Chinese Whispers and Australian Wine – The Reckoning (Part 4/4)

Kaddy went insolvent. 

Treasury Wine Estates (TWE) publicly said that even if China re-opens, it will be at least a five-year re-build.

Accolade has put Arras up for sale. When bankers sell the jewels, you know that they’re heading for the exits as fast as they can.

Treasury admitted that it can’t make money selling wine under $10 and is looking at axing brands possibly including Wolf Blass and 19 Crimes.

That was just one week’s news in the Australian wine industry.

Then, I saw this:

Even Yellow Tail is down 25% by volume in the USA since 2014 and GAINING market share there. That’s how bad the USA market is for other Australian wine brands through 2021.

To get a better picture of how the China tariffs have and have not affected Australian Wine, if you look at 10-year inflation adjusted data from 2011-2021 to catch the pre-China tariff vibe and the 2013-2023 period to catch the post-China tariff vibe, a few major trends appear in both data sets. If you slice geographic indications data using state names vs non-state names (South East Australia, Australia, no claim made, Murray Darling) by prices paid per litre and then look at trends in bottled vs bulk wine, a pattern emerges:

What emerges is that Australian wine, whether bulk or bottled, fetches higher and increasing prices using at least a state name of origin or a region within that state. Wines that use “super” regional or no GI names have barely kept pace with inflation over the last ten years. As of 2023, nearly flat (non-state bottled) to a 15% decrease (non-state bulk) prices are the result. The good news / bad news here is that there is a visible path forward for the industry.

Digging more deeply, non-state bulk wine is getting bigger in volume despite non-state exporters not having any pricing power. This is the clearest result of overproduction – grapes with nowhere else to go

With bottled wine, non-state producers have been shrinking rapidly while staying just ahead of inflation with remaining products:

With bottled wine, there is a cross current of trends making it harder to understand at a high level but a bit easier at a lower level. First, non-state bottled wine has fallen rapidly in volume from a high base but appears to maintain pricing. State labelled wine has been flat-ish overall in volume with rapidly increasing prices to 2021 and then falling in volume as a direct result of China but still holding most of its pricing gains.

This last graph above is of special interest as the revenue as a % of exports is almost a mirror of state and non-state across the 10-year period with state clearly gaining at non-state’s expense by similar amounts.

It is a lot of graphs but they do help understand the situation better.

The graphs that brings it all home most clearly are these below measuring the percentage of change of all these variables from 2011-2021 and 2013-2023 assuming RBA rates of inflation:

This graph assumes 20.8% inflation to 2011 dollar amounts – source RBA 2010-2020 inflation calculator

This graph assumes 26% inflation to 2013 dollar amounts – source RBA 2012-2022 inflation calculator

Reviewing the two graphs above, it is clear that the negative gray bar in state bottled section in 2013 vs 2023 is overwhelmingly a result of the China tariffs while the non-state bottled sector was in pre-tariff decline in line with the other trends made clear previously.

These graphs illustrate that there is a tale of two cites here and possibly, two industries. One able to survive over time including the pressures of inflation while the other is losing to or barely able to keep pace with inflation while still growing rapidly as we saw earlier.

So where do we look for hope to sell all this wine? 

Markets

For the bulk market, we can hope for bad harvests around the world or a slow bleed of inventories. Until then, domestic harvest capacity will be constrained until we clear these inventories. There are no quick solutions or markets where a huge amount of cheap wine is required absent some calamity somewhere.

For the rest of the industry, premiumisation focused on our best wine is the only path available. The big 5 customers (USA, China(!), UK, Hong Kong, Canada, Singapore) offer mixed opportunities.

China – someday, somehow it will be a growing market for us for higher priced offerings. But no bets being placed here for the reasons stated prior.

UK – a mature and stable market with a rapidly growing domestic wine industry and a bad post-Brexit hangover.

Canada has some upside but is a pretty mature market when viewed as a comparison market to the USA.

Hong Kong and Singapore both are popping higher in the data as large high value producers set up regional distribution there after leaving China. We still need to see what that means at the consumer level though as these sell through.

USA – of all the possible sources for significant and rapid potential growth, the USA alone can change things over the next 3-5 years. There is an enormous market for higher value wine that is simply not being pursued with the financial resources or expertise required. When you factor out Yellow tails footprint, we sell very little wine there compared to many similar but smaller markets.

Numerous other Asian markets all offer steady upside such as South Korea, Japan, Vietnam, Thailand and Malaysia though most have stiff taxes on alcohol limiting distribution to the top end of town. While we historically cheaper gear is sold to these markets in the past to compensate for the taxes charged, we need to learn the big lesson from China – the big end of town has a lot of money to spend on prestige products and little interest in lower priced offerings. 

A New Way Forward

How do we accomplish this while working our way out from under our massive oversupply?

First we need to recognise the current crisis of over supply of grapes and wine as being the logical endpoint of our “biggest and best” wine producing country strategy of the last 30 years. While near and dear to its original proponents, it hasn’t and will not work in its current form. We need to choose from the two and focus on one. We have limited resources and we are not a large country. While we are drowning in wine that doesn’t make money (or earn sizeable foreign currency for the country) trying to become “big”, the choice for “best” is a lay down misere.

Despite recent slow to negative volume growth for higher end bottled wine from Australia, we need to be mindful that the poor reputation for Australian fine wine hasn’t been caused by this segment (at least since 2010) but the perception as being a low end wine country. Worse, we have not leveraged the opportunity these lower end offerings wines created for us by getting into the market. This double problem is not as hard to change or “fix” as it sounds over the next 3-5 years.

We all need to think about the whole system, not just the profits and sales of wine companies or our own particular niche. 25+ years of trickle down wine economics has been worse than it could have been for everyone, including the large companies and low value producers. We too soon forget approximately $5-7 billion in public and private market devaluations and write-offs lost in the 00’s, BRL / Hardy’s being flogged off (twice), the continuing financial bleed-out of farmers with off-farm incomes, etc. It has been a goat rodeo of historic proportions.

No matter how you look at it for Australian wine, pretty much every major market trend since 2017 points to the rest of the world wanting less cheap (particularly red) wine from Australia (and possibly everywhere else as well) despite ours being currently even cheaper than other countries’ bulk wine.

The roots of this continuing problem are systemic and deeply ingrained. For instance, volumetric grape levies go back to 1929 to when the wine market in Australia was entirely different than today with little price differentiation and no automation. Times change and new learning about old solutions has to be applied.

When things are tough, it is natural to feel that anyone making money in the wine game is “making all the money” and that all transactions are zero sum / “I win, you lose” affairs because, well, they usually are.

In a smarter system, oversupply and falling prices are not typical. Look at successful wine economies around the world for what they have in common – high(er) end offerings, robust wine tourism offerings built around strong regional identities with international consumption and investment.

Most importantly, almost all of these economies (Bordeaux and Rioja aside) do not suffer from an oversupply of commodity wine production. That Bordeaux recognises the problem and is already implementing the solution is instructive for us. In an environment of slight grape undersupply, everybody at all levels can make money and has an incentive to re-invest in improving the quality of their outputs.

Interestingly, many successful primarily bulk wine regions exist in countries that also have multiple regions that are world renowned. It seems that big can follow best, but best doesn’t follow big. The old “waterskiing behind a supertanker” idea turned out to not be quite right unless you like drowning.

For all these reasons, we need to seriously consider that almost every major existing policy since day dot has contributed in some way to our current undesirable situation. We have to learn and change, quickly. All policies and settings need to be examined in light of the incentives they create or destroy and how they interact with other policies.

One simple idea is to consider is adopting the “opposite George” tactics of George Costanza during his brief period of life success on Seinfeld as a template (not that there is anything wrong with it!).

Another is to consider that perhaps we don’t know best for all these reasons including our inability to divorce ourselves from deep self-interest and that we enlist help from serious global policy wonks to do the analysis for us.

The ideas and suggestions put forth below are a non-comprehensive list of policies, settings, conversations and points of view we need to consider to re-start the Australian wine industry on a path of growth and excellence. My goal in provoking this dialogue is dramatically growing the size of the Australian wine pie profitably over time. To make this happen, we first need to insist on as much involvement by folks in positions of responsibility (vineyard and winery owners, etc) and not leave it to those interests that have failed the greater “us” over recent decades.

To those who don’t know, my views are mine alone and have been developed over twenty years of bewildered curiosity and engagement in Australia as a grower, winemaker, regional association Chair, CEO and Chair of an industry supplier, writer and industry critic. All of those roles imposed different demands about how to think about problems facing the industry and afford me a perspective different to most. And, I’m totally independent of any other interests.

There are no easy wins available for us in any market or any direction. If we do not insist on better systems, we can’t expect better outcomes. Having said that, there is no good reason that this can’t be a staggeringly successful industry if we are to consider it with fresh eyes and adapt to the world as it is now rather than the one we were bequeathed by those who were successful in another time.

Australian Grape and Wine

The monopoly power of the AGW to speak to Wine Australia and the federal government on behalf the entire wine industry needs to be reformed before other large changes can occur. The AGW membership needs to change the archaic rules of AGW governance under its existing rules including:

The Board of AGW must be elected by its members with an independent auditor of results as with any well governed association or corporation instead of the exclusionary system of hand chosen and appointed Board members.

The threshold for all decision making on the Board must be 51%, not 80%.

Ideally, their membership structure should be opened up so that it can effectively represent the entire industry, not just the 10-15 winemaking companies that dominate it and the rump of grower representatives with no power. As it stands, given that there are four colleges of three Board members each (small, medium, large, growers), any one sector or any three individual Board members can prevent any and all changes.

There must also be a public declaration of interests and possible conflicts of interest by all Board members such as purchase or sale agreements or events, other Board seats held, shared ownership or participation agreements, etc. prior to nominating for election. Individuals who do not wish to have their interests scrutinized by their peers shouldn’t run for industry Board seats.

All of the above are common sense / assumed governance principles and should be embraced as such immediately if only to not be seen as the source of the problems that the AGW is entrusted to address.

If they choose not make these basic changes, it is clear that their Board does not embrace the requisite duty of care for the industry and members should either leave, force its wind-up or ask the government to step in. They have had decades to address these problems with little to show for it.

Levy Reform

Serious and substantial levy and policy reform must occur to fund Wine Australia appropriately over the long term in a way that reflects the needs of the ultimate payers, growers and taxpayers. The most obvious reforms appear to be to implement an ad valorem rate / % of value system where the value of wine grapes or wine sold or purchased determines the amount levied rather than the current volumetric system. The current system is also viciously biased to favour large levy payers over small levy payers. The levy system must be common to all regardless of size for many reasons including fairness, broad buy-in and, possibly, lower overall rates for most.

Grower Profitability

The focus needs to be on profitable long-term incomes for growers regardless of segment by reducing oversupply. This will only occur in the short to medium term as a result of substantial and long-term / permanent vine removals. How these are determined should be somewhat evident but studied by serious people who are not conflicted by their roles (or their clients) in the wine industry. We don’t need Big Four type consultants, or various in-crowd industry consultants or accountants like those used in Vision 2020, we need serious economists and policy wonks from across the world who have studied these matters for decades.

Thinking a bit, this is the sort of role where Kym Anderson should act as an independent chair where he appoints the committee to make recommendations, not industry or government. Kym’s domain knowledge of the wine industry and policy is unrivalled and his work is respected worldwide.

Business and governments will have to be part of the process to be engaged in the changes required but they shouldn’t be voting members. Both have had 20 years to address the status quo and fluffed it. Time to let serious policy thinkers who deeply understand the industry have a go.

One suggestion is to set up a cap on vineyard area(s) with a permit system overseen by Wine Australia to prevent over development / oversupply in undesirable sectors or regions the future. It should in no way be used as a system to seek rents but adjust as market pressures and trends adjust. For example, growth would only be permitted once regional prices have reached sustainable levels for growers and producers or, perhaps, to plant new varieties to keep the industry moving forward.

Health Lobby

Make a long-term “big picture” deal with the health lobby and government now and end the health lobby’s long-term assault on the wine industry – at least in Australia.

a) Taxation of alcohol must be considered on a volumetric basis rather than the current ad valorem basis perhaps phased in over five years. With volumetric tax likely to reduce overall harms caused by the excessive consumption of wine, perhaps the total revenue “cut” for government could be revised downward as well.

The current approach of an “un-bonded / non-excise” taxation approach should be maintained. That was one thing we got completely right.

b) Tighten alcohol labelling to +/- .5% from +/-1.5%.

c) A “once and for all” domestic health warning on wine packaging should be agreed to, not subject to review for at least a decade.

d) Recognition that the wine industry is “different” to other alcohol industries with different regulation and tax rates warranted for many reasons.

Solve Multiple Problems to Engage Government(s)

The biggest domestic policy issues in Australia over the next fixe years (at least) are climate change and housing affordability. Uprooted vineyards, particularly on the Murray Darling River system, are ideal places for retirement communities and large scale solar farms equidistant to three state capitals representing about 3/4’s of the nation’s population.

Planning for housing should be close to existing towns / infrastructure and large scale solar sites close to existing transmission corridors. Affordable retirement (and other) communities require cheap land, tradies and investment to build them and lots of good paying support jobs (particularly healthcare) on a long term basis.

With 10 megalitre per hectare permanent vineyard water licenses, about 50 new households per hectare could be guaranteed water without increasing river drawdown. Nearby solar can power all the AC needed quickly in warm summers without increasing carbon production. Perhaps they could be a locally owned resource driving down power bills for all those in that region.

With increased population, existing sewage systems can be upgraded to provide second use water for the beautification of common areas for the community. Mildura’s population could double with cashed up retirees in less than 10 years on just 400 hectares with healthcare access for all vastly improved. If this sounds fanciful, Phoenix wasn’t much of anything except sunshine, oranges trees, cheap electricity and Colorado River water seventy years ago. Sound familiar?

Wine Australia and Promotion

Establish a realistic and aggressive long-term requirement for overseas wine promotion and fund it appropriately based on the value of grapes or wine sold. High value grapes and wine have far greater margins to support promotion and employment than cheap or bulk wine. Moreover, to increase future revenue, Wine Australia’s interests would be aligned with growers and wineries through increasing prices and income, not increasing tonnage.

Instead of marketing “Australian Wine”, we need to market high value Australian wine regions and wine growing locations. The “they don’t even know where Australia is” marketing argument about overseas consumers of the last 20+ years is dumb and shouldn’t be entertained any longer.

People who spend more money on things are people who want some brand assurance for their purchase even if they don’t know much about it. In fine wine, that assurance starts with regional names. Having said that, how many Champagne drinkers can stick their finger on a map and say “there” in finding it? Not many. This is how to counter this seriously dumb argument the next time you hear it.

