Winegrapes oversupply hits Murray Valley farmers

The Australian January 23-24, 2010  p 32
Tried and tested irrigation region becomes a vineyard graveyard
The oversupply of winegrapes has hit the inland areas of the Murray hardest
Asa Wahlquist

    On a hill near Merbein, high above a bend in the Murray River, lies the Pioneer Plantation. At the foot of upright Murray pines and under leaning desert gums are small metal plates bearing the names of the district's pioneers, the soldier settlers and their wives, the doctors, teachers and labourers who first settled this place.
    On the plains below, the land farmed and irrigated for over a century is being laid to waste hectare by hectare, farm by farm. Families who have grown grapes for generations are exiting the industry, the weakest link in an massively over-supplied industry.

    Last November the wine industry warned at least 20 per cent of vines were surplus to requirements. The Dutch agribusiness specialist Rabobank reckons the oversupply could be as high as 43 per cent this year.
    Over-planting, drought, the high Australian dollar, increased competition in Australia's export markets and Australian taxation policy have all played their part in the unfolding  catastrophe.
     The engine room of the industry, the warm inland areas along the Murray, is taking the hardest cut. Areas like Mildura and Merbein, on the Murray in Victoria's north west.
The oldest irrigation district in Australia was riddled with dead and dying vines, with deserted vineyards and blocks now cleared of vines.
    Winegrape growers Dave Beard and Danny Lee recently drove The Australian around the district. Lee pointed to one empty block. "He invested $12 to $15000 an acre [0.4 hectare] less than 10 years ago. Those people have not recovered any of that". He gestured to another cleared farm. Under the Small Block Irrigators Exit Grant farmers can receive $150,000 and stay on the farm, but they must strip it of all vines and irrigation equipment. "That is good ground, but it is now useless," Lee says.
    Entering his home area of West Merbein, David Beard comments: "this is one of the cruellest areas". They estimate Merbein has lost 60 per cent of its irrigators. As Lee and Beard drive around there is another nasty surprise around just about every corner, evidence of another grower who has turned off the water and abandoned their vines.
   Lee and Beard and many other growers blame the tax system – the Managed Investment Schemes and the accelerated appreciation tax – for the oversupply. They argue vines were not planted with the aim of meeting demand and contributing to the future of the industry, but to enable high-wealth individuals to obtain a tax break.
   Mark McKenzie, executive director of Wine Grape Growers' Australia, estimates 10 per cent of Australia's grapevines were put in by MISes. As the wine boom gathered pace in between 1998 and 2004, many wine companies that had previously purchased grapes, took advantage of the tax break and put in their own big vineyards. They now own 21 per cent of vines.
    Despite warning signs as early as 2000 that the industry was overheating, investment and plantings continued apace.  "We are not intrinsically anti-MIS," McKenzie says. "We are against any taxation-driven system where the taxation benefit is primary, and the ability to generate a profit from plantings over the longer term is secondary.
   "The corporate plantings, the winery plantings has also added to the issue and that is what sticks in the craw of a lot of the industry at the moment."
     McKenzie asserts it is the mum and dad growers, the full-time growers whose families have often grown grapes for generations, who are being forced to leave the industry. And they are leaving not from the  cooler climate areas identified as unviable by last year's industry report, but from the Murray River towns.
      Many major wine companies – including the Foster’s Group, Orlando, Constellation Wines – have put vineyards valued at over $450 million on the market.
     McKenzie argues they are just, unsuccessfully, trying to shift the problem. He says they should take the pain, take the write down "and hoike them out''.
   "The real problem is we are just not seeing the major wineries moving to reduce their share of the 20 per cent [oversupply]. They were also part of the rapid expansion of Australian plantings, and a lot of those plantings don't stack up, in terms of stand-alone profitability against independent growers."
     He explains the full-time grape growers "see the MIS plantings directly pushing them out of their market, and they see MIS plantings and cool climate plantings owned by doctors and dentists and others, substituting for them in the marketplace as well".
     Mike Stone is CEO of the Murray Valley Winegrowers which covers both sides of the river from the NSW/SA border down to Swan Hill.  The winegrape harvest in the region has begun with chardonnay for sparkling wine.  "Not only is the crop down at least 30 per cent on 2009, the price is down even further," Stone says.
     In what Stone calls the halcyon days, the late 1990s until 2002, chardonnay was worth $1000 a tonne. The current going rate for contracted chardonnay is between $150 to $200, well below the break-even level of about $300 a tonne. Spot market prices will be even lower.
   "What we are seeing at the moment is far, far short of even survival," Stone says. "What is so serious is we are not just talking about something that suddenly occurred in 2010. We have seen a decline in prices pretty steadily over the past five years."
     Five years ago, MVW had 1200 growers on its data base. Now it has fewer than 700. At least 4000 of its 20,000 hectares have already been pulled out. Peak production was 440,000 tonnes of grapes in 2005. Stone estimates that year 400,000 tonnes came from growers, "the rest is winery vineyards. The grower component in 2009 was 300,000 tonnes, so we have seen a drop in production of 100,000 since '05 and you are about to see yet another big drop.
    "The region has exceeded the  breaking point. You are now seeing an active exodus from the industry of many, many growers and this particular harvest is wipeout territory," Stone says.
   Back in 1997, when the wine industry argued for accelerated appreciation, Leo Pech from the Barossa Valley, was a lone voice against it. "I opposed it because I had negotiated the vine pull in 1985," he says. In 1985, when the industry had an oversupply of six per cent, the Government-funded vine pull removed just under 2,400 ha.
   "I could see that billions of dollars would be flowing into the industry from people who had never invested [in it before] and if we overshot the mark there was no legislation that would allow us to get back into kilter again," Pech says.
    The then-peak grape growers body, which Pech lead in 2001 and 2002, argued against both accelerated depreciation and MISes. The accelerated depreciation provision, which enabled investors to write off their investment in vineyards over three years instead of the usual dozen or more years, ended in 2004.
     A long timer in the industry – he is about to commence his 60th harvest – Pech can't understand why Government does nothing, despite the 20 to 30 per cent oversupply. "We had a vine pull on six per cent [oversupply] and a Royal Commission on 2.4 per cent [oversupply in 1965].
   "The MIS scheme for vines that is still there today. It is ridiculous, with a 30 per cent oversupply and vines are still being planted," Pech says.
    Sam Paton, a Victorian-based agricultural specialist and valuer, does not understand why the Rudd government doesn't end MIS tax breaks. "You think they would be looking for any excuse to cut expenditure. I do not understand why the Government just hasn't gone in and just got rid of that tax legislation that created this whole mess."
    That mess will only deepen this year. Though harvest is almost upon them, many growers do not yet know what prices will be. Lee says when he got last year' prices, just prior to harvest "they were so abysmal we harvested onto the ground and came through and cut the vines off and killed them. We did that for about one  third of our winegrapes".
     He has not got this year's final prices yet "but I am very doubtful we will pick anything," Lee says. "People spend the whole season preparing grapes for harvest, and then abandon them. We have just wasted thousands of megalitres of water on something that is going to go on the ground."
     Stone says many of the growers who are now in trouble are good farmers, who heeded the advice to improve their efficiency and plant the required varieties. "When the industry was good, they re-invested in expansion and equipment and infrastructure, switching over to drip irrigation.
    "Through no fault of their own, their contracts weren't renewed, they now have massive debts and no means of repaying the debt. The tragedy of the situation is that the vast majority of growers did what was expected of them," Stone says.
    For the consumer, there will be great wine bargains again this year. Good Australian wines might look cheap, but there is a hidden cost. It is not just the heartbreak of growers and their gutted communities, but also the foregone tax from those who took advantage of the tax breaks that helped build the oversupply.

