WA & WFA double delight & the dark side

Double delight

The Winemakers’ Federation of Australia (WFA) has released the 2016 vintage report. Following the Wine Australia (WA) export report last week, it’s a double delight as both reports were positive and show for the first time that Australian wine is coming out of depression.

The vintage was large, coming in at 1.81 million tonnes (up 6 per cent). TKR is not yet convinced Australia needs such an amount, and for evidence we refer to the 15.59 million litres of bottled wine exported at $2.50 litre or less (average $2.15 a litre). That’s about 5 per cent of exports going out at such a low price, which shows that dumping at cost or below is ongoing.

From the WFA report:

  • Total estimated value of the Australian winegrape crush was $951 million, up 21 per cent from $788 million in 2015.
  • Average purchase prices increased across the board: reds were up 13 per cent and whites up 12 per cent.
  • Average price across all varieties was $526 per tonne, the highest since 2009.
  • The proportion of winery-owned fruit increased from 28 per cent of the crush in 2015 to 32 per cent in 2016.

It’s good to see a better average return for grape growers, but the warm inland regions of Riverina, Murray Darling-Swan Hill and South Australia Riverland didn’t fare as well as cool climate regions. The total crop in these three major regions was down about 7000 tonnes, which is neither here nor there considering the vast amount these three regions contribute to the Australian vintage. Prices for purchased fruit:

Murray Darling-Swan Hill: Total purchased 237,435 tonnes, 43 per cent of crop below $300 a tonne, 56 per cent of crop between $300 and $600.

Riverina: Total purchased 211,435 tonnes, 41 per cent of crop below $300 a tonne, 58 per cent of crop between $300 and $600.

South Australia Riverland: Total purchased 368,747 tonnes, 42 per cent of crop below $300 a tonne, 58 per cent of crop between $300 and $600.

Average grape price 99-16

Some would have benefited from increased prices, but not all, and the picture is not as pretty as the WFA report makes out. Breaking the figures for the three regions down further we find:

Murray Darling-Swan Hill: Average price per tonne for red $329, for white $299.

Riverina: Average price per tonne for red $359, for white $289.

South Australia Riverland: Average price per tonne for red $342, for white $299.

Murray Valley Winegrowers (MVW) executive officer Mike Stone issued a media release earlier this month that said the value of the fruit bought from growers this vintage was $74 million. Across all varieties, growers received an average price of $312 a tonne, up 8 per cent from $288 a tonne in 2015. Including winery-owned fruit, the total value of the 2016 harvest was $118 million compared with the 2015 result of $111 million.

Stone also pointed out prices generally barely covered production costs and needed to improve significantly to convince growers that the wine industry was in full recovery mode. He added:

“The signs are positive, with export sales increasing and achieving the strongest growth in average value in almost 20 years. But growers remain anxious, wanting to see more evidence of demand picking up and prices responding accordingly.”

Brian Simpson, Chief Executive Officer, Riverina Wine Grapes Marketing Board points out the anomaly in his region,

“The Riverina averages whilst showing improvement across most varieties doesn’t tell the entire story of grape sales as you have alluded to.

“One large buyer in the region that continues to purchase vineyard holding in this region and many others is paying a higher than average price for most varieties purchased.  The impacts of this on the WAP is enormous and if we were to remove this winery’s prices from the WAP the story would indicate an industry in distress.  Sales of grapes below $300 are well below the costs of production and coupled with these low prices many growers payments are being delayed by numerous buyers.

“Payment terms is becoming a real problem for producers in the Riverina as wineries stretch the industry standard out to 4 and even 9 payments.  A number of producers are still waiting on payment for their production delivered in 2015.  It is poor form that wineries do not offer to cover the costs or production each season but to then not pay on time and not allow for interest to be paid is disappointing.”

Chris Byrne, CEO, Riverland Wine says

“The main driver of the improvement was Chardonnay, up by about $60 per tonne.

“The joy being variously expressed is not yet infecting this region’s growers or winemakers; so much reliance on export bulk prices per litre.

“The 3b Graphs reveal, no matter which way the data is scrutinised, that even with the small price improvement in 2016, the industry is at risk of eroding its critical mass.

“Returns per hectare or returns per megalitre are unsustainable and will give way; perhaps suddenly?

“For as many as 60-70 per cent of Australia’s growers, pricing signals are still urging growers to purchase water and grow volume.

The chart below shows the cool climate regions are getting the better deal, their gripe will be costs are higher

 Purcharce price

 

At the other end of the scale the wineries in the table below sold 100 per cent of their fruit at $600 a tonne and above:

Canberra Yarra Valley Pemberton Pyrenees Gt Southern
Clare Valley Grampians Rutherglen Margaret River Upper Goulburn
Geelong Tumbarumba Queensland Mudgee

The following regions achieved over $2000 a tonne for a good proportion of fruit:

  • Macedon: 100 per cent
  • Mornington Peninsula: 99 per cent
  • Tasmania: 97 per cent
  • Barossa Valley: 50 per cent

Kenny not so canny

The Conversation on July 19 carried an article by Paul Kenny, Associate Professor of Taxation Law, Flinders University, headed:

“Australia should be helping its premium wine industry, not hindering it through tax.”  

Kenny believes taxation is outdated and distorting the Australian wine industry. He says it encourages the production of cheap wine and oversupply. The upshot being the reputation of Australian wines in overseas markets is diminished. He covers lots of the usual ground, including the how and why the wine equalisation tax (WET) came into being, the boom of exports, low and high dollar exchange, the challenge from other New World producers and the resurgence of Old World producers.

He also covers health issues and NZ producers being able to access WET rebates. In short, for most of the article he doesn’t say anything that hasn’t be said many times before. The only part that caught TKR’s attention was this:

“The high wine tax has stymied the industry’s ability to compete internationally. It differs to the policies of old-world wine countries and emerging competitors who impose zero or low amounts of wine tax.

“However the wine tax punishes premium winemakers and favours voluminous cheap wine, as the Treasury’s 2015 Tax White Paper reform process noted. The Australian wine tax has different impacts on consumers and producers and this creates different distortions.

“It raises consumption and tax revenue but incentivises winemakers to reduce prices, downgrade product quality, reduce advertising and marketing costs. The costs of complying with the tax dissuades winemakers from investing in the quality of their wine and encourages winemakers to lower the cost of their wines due to competition.”

How can a domestic tax affect international trade? All wine is tax free as it leaves the country. The tax it raises is whatever is imposed in the country for which it is destined.

TKR can’t accept the argument that high tax forces producers to drop fine wine for commercial wine. There is more than enough fine wine in Australia, as much as people want to pay for. True, in some markets, notably the UK and US, the reputation of Australian wine has fallen. But that, in our opinion, was more the fault of marketing than making.

Kenny admits he has a share in a small vineyard. Without doubting his ability in taxation law, we are not convinced he has a grasp of the Australian wine industry.

Sticky situation

We think TKR was among the first, if not the first, to break the news that Casella had invested in vineyard land in McLaren Vale. We are not the first to announce that it has also acquired Morris Wines from Pernod Ricard.

The price wasn’t disclosed, but no doubt will show up somewhere in company accounts. The surprise was the change of mind from Pernod Richard, which was ready to sell everything apart from the brand, making the rest valueless.

Now the lot is in the hands of Casella. TKR is not sure in what direction Morris Wines will go, but we do think there is potential there, and Casella is a good company to bring it out. We wish them well.

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