Lots of wealthy consumers all over the world have only the vaguest ideas about where Champagne, Bordeaux, Napa, Sonoma, Tuscany, Piedmont, Barolo, Burgundy, Sonoma, Marlborough and Rioja are located but they happily buy wine from these places for many multiples the price paid for those from our best regions let alone “South East Australia” and “Murray Darling” (incidentally, these are not not even actual place names someone could find on a map!). (Grange, HOG and a few others aside obvs., don’t at me…)

Wine Australia’s present branding is “Australian wine Made Our Way”. This focuses on two ideas 1) Australia and 2) how we make wine. While I get the idea that is trying to be communicated (our larrikin spirit, etc), what if people like (or, worse, don’t care) the way other countries make wine they already like? How many Champagne consumers know what or how many varieties of grapes (seven, two red and five white) are allowed in Champagne? Or that they spray copper on their vines 20 times a season on average? BUT, they know they like Champagne and not that other stuff. And, they have money.

The question that we need to answer is, “why would or should a new consumer consider Australian wine assuming they already like wine from other places?” Wine Australia chose the process of winemaking (Made Our Way) for a point of marketing differentiation because it suits big multi-region wine blenders including TWE / Penfolds, Pernod / Jacobs Creek, Casella / Yellow Tail, AVL / most, Accolade / Hardy’s) that are not encumbered by old world winemaking rules. Fair enough. But, aside from the commonality of “Made Our Way”, the only things these companies have in common are wine and Australia.

While this makes “Australia wine Made Our Way” the perfect slogan to market to big Australian wine companies. How many consumers know or care about our stated point of difference compared to Methode Champenois, the blending rules of Bordeaux, the Cru system of Burgundy? We are looking in, not out.

Meanwhile, spending our promotion money on the generic term “Australia” is associated most strongly in wine terms in North America with “Yellow Tail” where it now has 50%+ market share. (Should this be considered a success of Wine Australia marketing then?)

The consumer knows Australians make wine but Wine Australia appears to think too little of them to go beyond “Australia” to “Explore Australia through Wine” for instance. Or maybe it hopes millions of consumers will stop their busy lives to say “well, tell me how you make wine then.”

I have long championed the step ladder theory that says consumers liking Yellow Tail will trade up over time to other Australian wine. YT definitely got folks on the first rung but we haven’t told them about the amazing things they will discover further up the ladder well. And, as the numbers suggest, the folks on rung number one have been wandering off the past 5-10 years. We urgently need to tell them about the rest of the ladder of great wine regions and wine experiences and to help them explore on-line, in-person and, most importantly, on and off premise to build our our offering. For instance, what is Wine Australia’s strategy to use TikTok? I get at least three TikTok’s a day sent to me about things far more mundane. But I watch.

All of these suggestions line up with the data that “wine from nowhere” brands like Yellow Tail (sorry to pick on YT, they have done extraordinary job at a tough price point) are also part of the fastest shrinking export segment of our industry (South Eastern Australia / non-state bottled). These brands have the least ability to increase margins faster than inflation while paying the least in marginal levies to support overseas marketing and paying the least for grapes. The irony never stops once you start looking. Meanwhile, growers from the main areas of inland grape supply are dominating the conversation in industry governance circles by complaining about R&D investment and levies.

The entire system is literally and spectacularly all backwards.

Wine Australia should back the regions willing to back themselves with promotional funding. If they won’t back themselves, that is their choice. Insist that levies in all regions be fair / equal for all levy payers on an ad valorem basis. We are in this together or we are not.

Australia needs world renowned “hero” regions. If you think Barossa Valley, McLaren Vale, Mornington, Yarra, Margaret River, Hunter, Tassie, Clare etc are “internationally renowned” hero regions in the same way as the regions mentioned above, you may not know a lot folks with money to spend on wine in other countries. Or, to see a peer type hero region, visit Stellenbosch. Having visited twice, I assure you that we have nothing close to what they offer overall and they are on the same time zone as most of Europe.

In fairness, Wine Australia can’t (visibly) pick winners from its individual levy payers, but it can recognise regions. Large Australian multi-region wine companies would be wise to invest in more than one cellar door in just one region and embrace regionality even if they do not do so on their labels.

While a certain large brand may have been most important to the growth and identity of a region, such as Hardy’s in McLaren Vale, it is regions that will lift and support big brands in a sustainable pyramid over time as customer preferences change. How many people visit McLaren Vale because of Hardy’s today compared to thirty years ago? Times change. Economies change. Marketing and promotion needs to change with it. The relative brand power between regions and wine brands has changed dramatically over the last thirty years. Vineyard prices alone are a more than adequate proxy for this assertion.

Another way to look at this seeming chicken and egg question is that power of the brand Silicon Valley has never been higher despite almost no one knowing about Fairchild Semiconductor or HP’s oscilloscopes.

Cheap and bulk wine doesn’t need promotional funding – it is a commodity. It needs low costs like low and stable electricity prices from nearby large scale solar and battery. If a region wants promotional funding, they should have to make high value added wine from “somewhere” and be willing to support it with a regional levy.

Conversely, Ricca Terra and a few others in the Riverland are showing how to escape the poverty trap of growing bulk or low value winegrapes and brands in these regions. Those are the businesses / brands that should be supported with levies there.

We need to ditch the confusing South East Australia and Murray Darling designations. These super regions can simply use “Table wine of Australia” or similar on their products. Consumers across the world will understand this just as they understand “Vin de Table”, “Vino da Tavola” and “Vino de Mesa”. What they can’t understand is places that don’t exist on a map.

High value wine has more employees, more marketing people, design people, sales people and vineyard workers per input while using far less irrigation water. What outcomes have we designed our systems for? How can we have maintained such perverse incentives for so long? Or, more importantly, for how much longer?

Research and Education

Serious thought needs to be put into the educational and research bodies roles and staffing. The AWRI needs to be appropriately funded by levies and matching taxpayer funds so it can do important research without spending its limited energies chasing additional revenue or appeasing noisy levy payers.

Further, there needs to be a “Chinese wall” (ironic, heh?) between research and industry politics. This will also reduce the possibility of the appearance of conflict of interest between employees with grape and wine interests and wine companies. This should apply at Wine Australia as well.

AWRI employees shouldn’t be paid to be embedded in Boards of regions and industry bodies etc. They should be creating valuable research directed by research priorities agreed with Wine Australia. The AWRI shouldn’t be the hotbed of industry intrigue staffed with corporate and business development managers, industry liaisons, etc. It needs great researchers focused on meaningful research of benefit to levy and tax payers of Australia.

The political shenanigans at the AWRI do nothing to foster a culture of greatness across the industry. And, as AWRI chases marginal revenue like grants at least some of the great talents employed at AWRI are being squandered to attract and deliver on revenue which isn’t necessarily even from or for the wine industry! These talents will find new places to do work they care about if this doesn’t change in my opinion. Screwed up management conditions like these are exactly what we used to look for in my 16 years of experience recruiting world class technical talent for great companies.

Also, the Universities (Adelaide and Charles Sturt in particular) need appropriate long term Wine Australia funding; last I checked on the University of Adelaide – one of the worlds’ great oenology teaching institutions – didn’t have an oenologist on staff. They had reportedly left for a position in the growing UK wine industry or academia. What a disgrace.

Short-term Research Priorities

Investing large sums in research to make low value grape growers slightly more efficient is the wrong answer for the entire industry. There is no good money to be made from $400 grapes without someone losing out badly. Lack of investment in research on behalf of any sector is not the cause of our major problems. Manufacturers and suppliers do this sort of work worldwide as a matter of their existence – we don’t need to do it for them, at least until we have our own house in order. 

Wine Australia Governance

This one is a conundrum. Only an independent body with deep skills can be entrusted with long term planning for research and promotion. And, only governments can be entrusted with regulatory affairs. But imagining a government department creating and executing world class marketing over a long period of time is a real leap of faith.

Wine Australia doesn’t have one great luxury / super premium marketer on its Board or team. We need insights from brand driven consumer luxury industries – music, fashion, art, hospitality, autos, etc. To get those, you need numerous people who have lived in those environments on an operating and governance basis and know what serious brand building means without being overseen by board members who lack this domain knowledge. If we want to win, we need to start at the top.

While a couple of capable and successful winemakers are a “nice to have” on the Board, were the most strategic and insightful candidates recruited for these positions as happens at the best governed companies?

At the operating level, we have an academic in the late part of their career running the show, not someone with a demonstrable need to prove something on the world stage. Given the gravity of the industry’s troubles this isn’t exactly The Dream Team we need.

The structure and remit of the Board needs much greater focus on the only objective we can afford – making and selling triple bottom line sustainably great wine worldwide. Research, sustainability and the lot need to be aligned behind that spear tip. That the execution of this strategy may not be solely executed by government employees must also be considered.

Only the Federal Minister for Agriculture Murray Watt can make the initial decisions necessary to start this process however. Share your thoughts with him at: minister.watt@agriculture.gov.au

Resources – growing 16 tonnes of grapes worth $6400 per hectare to make 11,000 litres of wine worth just $11,000 (or less) on one hectare while employing 10 million litres of river water for irrigation to grow the grapes isn’t a great deal for an inland grower, their community or the environment of Australia.

By contrast, the same 10 million litres used in McLaren Vale (the area I am most familiar with) could produce at least 45 tonnes of wine grapes worth $76,500 at current average prices from 9 hectares producing 30,000 litres of wine worth at least $120,000 in the premium bulk market or multiples of that as bottled wine at wholesale.

Sadly, neither example is sustainable for either grower because even the grower in McLaren Vale needs at least $17,000 per hectare to turn a profit of any sort because the price of land is at least three times that of the former example and a 9x multiple of land use is required to grow this quantity of grapes.

This is a simple illustration as to how oversupply affects the value of the entire country of wine grape growing, not just the bottom of the market. China only accelerated to our problems that were homegrown over the twenty+ years prior.

Assuming that some drastic vineyard area reduction occurs, we need to make sure those left behind are treated with respect and have options, some of which are suggested above. This will be a key metric that those who remain will be measured by.

Finally, there is one other possibility – two industries – one for high value and another for low value – that require two industry associations and all the chaos of policy and execution that would entail for all involved. Maybe the other suggestions made above seem more sensible in that light and will be acted upon.

And, maybe someone in a position of authority might ask Kym Anderson if he has some ideas how he might be able to help out.

Except as otherwise noted, all data sourced from Wine Australia website. It is an excellent resource freely available to all.

End 4/4

Postscript:

Meanwhile from todays Vino Joy News: “Alarm bells are ringing for sky-high Bourgogne prices but it’s unlikely there will be price adjustments in the short term, says BIVB president, citing blistering market demand and low stock as main reasons.”

Chinese Whispers and Australian Wine, Part 3

For the non-bulk wine producers who make regional claims about their bottled wine aside from “Southeast Australia” and “Australia,” the massive domestic grape and wine surplus is a predictable and peristaltic disaster. As long as the prices paid for grapes are low enough, inland winemakers (and others) will always try to make a buck buying really cheap grapes and making slightly less cheap wine from them. They’re basically addicts (as long as they still have tank space anyhow) to the low priced trade.

The only known way to break winemakers of their addiction to cheap fruit is to shrink the supply of the grape vines that produce the lowest grades of wine grapes to the point where the remaining growers of that grade of fruit can also make a buck.

The reasons that so many growers have persisted for so long without pulling out their vines are because of off-farm income from their entire family, living from personal savings or growing grapes as part of a diverse crop portfolio where they can absorb losses. This situation may be sustainable for the processor / winemaker, trader and levy collector, but not the grower. However you look at it, the net effect of oversupply is that these actors are siphoning income from growers to themselves.

In the current world bulk / commodity wine market, red varieties from Australia like Shiraz, Cabernet Sauvignon and Merlot are currently fetching about 25-50 cents (all prices in USD) per litre while comparable wine from competitors like Chile, Spain and South Africa fetch 50-65 cents. That’s a spread of 40-140% between these producers and Australia. Look at France and California for the same gear and it costs $1 to $1.50 per litre. That’s 300-400% more than what is being offered for Australian wine. All of this data is freely available from Ciatti.

Even at 50 cents per litre, an entire pallet of 64 cases of 12 bottles per case of 750ml bottles has only $288 worth of grapes processed to wine or 37 cents of wine per bottle. Most bottles cost more than that. Assuming about half of that $288 is processing and shipping costs and you land on grapes costing as little as $200 per tonne or less. There is no possible profitable or sustainable pathway to grow winegrapes at that price, let alone at 25 cents per litre. Breakeven for the most efficient and productive growers is the mid $400’s at least.

Why do we sell our commodity wine for so much less than even Chile or South Africa where wages are as low as 10-15% as much as ours? Why waste prodigious amounts of our most precious resource, water, when growers are losing money? We’re not geographically closer to big importers of bulk wine and we’re definitely not a lower priced place to do business, yet our wine is still cheaper than theirs. How can this situation occur?

The inference that we are the most desperate to sell our wine because we overproduce the most relative to our capacity to manage it appears to be the answer. And, that a significant portion of the Australian wine industry is addicted to a triple bottom line unsustainable business (communities harmed, resources wasted, producers going broke) while it trumpets its sustainability “credentials” to the world. For example, AGW’s 2023-24 PBS states “Australia’s grape and wine sector is setting a pathway to a more sustainable future and aspires to be recognised as a global leader in environmental stewardship.” 

Given the prices offered for our commodity wine, any neutral observer would conclude that the rest of the wine world sees our problems and hypocrisy far more clearly than we do.

The cardinal question is “why do we repeatedly do that which is obviously harmful to ourselves?” When our bulk wine trades at a fraction of the pice of our nearest competitors at the bottom of the league table for a commodity product, all the efficiency in the world won’t make us profitable or “sustainable.” So why do experts and institutions in Australia keep suggesting that we need to invest in research to be more efficient to be profitable and / or to invest in “building demand” rather than just produce less?

The reason is money and who pays it. And, not a huge amount of money either.

The money I refer to isn’t the money paid for grapes or wine but the money collected from grapes and wine; specifically the levies paid on all grapes. These levies are are paid per tonne of winegrapes regardless of value. About 2/3’s of wine grapes produced in Australia are grown in the inland regions where the lowest prices prevail.

In economic terms, these levies are a regressive tax rather than a flat tax like GST or a progressive tax like income. They are collected from all winemakers by the federal government and then matched dollar for dollar with taxpayer dollars and (mostly) given to Wine Australia. Wine Australia’s total budget in 2022-23 was about $45 million.

Wine Australia then spends these funds regulating and promoting the industry including research funding.

As a federal entity, Wine Australia has to look after itself first to provide its basic regulatory and promotional services. Their largest single external recipient of these funds is the AWRI. In 2022, this was about $8.5 million according to the AWRI annual report.

Insiders have indicated that under current funding arrangements with the AWRI, if the national wine grape crop harvested and processed to wine drops below 1.6 million tonnes (I’m open to correction on the details here), funding to the AWRI is progressively and sharply cut.

I don’t know the crop yield for 2023 but it is highly doubtful that it will be anywhere close to 1.6 million tonnes or greater. And, if potential yield were to be cut by the 15-20% required to eliminate the re-occurring surplus by vine removal, it will rarely be 1.6 tonnes million again. 

Dr. Michelle Allen Chair Wine Australia and Dr. Martin Cole CEO Wine Australia – photos from Wine Australia website

Referring again to Chair John Hart’s letter introducing the 2023-24 Pre-budget submission, he (again) gives the real game away as to who he cares to look after when he writes to Parliament that: 

“In short, we need to invest in working through the immediate challenges our industry is facing, but the challenges themselves have diminished the pool of levy funds available to us. 

