The representatives crowded into the conference room at Adelaide Oval were there to hear solutions. The November 2023 event was the annual Wine Industry Suppliers Association (WISA) conference, which always focuses on practical approaches to the wine business: How to drive more sales. How to increase wine tourism. How to be more profitable.
This year’s theme was “The Only Way Is Up”, and focused on how to remain optimistic in the face of the worst crisis faced by the Australian wine industry for decades.
Pia Piggott, an Associate Analyst at Rabobank, who had written a widely-read report called Swimming in Wine, outlined the challenge.
“We now have 875 Olympic-sized swimming pools worth of wine in storage in Australia,” she began. “That’s equivalent to over two billion litres of wine and close to three billion bottles of wine.”
“We now have 875 Olympic-sized swimming pools worth of wine in storage in Australia.”
Of this, one quarter represents over-supply.
It’s about external pressures
Piggott says three factors were behind the oversupply.
First, the 218% tariff slapped on Australian wine by China in 2021, widely seen as retaliation for Australian criticisms. Until then, China had been Australia’s most significant export market, with sales reaching A$1.2 billion (€737 million) in the year to January 2020.
Then there were the logistical bottlenecks caused by Covid. As shipping prices increased four- and then five-fold, ships began to bypass Australia in favour of shorter, higher-value routes. Many Australian wineries could not fulfill export orders and lost their customers, leaving them with too much wine.
“And three, we had record production. The 2021 vintage was the largest vintage on record — a 36% year-on-year increase.”
Not only has volume increased, but the value has decreased, because “China paid a premium for our wines, particularly the warm inland varieties, and for red varieties in particular,” says Piggott. “China was making up more in volume terms than the rest of the world.”
This has left Australia with a structural oversupply, with depressed prices for inland red varieties, with prices falling 67% since 2020. “It’s really unlikely to recover when the tariffs are removed,” she continued.
Australia’s traditional market of the UK is unlikely to pick up the excess, because “in August they increased the alcohol duties, which we’ve estimated will increase duty on a typical bottle of Australian wine by 20%".
Nor will the lucrative US market help, because the demand for wines under $15 a bottle is falling.
There was also the inflationary pressures that were felt acutely in Australia, with the cost of fertilisers, glass, barrels and other inputs rising sharply — while the cost of shipping makes it uneconomic to ship 20c per Litre bulk wine to Europe, where it will be hit with taxes.
Who is suffering the oversupply?
Close to 70% of all grapes produced in Australia come from the warm, irrigated regions of southeastern Australia, and it’s these that growers are now struggling to sell. Typically, growers sell their grapes to wineries. “As farmers come to their scheduled end dates, we’re expecting that wineries aren’t going to renew these contracts,” says Piggott. “This increases the risk for these growers, because they might not be able to sell the grapes, even at low prices.”
Some viticulturists have been grafting to white varieties. Some are selling up, or selling their water rights. And some, particularly those with overseas owners, are simply abandoning the vineyards.
Three possible pathways
In October 2023, negotiators announced that China and Australia had found a way to settle their dispute, and that the tariffs might be lifted well before their 2026 expiry date. Piggott told the crowd not to believe that this would magically solve Australia’s problems, because other industries were disappointed by the spending patterns of Chinese consumers post-Covid.
“We’ve seen that Chinese consumers have low confidence, caused by low inflation and low spending,” she says, adding that it’s possible China will re-embrace Australian wine in time.
If the number of vineyards isn’t reduced, the oversupply issues will remain regardless of how much the Chinese drink.
Piggott says she has modelled three possible scenarios for Australia. In the first scenario, where tariffs remain in place, she foresaw oversupply lasting for four more years. If the tariffs do come off, and the Chinese gradually re-adopt their old consumption patterns, then the oversupply will last for three years. In the best possible scenario, where the tariffs are dropped and consumption comes roaring back, the oversupply will last two years.
If the number of vineyards isn’t reduced, the oversupply issues will remain regardless of how much the Chinese drink — so it all depends on how much economic pain the growers can absorb, for years at a time.
Wine and water in the Riverland
“There’s too much red,” says Darren Oemcke bluntly. “It’s being sold for a shocking price.”
