Getting Excited by 170 Years of Wine Industry Data May Seem a Little Strange, But…

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So much reading material vies for our attention that prioritising it seems impossible.

The latest issue of my favourite UK wine magazine; the latest release of reviews from an American critic who can move markets; the Wine Australia market activity prospectus for the next financial year; Jasper Morris’s definitive tome on Burgundy.

All interesting, all potentially important, and all have landed on my desk or screen in the past few days. But don’t ask me about them, because I haven’t read any of them. I’ve found something more compelling to read.

Kym Anderson’s Growth and Cycles in Australia’s Wine Industry is a profoundly important work. Not because I agree with all his assertions. I’m not sure, for example, that a move from an ad valorem tax to a volumetric tax would “make it easier for smaller fine-wine producers to sell all their product on the domestic market”. Maybe it would, but I’d need to be convinced.

It is, regardless, a remarkable resource that is a treasure-trove of insights into how and why our wine production has evolved. With these insights come understanding of the role of taxation, of the impact of macro-economic conditions, of the roles of other industries, and of the impact of exchange rates.

Getting excited by a book containing 170 years of wine industry data may seem a little strange, but this work should be at the top of the reading list for anyone aspiring to make a dollar from the wine business, be that from growing grapes, making wine, importing wine, exporting wine, whatever.

If nothing else it can give us some perspective of the trends and market forces that can shape our businesses and our careers.

Here are just a few observations that the author has made from analysing the data, that have big implications for the shape of the Australian wine industry.

The current pattern of lower prices in warmer regions is likely to mean that climate change will lower Australia’s average winegrape priceunless vignerons switch to Southern European varieties more suited to our relatively warm climate.

This statement references the gap between grape prices in cool, warm and hot regions. Grapes in cool regions achieve on average a 25 percent higher price than those in warm regions, and 300 percent more than grapes grown in hot regions. The logic, then, is that if global warming increases the temperatures overall, that the average price paid for grapes will fall, as warm regions become hot, for example, unless a change in varieties occurs.

We are already seeing a price advantage for some alternative varieties in some regions. One factor slowing the spread of Southern European varieties is that overall plantings are in decline, and profits are low to non-existent for many businesses, so there is little appetite for planting new vineyards, and little capital available for grafting. What we should expect, is that when the next upswing in planting takes place, Southern European varieties in warm climates are likely to feature heavily, changing the varietal mix of our regions.

Do Australian producers benefit enough by emulating France’s varietal mix to offset any economic downsides, for example from being less differentiated from the world mix, or from growing varieties that are less than ideal for the terroir of Australia’s various regions?

Our mix of varieties has less diversity than most countries. We are dominated by French varieties. One thing I’ve heard Australian wine promoters say is that “Australia is a continent with vast distances between regions, and big differences in climate and environment. Our regions are distinctly different, so vintage conditions vary immensely.”

OK, so why then do nearly all our regions work with the similar short list of French varieties? Doesn’t that undermine our claim to regional distinctiveness?

Cycles are inevitable for perennial crop industries, so canny investors with finance and market outlets have bought assets in slumps, giving them a reasonable return on those low-priced assets and readying them for take-off in the next boom when they can sell those assets at higher prices and lower their capital base to concentrate on brand investment.

I’ve recently heard the comment, attributed to one of the country’s canniest investors in vineyards and wineries, that you don’t make your money selling an asset, you make your money when you buy it. That is, buy the right asset at the right time at the right price and you’ll make money from it. The tricky part, of course, is choosing the right asset and the right time.

One interesting observation of the book – available, incidentally, as a free e-book online – is that after each of the five booms in plantings, there has been an extended period in which plantings have gradually declined. During the most recent cycle, the fall in plantings has been most pronounced in hot regions (-19 percent), followed by warm regions (-9 percent), with cool regions having no loss of vineyard area overall.

There is also some cause for optimism, according to Anderson. The list of problems that Australian wine exporters have been dealing with is a long one, and pretty well acknowledged: oversupply, the supermarket duopoly, the GFC, anti-alcohol campaigns, the high Aussie dollar, perceptions of Australian wine among wine trade in the USA and Europe.

He sees positive signs in some of the big-picture developments that have taken place, namely:

  1. The “cautious optimism” about economic growth in the USA and Europe;
  2. The grubbing up of unprofitable vineyards in Europe, and in hot irrigated areas of California and Australia;
  3. The demographic shifts in the USA that should see wine consumption grow faster than the population.

Anderson’s work, by looking at the macro-economics of wine, can give the impression that we are victims, or victors, of factors beyond our control. But I don’t think we need to interpret it that way. It’s more that there are forces and trends that we’d do well to understand so that we ensure that our plans are informed by the lessons of the data.

Never before has there been so much data so easily accessible and ready to give us some clues about the future, if we’re willing to listen.

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