It is for this reason that Australia’s grape and wine sector requires a government commitment to invest in helping our sector through the economic shock caused by the closure of our largest export market….”(italics mine, hyperbole his.) 

Despite Hart only being slightly correct about the problem at hand (China only caused 19% of the wine surplus to June 2022 with little of it in bulk wine), Hart makes plain that all of these bodies are as addicted to the oversupply of cheap grapes for their levy revenue as the winemakers are to paying very little for those same grapes. Unfortunately, like addicts, they aren’t anywhere near rock bottom. 

While wine growers and winemakers are expected to absorb the highs and lows of the marketplace these bodies absolutely require and expect funding regardless of what happens to their levy payers. Evidence of this is that none of these national organisations appear to have made substantial financial provisions for catastrophic years with reserves. For instance, what happed to the levies collected in the very large 2020 and 2021 years that caused the other 81% of the oversupply? These statements and lack of planning are evidence of bureaucratic entitlement, not the governance and leadership that we expect and pay for.

This is just one dimension of the problem that the industry faces. Another dimension is that winemakers aren’t all created equal in the eyes of industry and government bodies in numerous ways. 

First, by their nature, the biggest winemaking companies have a disproportionate amount of input to and influence with all of these bodies from regional to national levels. At some level, this inherent unfairness is to be expected but particularly grates in light of the financial inequity of other conditions.

Second, the biggest winemakers pay a far lower levy rate than smaller winemakers per tonne of production to most levy based bodies. Some examples:

Starting with the federal government wine grape levy, a winemaker using at least 100,000 tonnes of grapes (Treasury, Accolade, Casella, Pernod Ricard, Australian Vintage) in a typical year will pay $5.73 or less per tonne in levies while a wine maker using 50,000 tonnes of grapes will pay $6.06 per tonne and a 5000 tonne producer will pay $9.08 per tonne. 

A 50 tonne small fry like us (Inkwell Wines) pays nearly $12.80, 210% of what the big guys pay. Of these per tonne amounts, Inkwell pays the same $5 per tonne for Research and Development ($4.976 per tonne) and Plant Health $.024 per tonne as everyone else. However, our marketing levy is $7.80 per tonne while 100k tonne+ producers such as Accolade, TWE, Pernod Ricard and Casella pay, at most, $.73 per tonne. We pay more than ten times – 1068% – as much as the large companies for marketing services generally ill suited to high value regional producers.

Meanwhile, the inland regions – Riverland, Riverina and Sunraysia – have formed their own cabal to lobby Wine Australia for still lower levies and more R&D spending (you know, research for efficiencies etc) than they believe currently benefits them. That they recognise they are effectively in a different industry from the rest of us shines a light on possible sustainable paths forward to be discussed later.

Without knowing the exact distribution of grapes and companies, this is one place where at least 5 or 6 million dollars of Hart’s desperately required revenue could be raised easily while levelling the playing field a bit. Plus, levies get matched by taxpayers.

Third, what Wine Australia collects on the value of the value of wine exported is another opportunity to level the playing field and raise significant funds because it too is also tilted to the advantage of the biggest companies – see below:

Free on Board (FOB) value of wine exported by company in a financial year: 
$0 to $20 million – 0.20% of value
$20 million to $70 million $40,000 + 0.10% of value between $20m and $70m
$70 million and over $90,000 + 0.05% of value over $70m
For example, if the FOB sales value is $75 000, the charge payable is calculated as: $75 000 x 0.2% = $150.
Rates are current as at 1 July 2015.

Source- Wine Australia website

For example – if Casella exported $400 million worth of Yellow Tail in a given year, it would pay about $165,000 (.041%). On the other hand, a small company with $1m in exports of a single product (still impressive) would pay $2000 or .2%. Were Casella to pay the same rate as the smaller producer, they would pay $825,000. With 2020 profits reportedly being $33 million, paying the same rate as small companies doesn’t seem to be unreasonable.

In short, small exporters pay Wine Australia up to four to five times (500%) as much as the largest exporters to export while paying 210% as much in levies for similarly valued wine and grapes.

I’m not picking on Casella, there are at least five companies of similar scale that could generate over $2 million in short order. When you take in the next 10 largest companies, there is probably another 50-100% of that figure of possible revenue again.

I will set aside a detailed examination of the highly favourable levy rates that the largest wine companies pay in regional levies for now but will mention that the state assisted levy arrangements can be appallingly bad for the regions where these companies source grapes for their most profitable products. In many cases, they don’t even have wineries in these regions and contribute little to local economies except grape purchases and employees or contractors for their own vineyards.

Simply put, if there is a way to skew the wine industry system of funding, it is skewed to the benefit of the largest companies in the wine business at every level in Australia. These examples alone are a serious barrier for many smaller companies to grow and “build demand.”

All of this matters a great deal because these bodies are employed by us with our levies to guide the entire industry and they are not proposing systemic changes to benefit the entire industry because they benefit from an existing broken revenue model that favours ongoing overproduction of low-priced wine grapes and wine, particularly by the largest companies. This shouldn’t be controversial.

Some may bring up the WET exempt status of small wine businesses as a contrary point of view. It actually isn’t. The WET rebate scheme is a pretty well thought out federal subsidy to support regional economies and promote competition. Were it left to the largest wine companies, these areas would employ very few people, have little in the way of food and tourism offerings and cause enormous social disruption and costs for cities and suburbs instead. And, we would have far less choice of wine.

As far as the AGW – having advocated for the tax policies that created the oversupply of winegrapes 20+ years ago and having never pushed forward a credible means to reduce this oversupply in the 20 years since (they won’t even use the word “oversupply”), they don’t have a lot of credibility making big suggestions to government.

So, it was with particular interest that I read AGW’s 2023-24 PBS justification for a request for $10 million to help flood affected inland winegrape growers remove or replace vines as a “biosecurity” and “safety” measure:

“This is not a request for intervention to downsize our sector. (my bold) It is about optimising our use of land, water and labour by ensuring we are focused on producing grapes that align with commercial requirements at the same time as assisting those growers who are dealing with the double-blow of reduced demand flowing from China’s import duties and the natural disasters experienced in our inland regions in recent months.”

What a waffle! It would be incredibly interesting to see exactly which growers were in line for this assistance and how AGW can possibly justify that these particular folks were those affected by the Chinese tariffs since we have seen these growers were the least affected by the tariffs but horribly affected by a flood and winemakers who can’t say no to cheap fruit.

John Hart, Chair AGW and Lee MacLean CEO AGW – photos from AGW website

In effect, AGW was asking for federal money to convert some of the unwanted oversupply of red grapes to less oversupplied white grapes without losing any potential levy funds for the industry or ever using the words “oversupply” or admitting the real problem facing the industry is “oversupply.”

While oversupply is the core problem, the impediment to solving the problem of oversupply is that these bodies have until now benefited from oversupply and are only keen to tinker around the edges to maintain as much supply as possible. It is how they get paid and accrete power. They are committed to oversupply as a policy while requesting additional funding for demand building because it suits them and their mates rather than the facts of the situation.

These bodies have zero incentive to change their behaviour which is why the AGW clearly states “This is not a request for intervention to downsize our sector.” This borders on pathological behaviour. To protect and expand their bureaucratic status quo at the ongoing expense of taxpayers and money losing winegrape growing levy payers is worse than “not ok”, it is deeply conflicted. Both the rest of us and Parliament need to connect the dots that these bodies will never facilitate meaningful reform unless it imposed on them by government.

Without a trace of irony, AGW’s “Who We Are” statement reads: 

“Our role is to help forge a political, social and regulatory environment – in Australia and overseas – that enables profitable and sustainable Australian wine and winegrape growing businesses.”(italics mine)

Ahem.

To complicate matters, AGW is historically closely tied to the LNP (Senator Simon Birmingham used to be employed by the WFA and a current AGW Board member was recently parachuted in by an AGW member straight out of a policy role in the Berejiklian government) at a time when the LNP’s influence at any level of government policy making in Australia is near zero. Smart industry organisations have deep relationships on both sides. The lack of results of this years budget speaks volumes about AGW’s lack of influence.

While not widely understood, having a non-elected Board that requires an 80% agreement to make any decision means no significant change will ever get pushed forward except for perhaps blaming China (or anyone else) for their own shortcomings, encouraging free trade deals and asking for tax cuts.

The AGW has recently lost policy fights with everyone from the health lobby over pregnancy labelling to the environmental lobby over deposits on wine bottles in Queensland. When you add in that they are seemingly out of touch with what’s been going on in their biggest value growth export market and their own largest members’ tank farms for at least the past 4 years, they must realise that they are in deep peanut butter.

Seriously, when the problems AGW’s members create are 4 times the size of the problem that an angry Chinese Communist Party is and your strategy to make things better for your members is to publicly blame the CCP, you need to acknowledge that you are unfit to make things better for your members tactically or strategically.

Politically, a close reading of the backgrounds of the Board members of Wine Australia also reveals a lot of LNP influence and direction as well. Given that all appointments occurred under the LNP (and don’t come up again until late 2024), this shouldn’t be surprising.

Given the significant changes required and opportunities presented by the current predicament, we can hardly expect much traction for the wine industry with a Labor government in power unless the federal government understands the need for their involvement. AGW and Wine Australia are both poorly positioned politically while being deeply conflicted by the levy system in place. The poor results from this years budget proves this point despite how truly difficult things are.

Hundreds or thousands of growers are going broke or are already broke. Has anyone heard of a serious proposal to address that crisis? The reality is that absolutely no one in a position of responsibility employed at AGW or Wine Australia or AWRI is personally impacted that by too many grapes (unless they are also a winegrape grower). And, because behaviour inexorably follows compensation, all we hear is crickets.

In life, business and politics, change does not happen until the fear of change is exceeded by the fear of not changing. The only thing these bodies fear is levy or member income declining so much that they are personally affected. And, the higher up you go in these organisations, the less personal fear each person has of getting the axe. While it is exactly backwards to the way it should work, programs and lower level folk will go long before the decision makers and policies. In the meantime, everyone suffers.

After 20 years of oversupply and “demand building”, we all need to concede that most of the key structures, programs and policies we have in place in our industry are working against the brilliant future it could have.

We now have a worldwide surplus, particularly of red wine, that can not be ignored. It is not just us. The last country to address this problem constructively will lose the most. The first country will have huge advantages. And, France is already on the (re)move. Keep in mind, AGW is one of many similar organisations across the world of wine pushing the “demand building” agenda for similar reasons. They can’t all be right.

The time has long passed for incremental, “softly softly” type changes. It is time for radical change if at least 80% of us wish to continue in this mostly wonderful industry. A Senate or Royal Commission inquiry into all peak bodies including all levies, taxes, fees and rules in the wine industry in light of the results of the choices made by these bodies over the last 25 years would be most welcome.

The Senate inquiry in the late 00’s (into oversupply of all things) clearly didn’t go far or hard enough. A bigger stick is needed. Root and branch reform of levy funding and industry governance is well past due We can’t pretend that the wooly mammoth of oversupply isn’t in every room in the house.

The fact is, the folks managing the financial arrangements and funding of these bodies are far more concerned about their own welfare and their mates than yours. The last thing they want is change or for Parliament to really understand what is going on. China is a real problem that has accidentally highlighted the much larger problem of persistent oversupply and conflicting incentives in industry governance.

As suggested in earlier parts, if you want change, contact all of your elected officials at the state and federal level on the phone and follow up in writing about how this is affecting you and our industry whether they take your call or not. If they don’t speak to you, write to them mentioning that they didn’t.

If they do speak to you, write to them and thank them and restate what you think needs to happen. Or, forward them this blog. No one enjoys accountability but will rarely avoid it forever if you hold them responsible for change.

In part 4, I will suggest some possibilities to ameliorate the human costs of the existing crisis and the settings necessary to ensure that Australian wine has a chance to be the best in the world.

End.

Chinese Whispers and Australian Wine, Part Two

The big question from Part 1 of this series is “why does Australia Grape and Wine mischaracterise Australia’s structural wine oversupply as being the effect of China’s tariffs?”

The effect of supply over time on our national inventory of wine is shown below (source Wine Australia):

Figure 4: Annual difference between production and sales (historical)

If we look back to 2015 – a period of relative supply and demand balance – and account for all the surpluses and shortages since, we end up with a surplus of 433 million litres over eight years. This amount allows for diminished inventories from 2017-2020 to be restocked and still leaves a huge number of which the China surplus only accounts for 25% of that number by volume. There is just no credible way to only blame China for our oversupply.

So why does the AGW want to make it seem it is all China’s fault? There are a few obvious answers that all pass the self-interest and CYA tests but, the questions that need answering are:

1. Was AWG aware of these momentous and rapidly changing consumer preferences (both away from wine and towards higher value consumption) for Australian wine between 2018 and 2021 in China and the massive overproduction of wine by AGW member wineries in the period 2020 to 2022?
2. If so, why weren’t they widely communicated?
3. If they were not aware of these, why not?

It is hard to see how AGW can assert that it isn’t either incompetent or worse with respect to understanding these problems. They are either a peak body with access to all relevant information and the skills to interpret and disseminate it regularly or it isn’t.

The fact is that the Australian wine industry has been managing a structural oversupply of wine grapes for about twenty years. Whether through good luck and / or the Casella family’s business acumen, a massive oversupply hasn’t occurred to this degree before. Yellow Tail saved many inland grape growers from ruin for most of the last 20 years and built a $500m per year business doing so. This is the same 20 years that the AGW and Wine Australia have been “building demand” to consume the oversupply using taxpayer and levy payer’s money. The last three years demonstrate that they have clearly failed in that long term effort despite a one time $50m injection in the 2016.

The Pre-Budget Submissions (PBS) submitted as the AGW only go back to 2019. Before that the AGW was known as the Winemaker’s Federation. The difference in the two is that the AGW is now recognised as the peak body for growers and winemakers rather than just representing just winemakers. 

In all the “PBS’s”, the word “oversupply” is never used. But “demand growth” and “building demand” are repeated ad nauseam. If you read all of the annual AGW submissions and substitute “because of wine grape oversupply” everywhere they use “build demand” or “demand growth” in the future tense, you will quickly get a sense of how badly the market has been oversupplied, particularly with inexpensive grapes used to make bulk wine or “no place of origin” bottled wine. 

In the last thirty years, the oversupply of these lower value grapes and wines have progressively smashed Australia’s reputation for fine wine in almost every major growth market we’ve entered – particularly the U.K. in the 80’s and the USA in the 90’s and 00’s. While neither makes enough wine for itself and needs to import bulk wine, it’s a variation on Gresham’s Law with low quality wine driving out high quality.

Since 2008, on average, across all regions, all wine grapes have dropped in value from about $720 per tonne to about $600 (Wine Australia). While this 16% drop is a simplification, no broad category of wine grapes (red or white, cool or warm region) is higher than 2008 levels today. What is not a simplification is that inflation has increased 38% over that time leaving growers a total of 48% behind in average real prices received over the last 15 years per tonne of grapes sold. And, 2008 was not a high base to start from.

