It is widely accepted that Australia produces between 15-20% too many winegrapes to meet its current requirements. Furthermore, now that it is broadly recognised that the only available course for a profitable Australian wine industry is for it to make less wine that it sells at a higher price, it is likely to be some time before Australian wine producers again call for more fruit. This, they did collectively throughout the late 1990s, which is one of the reasons behind Australia’s current glut of grapes.The oversupply has been exacerbated by larger than expected crops in 2008 and 2009, as well as the decline in export sales that commenced around a year ago and which currently shows little sign of reversing.Australian wine is again very cheap, producers are having to slash margins to remain competitive and consequently they want to pay less for grapes. Two of Australia’s three largest producers have already indicated that inland growers can expect cuts in revenues between 20-30% from 2008 to 2009. In many cases the prices being offered to growers are below the cost of production.According to Mark McKenzie, Executive Director of the Wine Grape Growers’ Australia, many growers have hung in over the past two to three years as the industry has bumped along the bottom, hoping for a reversal of fortune. Now that such a reversal seems anything but imminent, they are beginning to seek a way out. McKenzie suggests that about 2,000 Australian grape growers are presently facing serious financial issues.Trouble, is since, many would have difficulty even giving their land away, the only asset of any value left to these growers is their water license. Many larger Australian wine producers regard supply contracts as null and void if the vineyard ownership changes hands, so even if a potential new owner and operator were to emerge, the production would need to find a new home.Via Centrelink, the Federal Government established the $57.1 million Small Block Irrigators Exit Grant Package for growers of less than 40 ha of vines to turn off the water supply. Closing on June 30, this scheme offered up to $150,000 provided a grower’s assets (excluding vineyard and home) were less than $575,000. To qualify for the full grant, the asset value needed to be below $350,000.While Centrelink has yet to release the number of successful applications, McKenzie estimates around 150 in South Australia, about 10% of the total number in the State which he postulates would account for around 3,000 ha of vines. Given that across Australia’s irrigated regions growers are removing inefficient and older vineyards, it’s hypothetical that Australia will lose around 5,000 ha in total within a short time. By no means enough, it’s a start.Alarmingly, the malaise is spreading. There are reports of vineyard land in premium regions like Coonawarra and Clare being sold for land value alone less the cost of taking out the vines, while the issues facing Foster’s and Constellation to dispose of high-value assets in prestigious regions are well documented. Today there are dozens of vineyards for sale across WA’s premium regions. Prices asked are around $40,000 per hectare, against establishment costs of $70,000. At last count, the value of wine industry assets publicly on the market topped $500 million. With an estimated additional $300 million worth up for private sale, there is a smorgasbord before potential buyers.While some assets are of unquestioned value to existing industry participants Ð witness the sale of 394 ha in WA’s Mount Barker region by Constellation to a consortium associated with West Cape Howe Ð it is also apparent that many sites will remain unsold. Constellation recently removed 175 ha of vines in Coonawarra, Padthaway and Clare from the market with the intention simply to grub out the vines instead.It has been reported that Foster’s has received interests in each of the 33 assets it has placed on the market, which together totals 4,000 ha of established vineyard and three wineries. Greg Dring of Macquarie estimates the sale will bring Foster’s just less than $200 million in returns, 20% less than their book value. Having sold its Smithbrook assets (but not the brand), Lion Nathan might yet decide to offload the remainder of its vineyards and wineries. That would simply increase the magnitude of the firesale.We have known for some time that a shakedown was necessary. It appears to have arrived.