Oemcke is the Director of Hydra Consulting, a wine advisory service, as well as the Chair of Riverland Wine, and he spoke to Meininger’s on his way home from a meeting about the strategic future of the region.
Oemcke says the situation for growers has been “brutal” for two years, and that prices have crashed. But, he says, it’s important to remember that what’s happened has not been because of quality issues, but because of economic problems beyond the industry’s control. “The world’s been in oversupply or grapes since 1965 or 1966, and we’ve been very successful within that oversupply,” he says.
He adds that some red wines are still performing well, such as Grenache and Malbec, but that “we are very heavily exposed to Cabernet Sauvignon and Shiraz.”
No help from the government
There’s no help coming. The Australian government does not offer the kind of support that EU wine producers can rely on, from crisis distillation to support to grub up vines. “There’s actually resistance to providing that kind of structural support over here,” he says.
So when producers hit hard times, their options are: to mothball their vineyards and wait for better times; sell their land; grow different crops; abandon their land, as some overseas owners have already done; or go bankrupt. “There’s obviously a concern about disease pressure as the result of those abandoned vineyards,” he says.
The other option for growers in the inland irrigated regions is to sell their water rights, which are extremely valuable.
“Water and land don’t go together in the Murray-Darling Basin,” he says. “Your water is a separate title to your land.”
Unfortunately, there is a big incentive for growers to sell their water rights to people outside the region — which means the region is literally losing water. Another issue is that the government itself, through the Commonwealth Environmental Water Holder, is also buying water as a conservation measure. “That means there’s a risk of the irrigation infrastructure cost being borne by a smaller number,” he says, adding this organisation is working to ensure the region doesn’t lose too much water.
Some parts of the wine sector are booming
Stephen Strachan, Director, Langley & Co. Advisors, is in the business of land sales. He says there will be an inevitable “removal of vineyards and, as a consequence of that, a removal of bulk and branded wine in the marketplace”. Strachan says he’s seeing plenty of deals happening right now, as buyers are able to buy vineyard land at a discounted rate. They may, however, intend to plant them with other crops, like almonds.
He says that most regions in South Australia are affected by the downturn, with the exception of the cool-climate Adelaide Hills. “If you go to cool climate regions like the Yarra Valley, Tasmania or the Mornington Peninsula, you wouldn’t know there’s a problem in the industry because they’re seeing a high degree of success,” he says, adding that there is “exceptionally strong demand for premium Pinot Noir, Chardonnay, Pinot Gris and a few other varieties as well”.
The best quality Pinot Noir from the Yarra Valley sells, says Strachan, for more than A$5,000 (€3,086) a tonne.
There are also many people in the irrigated regions who are doing very well. “We’ve got mega-wineries like Accoldate and then producers who produce a few tonnes a year,” says Oemcke.
These smaller producers are the drivers of change, as they are the ones trialling new varieties.
These smaller producers are the drivers of change, as they are the ones trialling new varieties. “That part of the sector is tearing along,” says Oemcke. “There are also a lot of natural and pet nat wines producers out of the region, and the global interest in those wines is incredible.” These include wines like Unico Zelo and Riccaterra. “Smaller producers producing niche brands with a high value are doing incredibly well,” he says.
Australian producers also stand to benefit from the global swing towards no-alcohol products; the IWSR expects the global market to grow by 33% to $14.7bn (€13 Milliarde) by 2026, driven by consumers in Germany, the UK, the USA, Japan and Spain.
Australia has set itself the goal of being the world leader in this category and in 2023 the government awarded a A$3 million (€1.84m) grant for research into low-alcohol wines. Also, producers interested in trialling new products can rent time with a spinning cone, rather than paying for one themselves
“The other thing that’s happening is we’ll do a big push on wine tourism in the Riverland, because it’s probably the most underdeveloped region for wine tourism,” says Oemcke.
It's a waiting game
Even Piggott had some words of optimism to offer. “Domestic sales make up 40% of Australian wine sales,” she says, noting that wine prices hadn’t moved for a long time. “Australian consumers feel like they’re in a recession, even though we have a strong jobs market,” which means they’re more likely to reach for lower-priced wines and drain some of that lake.
Plus, she says, the industry is already responding, with a move towards planting white grapes, and towards premiumisation. As some businesses sell, others are waiting to snap up opportunities. Her conclusion? “Just keep swimming.”