In the UK and the USA, our fine wine offering led the initial charge but ended up getting swamped by the cheap stuff in the market place. In reputational terms in the USA, “Australia” still equals “Yellow Tail” for all but a tiny segment of consumers. In China, it was a bit of each at the beginning but, as shown in Part 1, the Chinese quickly rejected our cheap stuff. Not coincidentally, Yellow Tail’s owners (the Casella family) have boasted publicly that because only 3% of their sales were in China, the tariffs haven’t really affected them.

Remember the $50 million one time boost to improve marketing Australian wine targeting the USA and Chinese markets? Despite a positive evaluation by Deloitte and Touche of the program published in May 2021, it is easy to pick apart now as it came after three years of undersupply / falling inventories, etc.

D&T weren’t cherry picking data like AGW, they just benefitted from good timing. It paints a rosy picture of premium wine income growth in China pre-tariffs, but also seems to have missed the collapsing volume demand by China in the preceding years as discussed in Part 1. On the other hand, there has been no good news in the USA (7% decline in volumes June 2016 – March 2023) and average price decreasing by 9% and 16% total inflation over the same period (Wine Australia) since the $50 million dollar package was announced. Again, China is not the problem here.

It is impossible to build up a surplus of 400+ million litres of wine in just two years like Australia did from 2020 without it being overwhelmingly from inland grapes. The problem with wine grapes is that their supply is “sticky”, they can’t be turned on and off like an annual crop. But, they can definitely be turned “up”.

Growers pursue a level of income to cover their costs and make an income. When grape prices drop due to excess supply, growers increase production to pursue a dollar amount of income thereby creating still more oversupply. Because the marginal cost of doing so is so low (generally just a bit more water and fertiliser), it is a low risk strategy with potentially high returns.

Wineries only defence to this is to put tonnage limits on growers which leads back to the problem of bottom feeders sucking up the leftovers at even lower prices. Given human nature as it is, the only mechanism to prevent this is to reduce acreage of vines commensurate, at least, with the area required to produce the oversupply.

For example, assume 1.7 million tonnes per annum is established as a total level of supply commensurate with demand while we have the capacity to produce 2.1 million tonnes (as in 2021). There should be a coordinated policy developed by industry and government to reduce grape producing capacity by 400,000 tonnes of those grapes in greatest oversupply. In this example, if the least profitable grades are able to be grown at 25 tonnes per hectare, we need to reduce our foot print by at least 16,000 of those hectares or about 11% of the total national grape growing area. If the historic productivity capacity of a vineyard is less, then more hectares will be required to be pulled.

This is simplistic math to illustrate a point but it is the starting point for the right conversation. One way to look at the best areas to remove vines is that many regions are capable of producing alternative crops and alternative uses of the land need to be considered as a baseline of land value assuming water rights are included. Meaning, can the grower switch to grazing, broad acre or other agricultural uses to obtain a better return? Not all regions are suited to these pursuits and may not be the best to eliminate supply from.

One pastoralist in southeast South Australia recently bought a significant area of vineyard that adjoined his land from a large wine company. He bought it because he thought the grazing value exceeded the vineyard’s income value. He is keeping a small portion of the vineyard for its A and B grade blocks and tearing the rest out (mostly C grade) for pasture. C grade isn’t bulk quality but it is made to lower price point wine. The point here is, nines pulled needn’t be all inland vines that need removing and any solution will involve a variety of approaches and situations.

A working rule of thumb I propose is that of bare land vs. vine value as a total of planted land value. In short, if the land value (including required irrigation supply) isn’t greater than the price of physically establishing a new vineyard on that land, that established land or region isn’t really “brand-able” and should be considered ripe for removals.

This observation is sure to make a lot of folks unhappy but the regions around the world where it is the value of land that establishes the value of the grapes are inherently “brand-able.” Think Napa, the Piedmont of Italy, Burgundy, Champagne, etc. In fact, the greater percentage of the total value being land value, the greater the resulting wine and regional brand value. As a rule of thumb, this holds up pretty well in the inverse as well. And, it maximises the areas to be considered as appropriate for vine removals.

A contrarian might say “what about Bordeaux?” Well, the French government believes it will be able to persuade growers to remove 9500 hectares or 10% of the regions’ vines for about $8500 (AUD) per hectare. If this formula were followed here, we could eliminate structural oversupply in the Australian wine industry for as little as $100 million. Considering that the AGW was asking the federal government for about $85 million this coming budget year to fund approaches with a long and spotty history of success, this seems like a long term solution to industry wide profitability that could be implemented quite quickly at a reasonable price.

However you slice it, as long as the 20-year surplus of primarily inland vines continues, the wine brand Australia and its possibly more valuable regional brands will continue to suffer. And, the levy and taxpayers money spent on “demand building” will continue to be wasted keeping the industry’s nose just at the water line rather than being profitable at all levels and having an improving international brand.

The problem that has to be solved is that there are too many vines bearing too much fruit grown with water that is far too cheap for the value of the end product to be a good deal for anyone except a few canny winemakers and traders. If we solve for that problem instead of the failed attempts of the past to deal with oversupply by “building demand”, we’ll be on the right track. Then we can talk about marketing programs that can pay real dividends for all levels of the industry.

End Part 2

Stay tuned for Part 3

Chinese Whispers and Australian Wine

1 May 2023

The tariffs imposed on Australian wine by the Chinese government in late 2021 in retaliation for some regrettable remarks by our former PM about COVID have wreaked havoc in the Australian wine industry since. The media and spokespeople for the industry have since simply characterised our ensuing oversupply problems as “China’s fault.” The only problem with this story is is not that simple and, worse, just not so.

In international markets, commodities always find a way around problems like tariffs. For example, Russian oil that used to be supplied to Europe is now sold to India and China since the invasion of Ukraine. Middle Eastern oil that used to go to India and China now goes to Europe. 

Wine is not totally different to oil except that it isn’t as relatively an undifferentiated commodity as oil. But, over time, it will always get mopped up for similar reasons in similar ways at some price provided that there isn’t a global oversupply.

A month or two ago I watched an interview with a big bulk wine merchant in the USA complaining that Australian wine is being offered for 25 cents per liter delivered and wrecking their bulk market. Buyers complaining wine is too cheap? This makes no sense. The USA produces more than twice as much wine as Australia but only supplies about half of its own consumption. They actually need to import bulk wine from us and are complaining that it is too cheap! I pondered this seeming paradox during vintage and guessed that there was more to the story.  Now that I am off the forklift, I spent an hour or two on the WineAustralia website trying to understand this more fully.

It turns out that the principal reason is that if the USA buyers buy our nearly free Australian bulk wine then blend and repackage it, they still can’t sell it. The reason behind this that you may have not heard is principally explained in the following graph:

Chinese consumption of wine has fallen so sharply since 2017 that even if we went back into the Chinese market without any difficulty, we would likely still have a huge and growing oversupply rather than a shrinking one. That is how bad the underlying problem is in the world of wine. The world is awash in wine because the Chinese have reduced annual consumption by an amount almost equal in volume to the annual output of the entire Australian wine industry. Yet, even at our peak, we only sold them 13% of our wine. This gives an indication of how much wine other countries are no longer exporting to China even without tariffs.

Between its peak in 2017 and the end of 2022, Chinese consumption of all wine has dropped 54% or 1.04 BILLION litres per year. As a matter of perspective, the total production of Australian wine in 2020 was 1.1 billion litres (WineAustralia). Chinese domestic demand dropped 16% – or 169 million litres – just in calendar year 2022. This puts their wine consumption back to the level of 1996 or 1997 when they were a far poorer country.

The fall in demand has been so steep that there is now a world-wide oversupply of wine, particularly red wine (the Chinese imported mostly red wine). It isn’t just an Australian problem and it isn’t because of the Chinese government or even COVID. It’s that the Chinese are drinking significantly less wine and have been doing so for six years. Were it otherwise, Americans would happily buy our bulk wine, blend and re-sell it to the Chinese. This is the story no one is talking about and it is unclear why this is so as it is totally out of our control.

The curious point here is that this collapse was largely foreseeable to Australian winemakers and peak bodies. In total in 2018, the Chinese bought 171 million litres from Australia for $932 million. Then in 2019, they bought 146 million litres for $997 million. In 2020, they bought 129 million litres for $1.15 billion. In a shortened 2021, they bought 78 million litres for $868 million (WineAustralia). In the three years before tariffs, the volume of Australian wine exported dropped by 93 million litres per year while the average price paid per litre increased 87%. This juxtaposition made me curious and curioser.

Going back to the data again, the near 50% decrease in export volume and near doubling in price between 2018 and 2021 indicates that there was another huge shift occurring in the Chinese market. While the near 50% drop in the volume of Australian exports closely mirrors the drop in Chinese total demand in that period, the doubling in price indicates that the Australian offering was taking serious hold at the higher end of the market while our cheaper exports couldn’t find buyers. Given the average price of $10.38 per litre or about $8 per 750ml at wholesale indicates an average bottle price of at least $20-30 per bottle. This is an outlier result in the history of Australian wine exports. What makes this so significant is that this price increase occurred while the overall Chinese wine market collapsed.

The “no label claim” section of Australian wine exports (meaning no state or region is claimed on the bottle) decreased from half of total Australian sales volume to just 17% (a 66% decrease) in just three years. In value terms, the “no label claim” segment also fell by 64%. In the bulk segment, volumes dropped by $45 million or 75% between 2018 and 2021 while value dropped by just 40% to $47 million. The vast majority of the “no label claim” and bulk segments can be assumed to be from the inland wine growing regions.

Added together, in just three years, aggregate Australian exports of bulk wine to China decreased by a total of 105 million litres while post-tariff, they only decreased by 17 million litres in 2022. The point is, the inventory build-up of bulk wine in Australia as a result of changes in Chinese consumption patterns was already at least 85% done before the tariffs were imposed in 2021. They either remained in inventory or were sold elsewhere.

The collapse of bulk wine exports to China before tariffs over three years between 2018-2021 is equivalent to about 8% of our average 1.25 billion litre annual production while the sales of bulk wine lost in 2022 (17 million litres) is just 1.2% of annual total production. For practical purposes, the former portion of the Australian oversupply problem isn’t due to the Chinese tariffs at all. It is due to collapsing demand for inexpensive Australian wine, red in particular and winemakers’ failure to adjust to a rapidly changing market from 2019 to 2021.

However, if you were a bulk winemaker in 2021 and still thinking that the Chinese bulk market would get back to 2018 levels, you would have overproduced an aggregate of 150 million litres of oversupply. 

The other side of the coin is the more expensive end of the bottled market where a label claim is made. It lost 55 million litres of volume in aggregate sales to China from 2018-2021 or about 4% of the annual crush. This is not insignificant but still far better than the rate of overall decrease in consumption in China during this period. In fact, it apparently outperformed the rest of the suppliers to the Chinese market with aggregate income increasing by $268 million during the same period. 

Added together, an aggregate of 160 million litres of decreased demand in China between 2018 and 2021 was either added to our storage or sold elsewhere, 2/3’s of it from the inland regions. In value terms, the lower end declines were worth a total about $110 million while the higher end declines were worth about $500 million. 

This data clearly indicates that across the price spectrum, Chinese consumers were aggressively buying “up” even “way up” over time and rejecting lower priced offerings made from bulk wine or that were perceived to be of lower value (no label claim) and that Australian winemakers completely missed the market shift and kept the presses running flat out in the hope that their boomerang might come back.

The happy news in all this data is how well higher end Australian winemakers did in the Chinese market against fierce headwinds. This is a success story that needs telling. 

The sad part of this is that all this data is available for free and winemakers ignored the warning signs long before the tariffs were imposed. 

This official and and freely available data presents an opportunity for a different understanding than what Chair John Hart OAM, of peak industry body Australia Grape & Wine implied in writing to the federal government in the AGW Pre-Budget Submission to Parliament in January of this year: 

“China’s imposition of tariffs on Australian wine imports came as a severe economic shock – a shock not of our own making but forced upon businesses without warning or recourse. It removed 120 million litres per annum from Australia’s annual wine sale forecasts and by June 2022 there was 570 million more litres in stock than at the same time in 2020.” 2, 3 (italics mine)

Source – AGW’s pre-budget submission to the Federal Government for 2023-24

What doesn’t Chairman John Hart mention is what else had been reported by Wine Australia on 30 March 2021 about the state of the Australian wine market in June 2020. Their report notes that 2020 had been the smallest crush since 2007, that sales volumes had decreased by 6% and was 60 million litres more than production, that sales exceeded production in 2019-20 for the third consecutive year contributing to a lower stock to sales ratio with inventory at 1.7bn litres, a 4% decline from 2018-19. What this says is that the AGW has selected the lowest possible inventory level in recent memory to imply that China’s tariffs are responsible for an increase of 570 million litres in Australian wine inventory.

Why they would over simplify in this way leaves one wondering why. 

To be generous to Hart – let’s take his 2020 year reference as a benchmark of 129 million litres sold (it was the last full year of sales to China) then improbably accept that this level of sales would have continued (despite overall Chinese wine demand dropping a further 33% between 2020 and 2022 and Australian volumes having already declined 25% between 2018 and 2020) and that we sell zero to China now (we still sell a bit). In doing so, the inference is that the maximum impact that that the Chinese tariffs could have had on Australian inventories through the end of fiscal year 2022 is 107 million litres (10.75 million litres per month for 10 months).

In short, the AGW conflates partially related causes to effects seemingly to blame the Chinese Government for our woes. Why the AGW would want to potentially further antagonise the Chinese Government after a year and a half of these punishing tariffs is any anyone’s guess.

The reality is, an increase of 463 million litres of un-sold wine produced by Australian winemakers since June 2020 unrelated to the Chinese tariffs is what is filling (at least) 81% of Australian wine tanks at 30 June 2022, while wine not sold to China as a result of tariffs accounts for perhaps 19%.

How did the 463 million litre increase pile up so quickly if not because of China? Why aren’t the AGW more clear about what has really happened and why? I will noodle on these in further posts.

And, if you are like me and didn’t have this understanding of the state of our industry and wish to make a difference, send a copy of this to your Member of Parliament. Budget day looms.

End of Part 1

Over The Rainbow – Sustainability and Farming Systems

There is no such thing as sustainable farming. I write this as the arts educated husband of the PhD who wrote the Sustainable Australia Winegrowing system. 

Moreover, the shiniest, happiest and newest term in viticulture, “regenerative farming,” is already being misused, abused and diminished by growers, winemakers and wine writers across the world. Terms like “practicing organic” (certified or not), “biodynamic practices” (certified or not) and “regenerative” (no one in Australian viticulture is certified as such) are now being recycled and conflated with “sustainable” (certified or not) to a greater extent than ever before both here and abroad. This careless use of language is either deliberate in order to mislead and / or dissemble or it is used unwittingly by those who genuinely don’t know the material difference(s) about any or all of the above terms regardless of their professional qualifications.