Industry facts
Winegrape plantings more than doubled since 1995 to over 160,000 hectares.
the oversupply first became evident in 2004
In 2009 Australia produced 20 to 40 million cases a year more than it is selling. This equates to 270,000 to 500,000 tonnes of grapes or 20,000 to 40,000 hectares.
the surplus exceeds 100 million cases, and at 2009 levels of production and demand would more  than double in two years.
Australia's wine exports increased through the 1990s and early 2000s peaking in October 2007. They have since fallen by 8 million cases and 21 per cent in value. The decline has been greatest for higher value exports.
The rise in the Australian dollar has halved returns to wine exporters to the UK between 2004 and 2009, while returns from the US have fallen by one third.
In Australia, wine imports have increased since 2006, eroding Australian wine's share to 89 per cent.
There are many pockets of oversupply  with too many regions producing middle-grade fruit with high-grade cost structures.
17 per cent of Australia's vineyard capacity is uneconomic and has few long term prospects.
Citibank estimates an oversupply of winegrapes at 30 per cent for 2010.
Agribusiness specialist Rabobank said "the worst case demand scenario could see the Australian industry oversupplied by roughly 43 per cent of production [in 2010]".

main source: Wine Restructuring Action Agenda
Winemakers' Federation of Australia, Wine Grape Growers' Australia, Australian Wine and Brandy Corporation and the Grape and Wine Research and Development Corporation.

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