Wine sector in decline

Oversupply of winemaking grapes has become the most significant issue facing the industry as it threatens grower viability with prices paid plummeting. Given that the majority of grape growers in the industry are operating on less than 10 hectares, there is no guarantee that the endeavour will be profitable. Especially given the high level of volatility in inputs cost requirements; fertilisers, fuel and water have all proven to be difficult to manage over the last five years. Industry revenue will decline at an annualised rate of 3.3% over the five years to 2010.

In order to account for the oversupply of grapes to winemakers, many vineyards are reducing their size, pulling out their vines. Unfortunately, while the price remains low, reducing the number of vines will only reduce the growers’ market power, and hence profit margin. Mismatches between demand and supply for particular varieties are partly caused by a significant lag between planting vines and producing grapes; typically two to four years.

The total values of grapes exported and imported to Australia during the five year period to 2009-10 are expected to grow. Industry employment has fallen over the past five years and tended to be responsive to changes in output, as much of the labour is casual. Profitability has fluctuated from year to year due to volatile grape prices, but increased overall during the last five years.

The introduction of automated machinery and other technologies, as well as some increase in average farm size, had a positive effect on profit levels. The past five years has seen a decline in yields per hectare, mainly due to lower water availability. Global demand for discretionary items such as wine was affected by lower consumer confidence, and tight credit conditions.

The future performance of the industry will be primarily affected by climatic conditions and continued mismatches between demand and supply for a number of grape varieties. Over the next five years to 2014-15, revenue will grow at an annualised rate of 1.5%. Revenue growth will be a result of tighter demand and supply conditions, with prices increasing but growth constrained by difficult growing conditions. There will be some positive impact on domestic wine grape prices from an improvement in international wine supply and demand conditions.

Future profitability in the wine grape industry depends on growers achieving economies of scale. Presently, small vineyard sizes represent a barrier to this. Costs of production are expected to rise, particularly the cost of irrigation water and fertilisers. However, grape prices are also expected to rise, but at a slightly lower rate than the cost of production. This will see profit levels declining marginally over the next five years.

There is only expected to be low to moderate growth in the area planted to wine grapes and the volume of grapes produced, constrained by access to water. The outlook for the industry has changed from one of oversupply to constrained supply. Wine grape growers presently have a poor bargaining position in relation to the more highly concentrated wine industry which purchases their product.

It is expected there will be consolidation of vineyards, which will go some way towards addressing the imbalance of bargaining power. This will allow some producers to achieve economies of scale and improve profitability. The future of the dried vine fruits segment depends on an ability to maintain and expand export markets and earn premium prices for quality products.

Key success factors for operators in the industry:

• Supply contracts in place for key inputs. Contracts will ensure a steady market for the grapes grown.
• Economies of scale. Larger scale operations will assist in gaining permanent supply contracts with major wine producers.
• Appropriate climatic conditions. Location is critical to ensuring yield success. That is, whether a traditional growing area or a newer, cool-climate location is chosen.
• Use of specialist equipment or facilities. The level of technology employed, with respect to the type of irrigation system, trellising, and control of chemical usage is important to productivity and product quality.
• Planting of premium, disease-resistant crops. The type of vines grown – whether they are premium wine varieties resistant to disease, etc will largely determine success with respect to product quality and yield.

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Robert Bryant is the general manager of business information firm IBISWorld.