Sustainability is the strategic framework used to ensure the continued existence of civilisation understanding that human expectations and population are both increasing over time while recognising that much of our resource base is increasingly finite. Said another way, if resources were not limited, the discussion of sustainability would be moot. While most think sustainability is a destination or state of being we can get to, it isn’t. It is a dynamic concept that requires innovation to be realised. To quote viticultural sustainability expert, winemaker (and my wife), Dr. Irina Santiago-Brown, being sustainable “is the pot of gold at the end of the rainbow that continually recedes from us the closer we get to it.” Sustainability is the goal, not the means. You can be more or less sustainable, but never sustainable.

While the goal of making sure that civilisation is able to continue to exist applies to all of human endeavour, how we farm (which is in turn categorised by farming approaches or certified farming systems) is one of the biggest variables wine grape growers can manage to pursue the goal of sustainability.

Despite abundant but decreasing resources, the world will be unable to feed itself into the future absent meaningful changes to how we farm. Growing wine and other alcohol inputs is different to other agricultural pursuits in that does not provide food, clothing or shelter for man and is not benign in its externalities to the planet’s health or man’s. (There is no such thing as a little heresy.) Given this status in an increasingly resource constrained environment and including the effects of ongoing climate change, more extreme weather events and declining availability of water; grape growers and grape growing will be put on a riskier and more precarious perch than other agricultural pursuits over time. 

Assuming a semi-rational world, to the extent that growing wine grapes and making wine (or other alcohol) diverts resources – land, labour, water, on farm inputs and capital – away from these other unfulfilled needs of a growing population is the extent to which wine grape growers will need to utilise their resources at a beneficial level of practice matching or exceeding that of the best of the alternative users of these resources. To the extent that wine grape growing does not do so will likely be the extent to which wine grape growers can expect to lose their social, ecological and economic licenses to operate in the future, in that order.

Environmental and sustainability schemes developed by industry are initially or eventually diluted to the point of meaninglessness regardless of sector in order to increase relevance or participation and because they are developed by industry players who simply don’t want change. This isn’t a criticism of any particular scheme but rather all industry developed schemes in all sectors.

With this in mind, industry governance – regardless of country – should be based on the highest standards developed by truly independent experts embracing all three dimensions of sustainability without industry interference or pressure. These descriptive and dynamic benchmarks need to be set in reference to competitive users of the same resources in a broadly regional context (e.g. hot climate and cool climate regions face different challenges and community benchmarks) and be continually revised over time in light of evolving practices and resource limitations. This won’t be cheap but will be far less expensive than not doing so.

Different systems will be required for growing and making wine, both with respect to others’ best practice in their business segments (e.g. wineries would potentially benchmark against other beverage manufacturers, etc). If industry governance operates from this framework rather than from the short to intermediate term of its’ members preferences, it will provide the wine industry the best possible chance to continue as a viable and successful industry for the longest foreseeable period of time. If this approach is adopted nationally, it could become a strategic competitive advantage for the national industry, particularly if other countries do not do something similar. In simple terms, we could actually lead the world in a serious way that we do not at present. Alternately, to not do so will actually increase risks to the members they are meant to represent. As Will Rogers used to say “even if you’re on the the right track, you’ll get run over if you just sit there.”

Within grape growing, the dominant vineyard farming approaches or “systems” (if certified) are conventional, organic, biodynamic and regenerative. While practices within these systems frequently overlap considerably, the regenerative approach currently appears to be the “best” pathway to pursue to achieve these ends. The regenerative approach is the only approach that seeks to continually and specifically improve the status of the resource base via diversity of plant and soil life, increasing organic matter and water holding capacity while simultaneously reducing or minimising the costs of external or off-farm inputs. Practitioners in other sectors report that yields are often similar to conventional approaches while profitability is typically much better than conventional approaches at any level of yield. 

And, it is not as comprehensively prescriptive as certified organic (all the things you can’t do) and biodynamic (all the things you can’t do + all the things you have to do) systems are. The current Australian sustainability system, SWA, is a mish-mash of prescriptive, descriptive and best practices from conventional farming that treats measuring soil health as optional. How can any system that doesn’t mandate rigorously measuring the effects of the endorsed management practices on the resource base be considered “sustainable”? Compared to what?

The big idea in the regenerative approach is that if you look after your soil, the soil will look after your vines. If it sounds simple, it (sort of) is. It is based on the insight that the carbon rich soils of most farming regions in the world were the result of the interactions of plants and animals over time. That these ideas mostly emerged from herding and broad acre cropping in Zimbabwe, the USA, Australia and New Zealand makes sense in this context. While some vignerons around the world have stumbled into and adopted parts or all of this approach, the heavy lifting emerged from other agriculture sectors, often in far more challenging environments than vineyards experience anywhere. To restore depleted soils to being resilient soils, the idea is that we need to mimic those systems. 

For the un-initiated, the core tenets are: 

1. Keep bare ground covered, even with weeds if necessary. Even that 40% of your vineyard right under your vines.
2. Have a diverse mix of ground covers (ideally at least seven species from four different plant families e.g grasses, clovers, legumes, brassicas, flowers, root vegetables, etc). This needs to be amended and fine tuned over the years and seasons.
3. Minimise soil disturbance. 
4. Incorporate grazing animals into your farm system or employ mechanical bio-mimicry if you don’t have grazing animals.
5. Minimise or eliminate artificial fertilisers and herbicides – even weeds have a role to play at times. 
6. To the extent possible, have living plants covering the ground year-round.

There’s more to it of course but the principle is that diverse ground covers activate soil life particularly by encouraging fungi and bacteria to cycle for optimal availability of nutrients, draw down and cycle atmospheric carbon and nitrogen as well as to prime the air and water cycle in the soil to ensure maximum water retention. 

The diversity idea is based on complexity of interactions in the soil between the plants’ root systems including your vines’ root system. Complex systems are typically more stable and resilient in any endeavour. The result seems to follow the math of network theory (n to the n minus 1) in that when you reach seven different species, all the possible combinations and connections between them reach about one million in number. Having one less species reduces that number to about 150,000. (This is my completely non-scientific observation). Having four different plant families increases this diversity again.

Because the regenerative approach uses fewer off-farm inputs and can reduce tractor passes and possibly foliar spraying, it reduces out of pocket costs and financial risk for growers. Beyond a certain threshold, the story of sustainability is usually about “better or worse” rather than “right or wrong”. In this respect, the regenerative approach right now appears to be the new “better” approach to reducing costs, improving on-farm and farm gate outcomes while operating at best practice levels. To the extent it puts the wine industry on a path to improving the planet by improving soils, drawing down and storing carbon and making better wine, it actually makes our industry more resilient to the shocks that are inevitably headed our way.

Our experience with this approach at Inkwell over the last three years (after having been organic certified for the last 7 years and organic in practice for 10+ years) is a noticeable improvement in plant health, fruit quality, expected yields and water retention. Moreover, we are still implementing our approach with full “conversion” occurring this year. Author’s warning – the period of time, absence of a control data set and recent unseasonably cool seasons do not make for a reliable or scientific data set. Having said that, we have not experienced nor can anticipate any serious downsides to this approach. It’s a healthier, ore interesting approach that happens to be a hell of a lot more fun.

A great place to start learning more about this approach is from Great Plains rancher and farmer Gabe Brown’s book Dirt into Soil. When you get more interested, Nicole Masters’ For the Love of Soil bears repeated reading as does anything about soil life by Australian soil scientist Dr. Christine Jones or Ray Archuleta from the USA (Google them). Dr. Jones’ case study of orange tree dieback from Florida is stunning and could possibly be relevant to vineyard diseases.

Charles Massy’s The Call of the Reed Warbler is an exceptional survey of many regenerative approaches employed in many different sectors and regions of Australia as well as the history of their development. All of these writers, researchers and practitioners have a number of YouTube videos that you can watch right away as well. Another viticulture specific publication worth reading is McLaren Vale viticulturist Richard Leask’s Nuffield Scholarship report as it is one of the only resources written by a viticulture practitioner. While we view things differently in terms of terminology, it is another great place to start. Jason Haas’ Twitter feed is another good resource. His Tablas Creek Winery in California is the only certified Regenerative Organic winery I am aware of. Beware, this is one big rabbit hole…

Once you get your head around the regenerative concept (a great deal of “unlearning” is required), your entire business and our industry start to look a lot simpler as well. But, as with all changes in farming methods, it is a multi-year process where the biggest change occurs between your ears. You can’t change everything overnight if you are a long-term user of fertiliser and herbicide without expecting some shocks. If this approach is interesting, read and watch a lot, ask a lot of questions, get help from someone with experience, take it small and slow at first and always measure the results. The social and economic benefits of doing so are a safer, healthier and less expensive approach to farming that are more sustainable to boot. 

Who’s Sustainable? Who’s Asking?

With the blessing of Wine Australia’s funding and limited participation, Australian Grape and Wine (the “peak” industry body representing about 20% of Australia’s wine growers and wine makers) and the Australian Wine Research Institute (funded by grower and winemaker levies, matching taxpayer funds and corporate research projects) rolled out Sustainable Wine Australia in 2019. Setting aside the origins of the program (my wife is suing them in Federal Court regarding same), SWA does not assess the sustainability of the Australian wine industry.

Participants in SWA assess their own businesses.  But the industry bodies that think sustainability is good for us have not been willing to turn the lens around at their governance of the industry. SWA is just another a “Look! A bunny!” response to the structural and embedded problems resulting from decades of poor industry leadership. It gives these bodies a chance to say they are doing “something” while continuing to shirk their own responsibilities.

Any serious accounting of the current sustainability (triple bottom line – people, planet, profits) of the Australian wine industry would be bleak reading from a list of symptoms to their causes. The AGW and Wine Australia rolled out Vision 2050 in April 2020. This is a forward-looking ‘strategic plan’ document that has received little attention since it was published. Not that it doesn’t matter. But who has read it then or since?

The lack of public response to its release was undoubtedly seen as acceptance of its goals by the wine community. While it covers most of the big issues, it makes a lot of motherhood and apple pie declarations while actually presenting a view that these bodies actually know what is best for us and have the ability to make things happen. Any consideration of its forerunners -1996’s Strategy 2025 and 2007’s Directions 2025 – reveals massive gaps in their understanding of strategic planning. This newest document praises those prior efforts, minimises their disastrous downsides and positively decouples these organisations from responsibility for these outcomes.

Vision 2050 is no different. It lays out a seemingly rosy view of our future wonderfulness while working from the assumption that China had eliminated our historic oversupply. In fairness, it also highlights the risk of insufficiently diversified export markets but does nothing to say “here are a few things we could do if one of these markets disappeared overnight or dried up, etc.” Less than 18 months later, the China bust has already laid waste to many of the un-tested assumptions of their thirty-year plan.  Despite the pious “father knows best” tone of the document, their institutional response to these radically changed conditions since has been practically non-existent.

My favourite part of Vison 2050 is as follows:

“Without social licence to operate, the Australian grape and wine sector will struggle for relevance. To succeed and prosper, our key objective is to be respected and trusted for how we conduct our business. In an increasingly complex world, the grape and wine sector must demonstrate the value it contributes to our nation – in clever and careful use of our natural resources, in proactively working with government and the health sector to demonstrate our product’s credentials, and through contributing to minimising alcohol- related harms, and in making a real commitment to the economic and social well-being of rural and regional Australia, especially through the provision of employment opportunities and services (see pillar 4).” P23

And better:

“It is critical that the grape and wine sector demonstrates to the community, consumers, customers and governments our social licence credentials. Our future requires the development of rich and enduring relationships based on mutual respect and understanding between these stakeholders.” P24

Recognition that our “social license” is our key asset (I assumed people were) is hugely important because much of the regulatory framework for our industry rests on this idea. So, when these bodies are spectacularly wrong about structural and historical oversupply and do nothing to advocate serious change to address the causes of that for decades, we need to consider that the system is fundamentally broken and that it is our institutions that are not sustainable or delivering on the ‘social license’ we require to operate in. China is just another thing they got totally wrong and isn’t the problem that needs solving.

Keep in mind that as a rural industry that the AGW, Wine Australia and the wine industry at large have always been cosy with Liberal and LNP Governments. It’s not for nothing that Liberal Senator for SA Simon Birmingham is a former AGW employee. Failed transphobic Liberal candidate for the formerly safe Liberal seat of Warringah Katherine Deves is a former employee of Treasury Wine Estates. TWE Global Public Affairs Director Jeffrey McCormack spent most of the last decade hopping between senior political roles in the federal Liberal and NSW state governments. He has now parachuted onto the AGW board after just two months in the wine industry (or any industry for that matter). The Wine Australia Board members were all appointed in 2021 by National Party leader and former Minister for Agriculture David Littleproud. They serve until 2023.

Given the seismic shift(s) in politics with Labor, Greens and independent candidates coming to power on strong climate and health agendas, these relationships are no longer the asset they were. In fact, they may be liabilities as the industry faces numerous long-term threats converging at different rates of approach.

Avoiding or resisting policy change is a viable short-term tactic if used in the context of a long-term evolutionary strategy. One only needs to see how the tobacco industry went with a “no change” strategy. Or, how the sugar industry (particularly in fizzy drinks) is rapidly losing ground to policy makers worldwide. The health and environment campaigners won’t stop there. We are clearly in their sights.

The AGW policy of bending as little as possible to any possible change means that that our strategic position of strength is getting increasingly prone to breaking. Their recent failure on the multi-colour labelling changes is evidence that the policy environment has already changed – even the most business friendly LNP government ever had stopped listening to the AGW. Imagine what can happen in a Labor government. The inevitable outcome of their strategy of change avoidance reminds me of the quote about how someone went broke; “very slowly, then all at once.”

To suggest their strategic planning process repeatedly demonstrates its own irrelevance is only partly unfair. Some of the issues highlighted are permanent issues, some existential in nature and in need of the credibility of bodies who are smart enough to not assume anything instead of nearly everything. Unfortunately for the rest of us, the people in positions in these institutions face little real world exposure to the environment of total and continually changing risk that many industry participants live with on a daily basis.

Inadequate window dressing type documents like Vision 2050 act to destroy our credibility as an industry when they don’t stress test their assumptions or offer alternative scenarios for deliberation. Instead, Vison 2050 thinks that the way forward should include “developing options for rationalising the sector’s representative bodies while maintaining maximum engagement with all stakeholders.” As screwed up as this industry is, the problem isn’t too many voices and too much competition for better ideas, it is that there is far too little of both because of the monopoly on policy advocacy that these bodies hold. Yet, they want even less discussion and more money to keep doing what they have always done to get the same results they’ve always gotten that are bleeding the industry dry. Why?

The real problem for AGW is that 70-80% of Australia’s winemakers and nearly all of its grape growers will not voluntarily go out of pocket to join a body that so clearly does not represent their best interests. They exist financially only because of their five or six biggest members. It is no wonder that they don’t make their financial reports or meeting minutes public despite their aspiration to be ‘transparent.’ My guess is that either of the McLaren Vale or Barossa associations have stronger balance sheets than this mob. It’s no stretch to think that new federal government already knows that they are a paper tiger.

