’s been reduced enough. Has it? TKR is not so sure about that, or that yields have fallen. Have they? The Riverland region accounts for about 25 per cent of the total Australian crush. In 2000 the average tonne per hectare was 16.95. This peaked in 2005 at 22.81 tonnes, and fell to a low of 15.76 tonnes in 2010. Since then has risen each year, reaching 22.03 tonnes in 2015.

What we do know is that prices are so low for the majority of grapes that in many instances increased yields have been encouraged to compensate for lost income. Stacy says:

Total vineyard area has significantly reduced, yields have been lowered, less wine has been produced and wine inventories have been drawn down to more a sustainable level. Couple this with relatively consistent level of sales/demand since 2008 (which is now generally consistent with production levels) and the emerging Asian export markets and it appears as though the historical imbalance between supply and demand is now less significant than in previous years.

“Although surplus inventories still remain in 2016, rebalancing supply has helped average prices reach the highest level achieved across all varieties since 2009 (as shown in the 2016 Vintage Report), placing the industry in a much better financial position in 2016 than it has been in recent years.”

Stacy is taking a chunk of his information from the Wine Australia (WA) paper Supply and Demand Balance of the Australian Wine Industry.

This paper came out in March and covers the 2014-15 season. The 2015-16 season will be covered in the next release in about a month. On inventory, the WA paper says:

“The inventory data reported in this paper is based on an industry supply and demand balance calculation. The basic industry calculation is as follows:

“Inventory (June 2015) = Inventory (June 2014) + Wine production (2014-15) – Total sales (2014-15).

“The inventory statistics collected in 2015 Production, Inventory and Domestic Sales Survey alone are not enough to accurately represent an industry wide inventory figure as the survey did not collect bulk wine transfers between wineries.”

“Not enough to accurately represent an industry wide inventory figure” is not how Stacy has presented his reading of the WA paper.

To his credit, Stacy does say: “The situation can be drastically different when assessed on a by-region or by-variety basis.” 

The example he gives is Barossa shiraz, which has been in tight supply. He quotes Austwine as saying in 2015 that it was in a state of undersupply.

Stacy: “This is a critical factor to consider for producers and wholesalers targeting a specific wine (whether that be by grade, variety or region), particularly those looking to cash in on the next wave of growth opportunities presented by Asian export markets. Now that the 2005-06 wine glut has been substantially reduced and new sources of demand continue to emerge, it will be critical for wine producers to secure adequate supply of their desired future varieties.”

Sound logic and good advice, but producers can only get all the fruit they require at the price they want to pay if there is oversupply and grapes are cheap. Growers want an undersupply situation (apart from at their own vineyard) so they can force the price up and make good money.

Stacy suggests producers enter medium to long-term contracts with growers to ensure supply. In the early part of this century they did, but when the dollar rose and the UK and US turned away from Australian wine, the producers dumped on growers big time.

TKR is not as convinced as Stacy appears to be that producers and growers can work in harmony. As for maintaining supply, wine is an up and down business, with each vintage offering more, less, the same, better, worse and higher or lower prices.

It cannot be smoothed out as his neat accounting mind wishes. Again, to give him credit, he does bring into his report weather conditions and disease affecting vintages, and puts forward the following points:

  • Would a small vintage affect the producer’s ability to satisfy pre-determined sales contracts? 
  • If the producer cannot secure adequate supply to service these supply contracts, will this affect their ability to maintain their relationship and agreements with key distributors? 
  • Furthermore, will the producer be forced to forge sales opportunities in new growth markets to focus on satisfying demand in existing markets? 
  • If so, how will this affect the producer’s ability to continue to compete for market share in these markets?

TKR feels Mr Stacy is not looking at the Australian wine industry the way it should be looked at. Taking his first point, let’s split the industry into how we think it should be viewed.

The majority of grape source is from the warm inland regions, Riverland, Murray Valley and Riverina. These are big numbers, as can be seen in this table from the Riverland for the past five years:

  • 2010: 277,813 tonnes
  • 2011: 315,358 tonnes
  • 2012: 359,193 tonnes
  • 2013: 326,904 tonnes
  • 2014: 359,401 tonnes
  • 2015: 364,326 tonnes

Small vintages in these regions are still big vintages, and as the inventory-production chart shows, are in alignment. It’s a different story in a less reliable region, such as Barossa, Mornington Peninsula or Tasmania, where a poor vintage can hurt. The secret is “less is more”. The better the reputation, the better the price. Burgundy will be down by as much as 30 per cent this year but has enough fat to sustain it. Consumers who pay top prices for wine understand vintage variation.

The above also answers Stacy’s second point. As for the third point, if the new market is paying higher prices, hence producing bigger profits, than the domestic or other established markets, it will be the other and domestic markets that will be rationed. Which answers the fourth point as well.

Gold meddles

ABC Rural ran a report by Claire Campbell on October 8 under the headline: “Adelaide Hills Terramin gold mine plan worries wine industry.”

The gold mine is to be situated at Woodside, in the northern part of the Adelaide Hills wine region. The two big wineries close to the proposed mine are Petaluma and Bird in Hand.

Ms Campbell’s report extensively quotes Inverbrackie Creek Catchment Group chairman Jim Franklin-McEvoy. His concerns include:

  • Harm to the region’s food and wine production
  • Adverse tourism impact as the mine site would be adjacent to two big Hills wineries
  • Many millions of dollars of annual farm gate turnover could be put at risk if mining proceeded
  • Adelaide’s metropolitan water supply from Mount Bold reservoir could be at risk of contamination from mining activity

Franklin-McEvoy justifies his concerns by saying all local producers are irrigators and crops are sensitive to water quality. He says:

“A lot of the rocks here are quite sulfuric so you’ve got the risk of sulfuric acid production and there’s unknown heavy metals there – I mean they can test certain amount of gold and certain amount of other metals there, but you really don’t want anything that isn’t meant to be there washing into Adelaide’s water supply.”

A good point, but does it carry weight, or is it a “good idea but not in my backyard’’ whinge?

Viticulturist Simon Tolley is concerned about extra trucks using the roads and is quoted as saying:

“It will decrease the quality of our valuable resource that we have and it will impact other crops such as strawberries and pasture.”

Trucks on roads will cause dust and possibly damage crops, but extra tourism, which the region is after, won’t. It’s an interesting view on dust management. Tolley also adds a list of what ifs or could be.

Naturally, the Terramin company says it understands local concerns and will monitor water and dust and so on. But companies, including wine companies, have been known to stretch the truth and even tell outright porkies from time to time.

There is also the job issue. South Australia is only beaten by Tasmania in the unemployment stakes. Australia’s official unemployment rate fell to 5.6 per cent in the August figures (latest available), with South Australia recording 6.8 per cent, up from 6.3 per cent. Terramin says it plans to create 125 jobs in the Woodside and Strathalbyn area.


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