Meininger's: While your marketplace is global in its outlook and operation, the platform gives you a unique insight into the state of the Australian industry. What is the mood right now?
Hornabrook: Broadly one of despondency and frustration. Many producers are in a really tough spot. Most have surplus inventory. All are looking for a palatable solution.
From our discussions it’s clear there’s growing frustration from a lack of perceived action by the industry body and the new federal Government. A significant part of the industry is on its knees with crippling red wine surpluses, others have been forced into liquidation and others have just ceased to exist. Increasing wine assets are coming into the market and it's likely there’s an economic meltdown coming. The situation has already affected the livelihoods of families and their mental health.
"A significant part of the industry is on its knees with crippling red wine surpluses, others have been forced into liquidation and others have just ceased to exist."
Meininger's: As we approach the 2023 harvest, do you have any idea of how much wine from previous vintages is sitting in tanks right now?
Hornabrook: Yes, 2.3 billion litres - 256 million cases of wine: more than two years of inventory without a market. That’s an almost insurmountable 25% above the industry's 10-year average. The VINEX Southern Hemisphere price comparison index shows the weighted average price has dropped 40% for Australia since November 2020. That's the average of major varieties, across both white and red. Red pricing is down over 60%, and that's only on disclosed sales. But the point to focus on is that the price declines are on wine made from record high industry grape pricing in 2019 and 2020.
Meininger's: Visitors to the WBWE bulk fair in Amsterdam were surprised to see less of a presence from Australian producers than they expected. Do you think that they aren't considering Europe as a potential market for their wine?
Hornabrook: What was telling at the WBWE was the presence of Accolade, one of Australia’s largest companies - overtly offering bulk wine to everyone. They desperately need to; but good on them for seizing the opportunity to actively re-engage European buyers. In contrast to the industry's early pioneers who independently opened up many markets for Australian wine, most producers now wait for the industry body to subsidise their overseas market-facing efforts or expect VINEX and brokers to bring them purchasers. Not helping is the Export Grants program which is woefully inadequate in these circumstances. I’ve had Australian brokers call me at their wits-end saying they have 30 million litres to offer, asking can it be traded through the VINEX marketplace? What's more surprising to us is that very few Australian producers use our advanced Closed Market, where pricing is hidden except to invited buyers.
As evidenced by the lack of attendance at WBWE and other fairs over the last 18 months few Australian producers are taking the initiative to re-engage UK and European buyers, which is very surprising. Unfortunately the Australian FTA with UK has still not passed both Parliaments (nor has their agreement with India) which must be hugely frustrating for the industry, and their EU FTA is still 'in negotiation' and potentially some years away. Of course, part of the reason for their lack of engagement with European buyers might be to save-face, to be spared the wrath of buyers who remember being told over the last 10 years, if you don’t pay China’s prices for our reds you won’t get supply.
"Few Australian producers are taking the initiative to re-engage UK and European buyers, which is very surprising."
Meininger's: This may be a tricky question, but how do you see the financial state of the Australian wine industry right now? Some sectors are presumably looking stronger than others
Hornabrook: It’s diverse. For those who have a diverse customer base it's a blessing. But a very significant share of the 2,156 wineries and more than 6,000 grape growers are either in a world of pain or in denial, as it’s just around the corner. It's worth remembering that the industry contributes AU$46 billion to the Australian economy so it’s not insignificant, and is a top-20 export earner for the country.
Meininger's: Talking to producers, there seems to be a mood amongst some that Australia and China are soon going to resolve their differences and that this will set everything to rights. How likely is that? Is the Chinese market for Australian wine going to bounce back to where it was?
Hornabrook: It’s almost irrelevant what happens with China, they're no longer the solution. Even if tensions thawed tomorrow, China’s consumption is at record lows and it won’t soak up 4 vintages of wine in tank. Through VINEX, we've seen Chinese buyer demand plummet for wines from all countries, and few attended WBWE. Look, the reality is that China and Russia have been two of the world’s largest markets to soak up surplus supply - both are now off the table, which incidentally is not only a problem for wine from Australia.
"China and Russia have been two of the world’s largest markets to soak up surplus supply - both are now off the table, which incidentally is not only a problem for wine from Australia."
Meininger's: Do you think this is simply a bad moment for Australia or will there need to be some fundamental changes in the industry?
Hornabrook: Make no mistake, this is a catastrophic moment for a very significant part of the Australian wine industry. There’s wine producers entering voluntary administration, warm climate grape growers with their head in the sand, spending upwards of AU$7,000/ha not realising they’re going to get less than AU$3,000/ha income in June 2023. What’s worse is you have State agricultural authorities visiting wine regions talking about "flood relief support" - with no mention of how they’re addressing the "wine flood crisis"!
With higher interest rates, lower margins and lower sales we're expecting cashflow to become critical and possibly loan payment defaults. It’s a fact, the only reason there hasn’t yet been a financial collapse yet is because the banks haven’t revalued wineries' underlying assets and moved on insolvent trading - but it's potentially a ticking time bomb.
I can’t help but feel if this was happening in almost any other country there would have been widespread loud protests on the inaction by industry authorities and Government. Part of the problem is the Australian industry is not unionised and, with no vocal uprising, the Government has no motivation to financially assist and facilitate a plan to support the grape growing and winemaking heart of the industry.
It will require a structural reset for a large share of the Australian wine industry to survive, and again prosper. But, before that, grape growers and winemakers need to seriously and relentlessly lobby authorities and buyers equally. The 2023 harvest starts in less than two months!
Australia can’t sustain producing its current level of grapes, it no longer has the international competitive advantage it once had - quality, diversity, organic and sustainable viticulture is the way forward, with an increase in white to red varietals needed. Production from the existing 150,000 ha of vineyards (across warm and cool climate regions) needs to reduce by 25% through lower annual yields to somewhere between 1.1 - 1.5m tonnes each year, down from the record yield of 2m tonnes in 2021.