What our industry needs right now isn’t Vision 2050 but Look in the Mirror 2022. The entire wine industry and our institutions need to address all of the major risk points that we currently face where we assume only the worst, offer serious alternatives for broad discussion and direct our energies and limited resources accordingly. Here are a few to consider. There are many.

Oversupply

The Australian wine industry has suffered from an oversupply of about 15% of its wine grape crop for nearly two decades with steadily falling or stagnating prices paid for grapes. When demand from China seemed to (finally) absorb this oversupply a couple of years ago, improved prices were still below any sort of long-term sustainable income figure. When I became a grape grower in 2003, $7000 revenue per planted acre was considered to be doing OK on an operating basis. Even then, this figure did not account for the capital holding and opportunity costs of owning a vineyard.

Since then, costs, (excepting interest rates) have increased for all major vineyard inputs substantially – labor, agri-chemicals, water, diesel, posts, wire, seed, equipment, the lot. It is fair to say that the “doing ok” figure is now at least $8000 per acre. Very few growers achieve this figure in any region on a consistent basis. Falling interest rates helped to absorb a lot of these costs but now rates are starting to rise again. This is the reason major wineries are selling vineyards despite interest rates still at historically low levels. As long as oversupply continues, vineyards are bad investment. And, any industry that cannot continually attract new or replacement capital is, by definition, dying.

Rising interest rates and inflation may be the final straw for many. The questions that need to asked in a serious strategic planning process are things like: will lower vineyard prices just encourage lower standards of production and drag the market lower?, will the “right” vineyards be pulled out?, if so, “right” for who?, will fragmented removals push some regions below critical points of community and industry viability? Etc.

The next step has to be “how do we get the best outcomes for the entire industry? And, “what are the best outcomes, and, for who?” and so forth. This is not the discussion we are having as an industry. Why not?

The continuing problem with wine grape oversupply is that most of the oversupply of wine grapes ends up getting “cleared” from the market for somewhere around the cost of picking because growers have to pick their fruit on to the ground even if there are no buyers. Because the clearing price is so low, it enables someone somewhere to still make a buck making the cheapest possible wine while dragging the rest of the market lower. In a normal market, years of this would drive growers to sell and wineries to close.

There are at least six reasons they don’t:

1)The wine industry doesn’t want balance any time soon, instead it foresees that until 2050: “Production levels will be maintained around the current long-term average” Vison 2050 (p.5)

2) Wineries spread their contracts and purchases around to keep as many growers growing as possible because wineries generally think that they benefit from lower prices (this is more arguable than accountants think). So, individual growers usually only have an over-supply on part of their vineyard, not the whole thing.

3) What sane investor wants to buy vineyards that don’t even return their cost of capital?

4) Tearing out a vineyard is a lot more expensive that it may sound.

5) A high percentage of independent growers have off farm jobs / incomes.

6) Magical thinking.

The result is most independent growers just go broke more or less slowly rather than exit. Most lack the funds needed to transition to new varieties or value add to their crop. Wineries know this and take advantage of it. While the government loves to call this scenario “market failure” because the normal incentives of supply and demand don’t work as expected, there is plenty of blame to spread around including to government.

In theory, beer and spirits should have enormous structural price advantages over wine because wine can only be made once per year while breweries and distilleries can produce year-round and aren’t nearly as affected by weather as winemakers are. Even with grape prices equaling picking costs, wine should still cost more to produce for these reasons. Yet, Australian wine producers are able to offer such cheap alcohol per unit in the form of boxed “goon bag” wine, that communities like Geraldton WA have tried to ban them. The human and social toll it takes (most visibly in remote communities like Geraldton) is extraordinary.

Resources:

While water resources are the result of a patchwork of regulations and legal entitlements by state and source, it is fair to say that water availability is, and will be, increasingly constrained by climate change over time. The trend is not our friend. And, wine grapes are not food.

In a severely constrained environment, governments may well make choices about who receives irrigation water and why. The wine industry’s ‘social license’ that assumes it has an equal right to this resource may not be sufficient unless it is seen as part of the solution rather than part of the problem. Supporting policies that enable wine to be sold for less than water (or any other alcoholic beverage) is not a strategy that will enhance our social license when we need one.

Soil:

Viticulture is ideally suited to be the model citizen for soil health. We don’t require annual tillage and vines naturally hold soils; both help prevent erosion. We also have the opportunity to be part of the longer-term carbon solution by encouraging the natural carbon nitrogen cycle to sequester and use nutrients with less inorganic inputs using cover crops better than we have in the past. We follow this approach in our vineyards in the hope of building long term soil health, water holding capacity and resilience. And, we test these practices with annual soil tests.

From what I have been told, SWA doesn’t mandate annual soil testing while its predecessor system SAW did. While their stated commitment is to “continually strengthening the standards of Sustainable Winegrowing Australia beyond ‘best practice’ “(P26), how can you manage, let alone improve, a resource without regular measurement?

Examples like this make accusations that the AGW’s and Wine Australia’s strategy is more about marketing than leaving a better world behind appear relevant. Some could call it greenwashing. Why they support a standard that doesn’t require testing our core resource is hard to fathom. Awareness of this willingness to look good rather than be good or do good is also potentially damaging to our social license that they think they are upholding.

People:

The goal of the postwar agri-chemical industry(s) was to increase yields and productivity while replacing labor inputs with mechanical and chemical inputs. Over time, this approach has hollowed out rural towns, driven consolidation and depleted resource bases worldwide. One positive trend that is emerging is that the chemical vs people balance is beginning to shift back a little bit. For instance, highly trained agronomists can substantially reduce or eliminate inorganic inputs in viticulture while improving quality and returns. And, practices such as mechanical weeding require people and machines rather than chemical inputs. At the other end of the chain, selling middle and higher priced wine profitably requires a lot of off-farm folks in design, marketing, packaging and technology who can be lured back to help revive rural communities if they believe they are clean and healthy places to live and raise families. Selling a lot of wine cheaply does not have this effect or opportunity.

The fact is that highly mechanized, chemical input driven wine grape farming has quite a lot of negative externalities – rural depopulation, soil degradation, excessive water use and pollution, low profitability and oddly, low employment. All of these run against the grain of the notion of sustainability. While most industries thrive on high productivity ($ of output divided by people employed), in wine it can be the opposite for the reasons mentioned above.

Getting outside of our wine bubble, there are a number of parties and policy makers that actually see the wine industry as a real problem in Australia, some who see it as worse than brewers and distillers. The problem with this view for us is that they are not looking for very nuanced solutions to “our” problems of oversupply and the like. They want to impose heavy handed solutions to real social problems and let the chips fall where they may in our industry. The wine industry is forever explaining that (most) wine is consumed more responsibly and deserves different treatment but it can’t explain away the abuse arising from cheap wine and goon bags either.

There is a reason for that.

Taxation:

Despite our modern history as “one big industry” since the formation of AGW in the 1990’s, reality has always been more or less different to that. Interestingly, the architect of the one industry, one voice approach, Brian Croser, now talks about acknowledging “two industries.” And, the inland growers’ regions have now banded together (as the oddly named Australian Commercial Wine Producers or “ACWP”) to effect policy change outside of the AGW. Their current and particular beef – paying levies on tonnage rather than value is not silly. I happen to agree with them. However, to expect that change without changing our taxation to the volume of alcohol produced rather than its value only destroys any remaining notion of fairness or “social license.”

Simply put, the ACWP make themselves look ridiculous by asking for all tax and levy policy to benefit them and disadvantage everyone else. Any notions of one industry, one voice has to be laughed at now by governments. Nonetheless, in a bid to save his beloved AGW from its foundational flaw, Croser now argues on the side of the ACWP and against volumetric taxation. You can’t make this up.

Volumetric taxation would be a game changer for the industry. It will make the cheapest wine much more expensive, no doubt. If the wine industry wants its social license to have value and credibility, maintaining taxation advantages that ensure wine is the cheapest way for the most vulnerable people in Australia to get pissed isn’t the best way to prove that.

On the other hand, by removing this very serious negative and focusing on the positive that most wine drinkers do consume wine responsibly is also an argument that volumetric tax doesn’t necessarily have to be at the same rate as spirits or beer. Both can be true. There is a deal to be had here that is a long term net positive for the industry.

Something like 70% of Australian wine is made from inland region grown fruit and something like 70% of that ends up in export markets as low value bulk wine without paying any WET tax at all. Of the remaining 30% of inland fruit, if a (worst case) revenue neutral volumetric tax were implemented and was anywhere near as disastrous as these same people suggest, it might make half of that remaining 30% (15%) of inland production unviable. While this would not affect only these three inland regions, this 15% is pretty close to the volume of long term structural oversupply in Australia. And, it would likely affect the least amount of land, the fewest people, save the most water and do more for on farm profitability of remaining growers in these (and other) regions than any other policy.

Given the extraordinarily profitable and counterintuitive success of people like Ashley Ratcliffe at Ricca Terra farms in the Riverland, the argument that industrial grape production of two or three varieties of grapes is the only viable economic pathway for the inland wine regions is a joke. Ashley cannot grow fast enough to keep up with a rapidly changing market. The opportunity for these regions to re-tool with warm and hot climate appropriate varieties that sell for far higher prices than the crops they grow today is enormous. If I were a young grower, that is where and how I would be investing in the wine industry regardless of tax policy today.

Depending on the volumetric taxation rate chosen, it will also likely create a tidal wave of innovation in the $10-$40 per bottle segments that may finally bring Croser’s other vision of Australia being the world’s best wine country to fruition. As smaller and newer players exploit the many export opportunities for fine Australian wine that isn’t just Shiraz and Chardonnay, they will grow and reap economies of scale allowing Australia to become very competitive in segments where it isn’t at present.

If I were in the multiple simultaneous pickles that those who govern our industry find themselves in today (carbon, health, water, oversupply, labor, etc) with the walls slowly closing in with all of them, this one choice on tax is as close to a silver bullet as they will find. But, it will immediately destroy the AGW as a representative body of “one industry.” And most of the biggest players will fight it tooth and nail. There is a reason that industry Boards don’t have a seat for the future, just ones for those who want to maintain the status quo.

Personally, I don’t see the problem long term. I’m all for short term (3-7 year) transition plans. Growers and wine makers will have to figure out new funding and representation models that make sense that doesn’t overweight a couple large companies. Governments will have to figure out who they want to recognize and support (companies / donors or voters?) but telling them we are “one industry” is a fundamental mistruth that can’t be papered over any longer. Or, that the advocates for Australia’s cheapest way to get pissed are entitled to a ‘social license” to keep making money off the backs of the vulnerable.

Branding:

As suggested here many years ago, we need to abandon “Wine of Australia” to the inland regions and their producers. As far as most of the world is concerned, this is already the case. To those who use the confusing as hell “Southeast Australia” appellation, just get rid of it and use Wine of Australia. We need an alternative for our fine wine offerings. I’m not bitter, just realistic about this very real problem that needs serious thought, not lowest common denominator one industry, one voice thinking.

Between 2017 and 2021 Wine Australia spent nearly $50 million (of one time funding) promoting Australian wine exports yet total bottled wine sales stayed flat at $1.1bn while unit prices increased about 15% (around the inflation rate for the period) because we just did more of what already wasn’t working. We need to embrace the need to promote differentiated state and regional branding for bottled products as a path forward (unless anyone has a better idea). Regions and states will need to learn how to promote themselves with Wine Australia’s enthusiastic financial support. Look how well Tasmania is doing as a brand with almost no money. They’re not silly.

All of these and others are serious threats that need to be addressed in a serious strategic plan. For instance: What will the industry do in a drought much worse than the last one? What is our plan B? What if government decides to limit the agricultural use of river water to food crops to ensure we can feed ourselves? What if government decides that an indexed revenue neutral volumetric tax is the go? What will happen to those affected by a radical step changes in policy rather than a negotiated or transitioned one?

Major change on numerous policy fronts is coming to us one way or the other. Our governance bodies need to shape up quickly and start presenting real choices for our future. We can either be the champion or the victim in this process. As Will Rogers used to say “even if you’re on the right track, you’ll get run over if you just sit there.”

The wine industry’s Plan A is dependent on nothing much changing despite being in an agricultural industry that is both irrigation and chemical intensive on an island continent that is also the world’s driest during a period of radical climate change and worldwide trade and supply chain disruption. What could go wrong?

Just sitting there isn’t an option. One principle that Vision 2050 is clear about is that they are “continually strengthening the standards of Sustainable Winegrowing Australia beyond ‘best practice’ to meet changing circumstances.” (P26) AGW and Wine Australia need to apply their logic to their own governance if they want a successful industry, not just taxing sustainable grape growers who make their marketing job easier.

Another example of Vision 2050’s extraordinarily low ambition is to “aim for a carbon-neutral industry by 2050. Nothing less will satisfy our sector and the planet.“ (P25) Nothing less that “aiming” by 2050? Really? How can they maintain a sense of entitlement to a ‘social license’ when their goal for carbon reduction is at the absolute bottom of the worldwide industrial stack? We can do this by 2030 if we have any sort of serious leadership.

Recognising that we produce an addictive substance that is not food (I know, I know, pure craziness) is to recognise that when push comes to shove, our industry can’t be as good or bad as other industries, we have to be better. Much better. In all respects. To quote Vision 2050 again: “We must deliver against the principles of legitimacy, credibility and trust. Reputation is everything!” (P24)

It’s time we demand that the AGW and Wine Australia get much better and and start delivering for us on the hard choices. We will all eventually face these; together or alone. That is the real choice.

Dr. Krstic’s Craziest Hour

The Wine Rules name is an homage to John Irving’s Cider House Rules. Irving explored the written and unwritten “rules” of life and morality across races and castes in all its ironic and hypocritical splendour. How these themes play out in the Australian wine industry are always a source of fascination for me.

So, when good friends suggested the tone of my last post; “Dr. Longbottom’s Young Frankenstein (without the funny bits)”, was a bit over the top, others even considered themselves “outraged,” it gave me pause to reconsider. In short, they said, “you could have written it differently, more nicely.” Maybe they are right, maybe they aren’t. Before you consider that question, please consider these:

1. Where was your outrage when Dr. Santiago-Brown was being privately smeared and defamed in 2014 and 2015 having done absolutely nothing worthy of either? Did you speak up then?
2. Where was the outrage when Dr. Krstic decided to send a letter to AWRI’s mailing list saying that instead of investigating Dr. ISB’s very serious allegations made in private conversation then in correspondence and then publicly in this blog? Having made the Board and MD of AWRI so aware without any investigation being undertaken, our avenues to address this matter were exhausted barring taking a wealthy public institution to court.
3. Where was the outrage when Dr. ISB’s academic work was plagiarised by a national research institution?  Don’t their employees “sign a paper” saying that plagiarism – in any of its forms – is not ok when they start working for the AWRI? 
4. How can you read an extremely detailed description of the process of exactly how institutional / systemic bullying occurs effectively and without sanction in academia and research and then arrive at the conclusion that the person exposing that process is a bully knowing that the person in charge of that institution was begged to investigate the matter privately and did not do so?

The fact is that no one will speak up against these institutions or these people for fear of negative personal and career impacts. This is the essence of institutional bullying. In our case, they lack such leverage and obviously think that we will go away. As the saying goes, ignorance is free but education is expensive.

What makes this such ripe content for The Wine Rules is Dr. Krstic’s reaction to the last post. He started a private / not-public Facebook post accusing me of being a “cyber bully” and the rest. Various voices including the head of Wine Victoria chimed in with their support, others with their unfavourable opinions of me and the blog. (My personal favourite was the one who suggested that I didn’t “get” the internet because the piece was so long. D’oh. Having met or represented three of the six founders of the internet, many of the first and second generation internet companies (from 3com to Netscape, Broadcom, etc) in my life (oh, and my friend who was the sys admin on node 3 at UCLA that made it an “inter”net, I can only laugh.) But, it was a good laugh.

Defensive people are rarely ironic on purpose but this may be Dr. Krstic’s craziest hour. He was clearly upset that his employees’ conduct was exposed to some sunlight and that he was personally exposed for having chosen to not investigate allegations about the cloistered world of bullying in the wine industry research field. Ingeniously, he struck back by name calling in a private Facebook post where the only people supposedly able to see it are mostly from the cloistered world of wine industry research! You can’t make this self-validating nutbaggery up. This mob has lived in a truth and accountability free zone for so long that the sometimes harsh light of reality must be blinding. 

For the rest of you, I strongly suggest reading Caste by Isabel Wilkerson to understand that the reactions expressed by him and his are utterly typical reactions to a situation where the expectations of the dominant caste, race and status are upended by people who don’t fit their worldview. If that seems too serious, read The Cider House Rules. Both are magnificent.

How the AWRI Board can handle the cognitive dissonance of this situation and these behaviours without taking decisive action is beyond comprehension. 

We press on. 

China: The Wake Up Call We Needed to Have

Prologue

I have had quite a few emails and phone calls recently asking where I went for five years, why I’m blogging again, etc. Well, the last question should be obvious enough but I’m not only interested in the institutional abuse of power at the AWRI or its appalling lack of leadership and governance with respect to my wife’s published research. The machinations and governance of the entire industry have always been of interest because it has been so particularly counterproductive for most of the last quarter century. 

The reason I went dark for five years was to undergo four knee surgeries including three different replacements (don’t ask), build a cellar door and micro-hotel business from used shipping containers in McLaren Vale and to see if absolutely anything would improve on its own.

It turns out the only thing that showed much positive change was the China trade. We (Inkwell Wines) have avoided China for our own reasons, but to see China mop up all of our over-supply in a few short years was pretty damn exciting and beneficial for everyone. However, to see that crash overnight with no “plan B” was a particularly Australian wine industry type experience.

Anyhow, this blog is written to get folks to think about the fact that the problem isn’t China, Morrison, the Chinese wine industry (despite all being individually and collectively problematic), but us. Every “grand” strategy ever launched by the Australian wine industry has ended in fizzle or worse for those of us on the bottom rung – growers and small fine winemakers.

There are structural, governance and regulatory dimensions of this problem that never get addressed because we have had the same leaders (or their proxies) in place for these past thirty years. What we need is a new generation of smart, lateral, integrated-thinking leaders and policy about the entire operating context for our industry.

The old model has conclusively proved it doesn’t work multiple times in all of our biggest markets including the local market. We need to stop. And then, begin again with fresh eyes and dreams.

This blog is for those who feel or believe this but need or want a way to start this discussion. Please read the following as the start of change that must occur both with the “fierce urgency of now” and the wisdom of our grandchildren looking back on us.

CHINA, AND EVERYTHING AFTER

The news that China is going to impose huge new tariffs against Australian wine is the news none of us needed to have to close out 2020. The degree of shock registering throughout the industry provides the first clue – that, once again, we aren’t prepared for the future. But, with any loss of this magnitude – China consumes 25% of the wine we produce – we have to ask how and why it happened. To understand this, we need to understand the last crisis in the Australian wine industry – the glut of the oughties.

The post-millennium glut was a predictable outcome of massive overinvestment in the wine sector in the late 90’s and early oughties resulting from accelerated tax depreciation for new wine grape vine plantings. This policy was the result of wine industry leaders of the day lobbying for these tax breaks in a belief that Australia could be the biggest and best wine producer on earth.

These same leaders, despite turning out to be hopelessly naïve, have continued to inform and drive industry policy ever since. What we have today is a recipe for disaster designed in the 1990’s for a 1980’s problem.

From 2005 to 2015, Australia suffered massive twin hits of wine oversupply and a tumbling reputation for quality worldwide while wine inventories cleared and the industry unprofitably “adjusted.” What a lot of folks missed in this ten-year period was that this outcome was neither biggest or best in any positive sense. And, because a) everyone in the industry was in on the original scam (in so many ways) and b) most people just can’t say “I stuffed up”, we never identified a suitable new national strategy or new people to lead. Nor did industry stop listening to those who flogged this nonsense in the first place. 

Industry appeals for the government to assist in an adjustment process were justifiably rebuffed at the time. As an aside, Simon Birmingham has been on both sides of this divide; first as the man in Canberra for the Winemakers Federation and now as Trade Minister during this China row.

In the last five years, the entire sector has bounced back to something like parity due to a huge increase in demand from China in a strategy long championed by folks like Warren “Wazza” Randall of Seppeltsfield Wines. Almost alone, Randall saw that the scale of the opportunity China presented was our last best hope of a large market where we could sell above average value wine after our “biggest and best” strategy had wrecked our opportunity for a fine wine reputation in the USA and UK. Randall devoted enormous resources in China selling the Australian fine wine proposition. For many, his success was our success. 

I’ve often observed that the people who understand the wine market best are grape growers. All news, good or bad, is felt by them immediately. Only growers think in decades and generations. Wine makers think in vintages while public companies and marketers think in quarters.

As Australia’s largest private grower of high value grapes, “Wazza” understood that prices would never increase until net demand exceeded net supply and that only China held the promise to absorb that much wine in the near to medium term.

The result since 2015 has been something like balance in supply and demand. This is an incredible turnaround that deserves full credit. This strategy was always two things: 1) necessary over the long term and 2) risky over any time frame. While the Free Trade Agreement signed a few years ago seemed to neutralise a lot of risk and lower barriers, the destabilisation of the USA China relationship since 2016 has created risks that have revealed deeper cracks in the Australia China relationship than most were aware of. This will take a lot of time to stabilise, if ever, and is largely out of Australia’s control.

The best part of the China trade has been that it has involved both huge quantities and two to four-times the prices paid by other large markets. Almost too good to be true. On the corporate front in China, Treasury Wine Estates has been the volume leader leveraging Penfold’s Grange as a calling card to open many doors. 

TWE has now announced that they are withdrawing from China to divert elsewhere and that they would be reducing Australian grape intake starting immediately. While trade policy will change in a year or five, the market will remember that we didn’t hang on through the tough times. How bad will we look if trade policy does an abrupt about face in six months? We’ll look like Good Time Charlies, not a serious industry or nation. This is an under-appreciated risk.

What this “shock” event has revealed about our national wine industry is that absolutely everything has to be going right – a growing world market, China booming, low-ish currency, no “too big” vintages, some bad vintages overseas, FTA’s, etc – for supply and demand to be in balance. Prices for grapes have only started rising across the market for the past few vintages and for many are still below prices paid well over a decade ago.  In inland regions, more than 90% of growers are still losing money.

What the last few years has shown is that our default trading context – the WTO, TPP and FTA’s framework built over the last decades – is coming apart at the seams. We can’t bet on export growth anymore to solve our problems. And, these matters are largely out of our hands despite our best efforts. 

There is less irrigation water available in most places and or higher prices than in the past, as well as hotter, shorter vintages that don’t allow for capital invested in wineries to be used as efficiently. The oversupply of winery capacity resulting from the millennial building boom has temporarily masked the shorter vintage problem but this trend seems set to continue with climate change.

This failure to think inter-generationally is, perhaps, the most under-appreciated risk right now both for those winemakers who sell to China and the entire Australian wine industry. Fifteen years of wishful thinking that nearly (almost) got us ahead isn’t a strategy.

As an industry, we need to either pray things go back to normal quickly or we need to discuss existential questions sooner rather than later. Because, it is very unlikely that: 

1. the Chinese will revolt over Australian wine and demand tariffs be lifted
2. either the Chinese or Australian government changes its current position  
3. the USA China rivalry settles down any time soon

The core issue we have to grasp as an industry is that no one has ever chosen between “biggest” and “best” for the Australian wine sector. And, aside from the Randalls of the world, no one in a position of leadership has publicly proposed serious alternatives to either or both of these options. 

The policy implications of serious change are significant. However, the cultural change required is, in the wine context anyhow, practically “un-Australian”. Meaning, the consensus-driven style of Australia’s governing bodies and institutions – always billed as a strength – is poorly suited to the hard decisions required. If you are a leader who has something to say, now is your moment to risk getting kicked off the old boys’ club Christmas card list. It’s not that bad, I promise.

A few points for those who don’t know the industry intimately: 

1. Australia exports about twice what it consumes domestically so is effectively dependent on foreign demand and currency fluctuations to remain profitable.
2. Exports are not taxed while domestic sales attract 41.9% (inc. GST) tax on sales over $500,000 for wineries.
3. The peak industry body, Australian Grape and Wine, operates on a principle (not written) of Board unanimity and hand selects its Board members that represent less than 20% of winemakers but 90% of production. In other words, the industry’s least change adept / most risk averse members controls industry policy.
4. The federal corporation that oversees the industry, Wine Australia, has a Board of hand-picked Directors recommended by a “third party” (usually an industry grandee well past their use-by-date) from a slate of self-nominated applicants. This means very little innovative thinking or real change is tolerated. And that is before the first meeting opens for business. 
5.  National wine grape supply is overwhelmingly grown using scarce river water. Those with permanent water entitlements get nearly free water to grow huge crops of largely unprofitable grapes. While few make money, the cost of change is higher than incrementally losing their capital as long as water is nearly free.
6. Export prices for Australian wine at wholesale are between $1-$2 per litre in most of the world but around $5 per litre to China. As a reference, the shiraz we grow in McLaren Vale is worth around $8 per litre on the vine (before picking costs, winemaking, oak barrels, packaging and distribution costs) are taken into account. From our perspective, $5 per litre exports are only a win relative to $1-2 exports.
7. Using the above inputs and outputs, our shiraz uses Australia’s scarcest resource, water, to create close to 100 times the product value of the same water input in a wine grape crop grown in an inland region. 
8. Most winery operating margins lost in the last decade or so have ended up in the ColesWorth duopoly’s pockets (a duopsony for the pedantic) on a nearly penny for penny basis.

Seemingly, there are only two ways to look at this. Some would argue that as a high cost producing country, the only way Australian wine is competitive is at lower price points from fruit grown in inland regions grown for export markets ($1-$2 per litre). This is a razor thin margin business with exacerbated water and currency risk that does not create a huge number of jobs and is successfully dominated by Casella’s Yellow Tail brand, particularly in the USA. Their brand focus and enormous scale make this possible. On the other hand, when the Australian dollar was at historic highs, even their business looked wobbly for a while.

The other way to look at it is that high value wines use far less water, employ disproportionately more people, are in climatically less risky regions and are better able to withstand currency and demand variations over time because of the high dollar margins ($5-$100 per litre).

In either case, large companies dominate the market for the purchase of wine grapes (in market parlance, wineries are “price makers” while growers are “price takers” due to the perishability of grapes) in respective wine grape growing regions and have monopoly-type price-setting power due to their sheer scale.

The brand “Australian Wine” is hopelessly out of focus as a result of serving both of these fiefdoms. What has seemingly escaped everyone is that this either or analysis needn’t be the case and that major structural change is necessary if we are to sustainably continue. Finally, government involvement is required – sooner or later depending on the path chosen.

As mentioned, China is not the problem we face. We face many challenges and need integrated thinking and strategy to re-platform the industry for generations. Industry has taken a one-by-one approach to problem-solving that, when it has accomplished anything, can only be viewed as a “kick it down the road” strategy.

The wine industry regularly defends itself as “special” when making arguments about, health, taxation, tourism, regional economic development, etc. And the truth is that wine is different, even special, in that we do support regional economies better than most rural industries and because we only produce once per year. We are not like beer or spirits that can be produced any time of year, anywhere, with ingredients available year-round and using capital equipment year-round. 

The other truth is that we produce an addictive product that performs identically to beer and spirits (for people who consume for inebriation purposes) that does not deserve preferential treatment on the basis of consumption pattern.

There is nothing “special” about cask wine or bottled wine under, say, $10. When you realize that 41.9% of that price is for tax, you realize wine can be made as cheaply as bottled water or soft drinks. Not special at all in this respect.

If the wine industry insists on being treated differently from beer and spirits on matters of tax, we need to be honest about what else makes wine special. As usually mentioned, wine is enjoyed as the beverage of choice to celebrate life’s moments and is enjoyed more responsibly by its customers. This is not only because of price but because it is deeply etched in our souls, cultures, religions and even at a genetic level as some research suggests. (Humans grew brains faster by eating over ripe fruit that gave us a huge caloric advantage over other species and a buzz as a kicker). This is no small thing.

When you consider that our rivers are already running dry, the temperature is dramatically increasing, the medical establishment and other lobbies (including beer and spirits) want to make wine more expensive and that we do not produce essential food with our resources, at some point, we will lose the moral authority to argue that our “special” case is a net positive for society.

What we need to consider is using this latest crisis as a lever to shift the entire industry onto a more sustainable path for producers, the health of society and the preservation of our resources. These interests can all be served simultaneously by changing the way the industry is taxed. And, the industry can choose a better path by driving that process rather than having it imposed from without by a changing social or natural climate.

The latest long-term strategy (Strategy 2050) doesn’t even scratch the surface of addressing all of these challenges in an integrated way – it is just a repositioned, un-stress-tested, don’t startle the horses re-print of what got us into this mess in the first place. How far the consensus is from reality was proven by one announcement from Beijing.

Here, then, is a list of proposals that could achieve all of the above:

1. A volumetric tax that broke even with the current ad valorem tax at around $15 per bottle. (Keep in mind, we would still be also required to pay an ad valorem tax (GST) on top of a volumetric tax as we do now on ad valorem so it would not be a pure volumetric tax). The current “un-bonded” system would remain. 
2. This tax could be phased in in three steps over a five-to-six-year period to allow time for adjustments. 
3. Government offers to buy grape growing properties (only available to those with full permanent water rights) on a reverse Dutch auction basis using a multiple of the water rights value as a “floor” price so that owners can sell in dignity provided they grub out vines and plant native biodiverse flora over the property. The goal should be to retire maximum permanent water rights per hectare.
4. Remaining growers would be encouraged to voluntarily re-plant or graft some of their holdings to varieties more climatically suitable than Chardonnay, Shiraz and Cabernet. Think Nero d’Avola, Grenache, Touriga Nacional, Mataro, Fiano, Vermentino, Arinto, Greco, Albarino, etc. This could be achieved through a temporary loan scheme under-written by governments or by contracts with wineries. Diversity, sustainability and less water demand will result.
5. The government agrees to fix the volumetric rate rather than indexing it and indemnifies winemakers from lawsuits and legislation designed to harm it by medical, health, trade and consumer groups.
6. Labelling to be within 0.5% alcohol by volume as with other major producing countries. 
7. No company should be allowed to have more than 20% market share in the national market or more than 30% share of purchasing in any wine region by law administered by the ACCC. This will require some company reorganisation but will also allow companies to become large enough to take on export markets seriously and not unduly dominate local markets for production or consumption. Further, it will encourage export growth without harming current large exporters in the domestic market (bar the 20% rule). It will also reduce the Balkanisation of supply that harms growers.
8. Some form of incentive for producers who make physical investments in all of the sectors required for the long-term success of the industry and regions – growing, production and tourism. I know this makes “virtual” producers cranky but they do not contribute to regional economies in the same way as people who make capital investments do – be it in consumption, employment and housing patterns. We need to remember that societies have economies, not the other way around.
9. Grocers need to be prohibited from owning wine production, packaging and distribution businesses. Their 80% share of wine retail is bad enough.
10. No one over 65 should be on any industry Boards. Please leave the next generation to make their own mistakes. Boards should be both more inclusive to women and minorities as well as chosen more democratically. Maximum starting ages for new Board members should be 55 or less (don’t worry, I’m nearly 58).

While there is something to annoy everyone in this list (promoting more government involvement and more market competition – crazy, huh? Proof enough of its worthiness for consideration IMHO), these proposals present lots of small losses, changes and opportunities for different companies and regions but none are necessarily fatal to any.

Cheap producers will still be able to export but will be harmed in the local market. More expensive producers will be able to reduce prices and be more competitive, particularly in the $20-$40 per bottle segment. Innovation, consumer choice and quality will explode.

Net employment will grow as higher value producers grow (high value wine employment is a much higher portion of revenue than low value wine). “Stranded” growers will be able to quit or retire with dignity and their holdings eliminated from national supply. Those that don’t sell or adjust risk failing but they already have that risk. Permanent water will be saved benefitting the rivers and the environment (hopefully). Ideally, land left without water will be required to be returned to restore native vegetation that will provide bio-diversity benefits for those who remain.

The big loser will be folks who buy wine because it is cheaper or equal to beer or spirits. This is no bad thing. And, for Aunt Mabel on a pension who enjoys her “one glass with dinner”, maybe the government will re-visit the aged pension or her rellies will help out. As an industry, we should not be viewed as part of the problem or one of the causes of the problem, of disadvantage in Australia. Let the beer and spirits industry answer for that instead. That would make our industry special.

I’m sure there are variations on the above schema that could work. Peak bodies need to be advocating for a “grand bargain” to address the long-term triple bottom line for the industry. Any other solution will be incomplete and set the foundation for yet another crisis. 

We need to operate from a gross wine grape production base probably 15-25% lower than at present for the profitability and survival of all remaining participants. Failure to do so will be to bleed all industry participants as occurred between 2005-2015. As an industry, we do not have the resilience to survive that again with our current balance sheets. And, the poorer we get, collectively and individually, the greater the justifiable pressure to continue to sell our assets to foreign interests – like the Chinese – will be. 

Governments can be slow, but they aren’t stupid. If peak bodies do not pro-actively respond soon with a plan for the long-term viability of the industry, governments will see their failure as an industry unable to help itself and will step in of their own accord and on their own terms. (This is when government use the term “market failure” without a trace of irony despite them regulating the industry). Then, god knows what will happen but we can be sure it won’t be great – just look at the dairy industry, or the live export business, or the grain export business, etc. 

This is not a “steady as she goes”, “she’ll be right”, “softly, softly”, or “sheet it home” moment in wine industry history. Nor is it a time to bravely say “let the market take care of it.” Government policy is part of how we got here. It will need to be part of how we get somewhere better.

It is time to implement a lead, follow or get out of the way standard at every industry body. The visionaries who are willing to take risks, and take an activist, sustainable intergenerational view on policy, are our best bets, not the folks who have been doing the same things the same way hoping for different results. That’s the definition of insanity.

Source for photo – foodnavigator-asia.com

Dr. ISB Responds to AWRI Evasion – AGAIN #TooLegitToQuit

Dr. Irina Santiago-Brown at Inkwell

Below is the text of a letter sent by Dr. Irina Santiago-Brown today in response to a non-responsive letter written by Dr. Mark Krstic, MD of AWRI. In his letter, Krstic suggests a meeting or meetings to understand Dr ISB’s claims of authorship of SAW that was used without attribution in the AWRI’s SWA system. Krstic’s letter was in response to a cease and desist demand letter written to Krstic by Dr. Santiago-Brown on 5 November 2020 that has not yet been honoured by the AWRI.

25 November 2020

Dear Dr. Krstic,

I refer to your letter of 13 November 2020 and note that a response was requested prior to 12 November 2020.

In response to your request for meeting(s) to constructively resolve my concerns, I can only wonder what your motivation is in doing so. 

There is no need for a meeting. As explained in person and in writing, my authorship of SAW, and thus SWA, is systemic and structural. You cannot parse, delineate or “un-pick” my contribution from SWA. While AWRI has attempted to obscure my contributions, you have not done so successfully.  

All portions of SWA that were not adopted directly from Entwine, or (possibly) developed and published since you adapted and published SAW as part of SWA, are directly derived from my work. Until you acknowledge this, no progress is possible. Given the publicity this has received, isn’t unusual that absolutely no one else has claimed authorship of SAW if it isn’t solely my work?

As the MD of the premier research institute in Australia for the wine and grape sector who employs a staff to research and administer sustainability for the sector, don’t you find it inconceivable that the AWRI would not have attempted to understand my research prior to publishing it without attribution? The claim that you are “not entirely clear” of what I consider “compromised” more than a year later, and after much correspondence exchanged, can only be viewed as disingenuous. The AWRI’s failure to do so now can no longer be considered a result of ignorance or lack of awareness or clarity. 

I have demanded in writing that you suspend or disband SWA until such time as you can develop a new system that is not derived from my work. You do not mention this demand in your letter. You have consistently and disrespectfully ignored every clearly stated written and verbal request and demand I have made to date. This cannot be viewed as being disingenuous. However, it can be viewed as a continuation of a nine-year pattern of behaviour by the AWRI to inhibit, diminish and defame me and my work. 

With respect to your “timeline”, I should not have to remind you that another form of research fraud is to knowingly publish false information. Again, if you do not know what is false on your timeline, it is a function of administrative and academic incompetence or malfeasance by the AWRI. That is your responsibility.

My view is that your timeline is an active attempt to diminish and defame both me and my work by making them “one of many” non-equal people and events in a factually inaccurate, and frequently irrelevant, timeline. It is a document that can be changed or deleted at any time and does not represent adequate attribution or recognition of my work much as the attribution of my work by MVGWTA is now an “error 404” web page.

The AWRI (and others) did the things I have previously mentioned to prevent my work from being developed, used successfully and recognised between 2011 and at least 2017. Since some point in time in 2017 or 2018, the AWRI adopted, adapted and published my work without attribution, let alone a sense of irony.

That you have not fully investigated all of my claims in the 11 weeks since you were informed of them is a failure to comply with your fiduciary responsibilities to both your staff and me to provide a duty of care for a safe work environment. That your Board has not formally instructed you to do so is also a failure of their fiduciary responsibility to provide a duty of care. 

I can only speculate that the reason you, and they, have not investigated these allegations is that you, and they, are fully aware of at least some of this behaviour and fear the outcome of a proper, thorough and impartial investigation. Your continual efforts to paint you and the AWRI as victims in this matter is staggering in its dishonesty.

If you believe my claims of abuse of power by the AWRI (including bullying, defamation and plagiarism) are defamatory and un-true, you should investigate them and sue me for them. You, and your Board, can no longer avoid this reckoning without significantly harming the reputation of the AWRI knowingly. This is also a duty of care matter. You need to do as I have requested.

To be clear, these requests are:

1. Stop using SWA immediately or attribute my work properly and in in full.
2. Remove my name from your “thank you” page as my name is included with many others who have not contributed to SWA and uses their credibility. This is a type of research fraud.
3. If your “timeline” is to be kept, it needs to be re-written in full, acknowledging that there were no sustainability initiatives in place in Australia prior to the publication of my research and/or the development of SAW.  All other initiatives, including Generational Farming, were related to the environment only. If you do not understand the distinction being made, you shouldn’t be in your position.
4. Publish a press release acknowledging my work with a public apology for your “misunderstanding” of my authorship and your subsequent efforts to diminish me and my work.
5. Remove Dr. Mardi Longbotton from the management of the program until all of my claims have been investigated thoroughly. Only then we will have a productive reason for a meeting.

Please advise whether you will be doing as requested by 2 December. Absent this, I will pursue other remedies. I will not accept any more evasion or delay from you. 

Best Regards,

Dr. Irina Santiago-Brown

BTW – Regarding your request that we publish your correspondence in full – start your own blog.

Dr. ISB responds to the AWRI: “It’s the Constitution. It’s Mabo. It’s Justice. It’s Law. It’s the Vibe.”

The Castle shared on YouTube

For those not from Australia, this video clip is from the big courtroom conclusion to The Castle, one of Australia’s great comedies. It is a David vs. Goliath tale about a middle class family trying save their tract house (The Castle) from an airport runway expansion. And, it was Irina’s first Australian movie experience. As a person’s home is all they have, an academic’s published work is all that they can say is theirs. And, in the end, The Castle is about the shared belief that being right matters more than being powerful in Australia. It’s all about the vibe.

Please find Dr. Irina Santiago-Brown’s response to Dr. Mark Krstic’s most recent correspondence regarding her allegations of mis-use of her published work by the AWRI appended below.

5 November 2020

Dear Dr. Krstic,

I am in receipt of your letter to me of 30 October. 

To summarize, you make the following points:

1. You assert that I made various demands and threatened legal action against the AWRI.
2. Your letter implies that my husband and I may have damaged the reputation of the AWRI, its officers and employees.
3. Your letter says you will not use my work without attribution, nor claim credit for my work, nor attribute my work to other entities or authors and that you appreciate any or all of these actions would require my consent.
4. Confusingly, your letter then modifies this prior positive assertion by saying that you “do not believe” you “have done any of those things” and then goes on to deny that that you have misused my work in the same sentence.
5. Your letter then attempts to mollify me and, by inference, threaten me by saying you do not “intend” to embarrass me in the media. 
6. You offer to meet to “discuss my concerns and endeavor to satisfy you in relation to them.”
7. Finally, you wish to “clearly understand what” I “consider is comprised in each of the SAW content, SAW system and SAW online system.”

I make the following points in response:

1. Your letter is substantively non-responsive to my cease and desist demand letter.
2. Your letter is non-responsive to my claims of a pattern of mistreatment by AWRI employees and officers involved in this matter over an extended period of time. This pattern of behavior has been, and continues to be, an abuse of power by the AWRI.
3. My husband and I have repeatedly suggested that if my entirely appropriate demands are not met, my only recourse would be legal action. This is not a threat. It is my legal right. If, as you assert in your letter, you are innocent of all my claims, you have no reason to view the assertion of my legal rights as “threatening” to you.
4. By not resolving a simple matter amicably and privately when requested to do so in writing and person, and instead continuing a pattern of diminishment of me and my work by the AWRI, both you and Chair Rose personally entered into the pattern of inappropriate behavior and mistreatment by the AWRI towards me and my work.
5. That you wish to “resolve this matter amicably” now appears to be a result of the publicity generated by my husband making my claims public on his blog TheWineRules and not because of my polite request to resolve this amicably and privately over two months ago.
6. As I explained in my first email to you, either you are mis-using my work or my PhD was a fraud. There are no other possible logical conclusions to this matter. If you wish to keep using SAW without attributing it formally to me, I suggest you take up having my PhD rescinded with the University of Adelaide.
7. You are free to attempt to build your own sustainability system from scratch. To the extent that a new system uses my work without appropriate referencing and attribution, I will again demand you cease and desist from doing so.
8. It is not my responsibility to explain my work to you so that you “clearly understand” it. I don’t work for you and my time is valuable. It is your responsibility to read my published work including the SAW system, understand it and attribute it appropriately. That you do not “clearly understand” my work now, and that no one from the AWRI has ever contacted me prior to using it in order to “clearly understand” it is yet more evidence of the reckless disregard for both my published work and academic reputation by employees of the AWRI including you.
9. In your press release of 15 October 2020, you said “The AWRI stands by the actions of its staff, its integrity as a research organization and the integrity of the Sustainable Winegrowing Australia national program.” How can this statement possibly be true when you claim to not “clearly understand” my claims on 30 October 2020? 
10. The reason my husband and I have made this public is because we have nothing to hide in this matter.
11. If you believe that either my husband or I have untruthfully damaged reputations, we welcome our day in court to defend our reputations from your continuing mistreatment. 

Please recall my first email to you on 3 September 2020 attempting to resolve this matter “amicably”. At that point in time, I hoped this to be a simple matter that could be easily resolved. The only reason there is now a “lengthy exchange of correspondence” that “you do not wish to enter into” between us is your unwillingness to behave according to accepted norms of academia as previously requested by me in an “amicable” fashion. Because of the choices you have made since that time, this is no longer a simple matter. 

To remind you, we already had the meeting you request in your letter on 24 September 2020. It was unsuccessful then and your press release from 15 October and your letter from 30 October are clear that any new meeting will be unsuccessful for the very reasons made clear in those documents.

There are three points resulting from your decision-making that now complicate matters:

1) Because of your ongoing mis-use of my work and your continuing failure to acknowledge that the AWRI is doing so, I am demanding that you disband the SWA system immediately as it is unworkable in its present form without using my work.

2) You and Chair Rose have exhibited a complete failure to provide duty of care for the health and safety of both the employees of AWRI and me as required of management and officers of any company by not formally investigating my claims of mistreatment by the AWRI first reported to you in writing two months ago. 

3) Both you and Chair Rose are also bound by the AWRI constitution “To take into account the legitimate interests of both Wine Grapes Levy Payers, Grapes Research Levy Payers and other key stakeholders in the pursuit of these objects.” As a levy payer, you do not appear to have taken into account my interests in any way thus far with respect to my claims. 

For all of these reasons, you and Chair Rose have now established yourselves as being both au fait with and complicit in this matter.Given the serious nature of institutional integrity raised by these facts, I am suggesting that terminating the employment of all those involved in the mis-use of my work and the handling of my case, including you and Chair Rose, is now required. 

In order to protect the reputations of many fine AWRI employees not involved in this matter, it is my belief that doing these things voluntarily and immediately would be the least embarrassing outcome for your institution and the Australian wine industry.

Please advise me in writing by 12 November 2020 as to whether the AWRI’s choice is to seek to have my PhD rescinded in order to continue using my work without proper attribution, publicly disband SWA in its present form or litigate this matter. We see no other paths forward at this time.

Regards,

Dr. Irina Santiago-Brown