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The Global Grape Glut: Vineyards vs. Volatile Markets


Leo Gonzalez

March 9, 2024 - 01:21 am


Battling the Vineyard Vexation: Australian Grape Growers Grapple with Industry Crisis

(Bloomberg) – Amidst the lush landscape of Australian vineyards, Tony Townsend, a seasoned grape grower, made the difficult decision to curtail his operation by half last year. Having cultivated 14 hectares of prosperous vines for over a decade, the disheartening move was prompted by a stark realization. Townsend estimated an impending loss of about A$35,000 ($23,000) should he proceed with harvesting his bountiful crops. He now awaits a reprieve from a searing heatwave to dismantle the remainder of his enterprise—a testament to the daunting hardships faced by vineyard owners.

"I found immense satisfaction in the viticulture sector, but the economic reality made it impossible to persist," lamented Townsend, gesturing towards a heap of uprooted vines destined for incineration.

Nestled in Riverland, South Australia, Townsend's property lies at the heart of a winemaking hub responsible for one-third of the nation's grape production. However, since the onset of 2020, a calamitous conjunction of surging costs due to the COVID-19 pandemic and the imposition of Chinese import tariffs has precipitated an overabundance in grape supply alongside plummeting market prices.

Townsend's fate is not an isolated incident, for the wine industry is feeling the squeeze globally. Despite a significant downturn in global wine production to a 60-year nadir in 2023, a surplus of wine stock lingers, indicating a swift decline in consumer demand. The International Organization of Vine and Wine (OIV) OIV data reveal that wine consumption has lagged behind production since at least 1995. Yet, now the sector reaches a critical juncture where shifting consumption trends and bleak economic forecasts appear to be long-term fixtures.

A glimpse across the Pacific to California underscores a similar predicament. Stuart Spencer, the executive director of the Lodi Winegrape Commission, articulates the distress, saying, "We face one of the most pronounced mismatches between demand and supply witnessed in three decades." The 2022-23 season in Australia accounted for the leanest wine yield in 15 years, yet producers grapple with unprecedentedly high stockpiles as detailed by Wine Australia in a November assessment.

Compounding the issue, the agricultural inputs like fuel and fertilizer have surged in cost due to the conflict in Ukraine. Concurrently, insurers increase their premiums acknowledging the growing threats posed by climate change. "The dramatic escalation in production costs has fundamentally disrupted the wine industry's delicate financial structure," acknowledges Richard Halstead, chief operating officer of consumer insights at IWSR, an alcohol beverage market research company.

This economic upheaval coincides with shifts in drinking preferences—red wine producers are particularly hard hit. More consumers are opting for lower-alcohol alternatives such as sparkling, rosé, or white wines, notes Christophe Chateau, a spokesperson for the Bordeaux Wine Council. Furthermore, Gen Z consumers are moderating their alcohol intake, amplifying the popularity of non-alcoholic beverages.

In places like Riverland, the outlook for red wine producers—prevalent in the region—is grim. Lyndall Rowe, Chief Executive Officer of Riverland Wine, an umbrella organization for growers and producers, remains pessimistic about profit margins this season. As a result, some farmers are transitioning to more lucrative crops like almonds or watermelons. Elsewhere, Spain contends with an excess of Rioja reds even as white wine enjoys heightened demand, says José Luis Benítez, director general at the Spanish Wine Federation.

These market forces are compelling farmers to contemplate difficult transformations. Benítez warns, "Farmers will confront substantial issues because the transformation of red wine into white is not practicable."

In France, the government initially allocated €200 million ($216 million) to aid farmers in uprooting underperforming vineyards and diverting surplus wine to be converted into ethanol. The scheme promised each farmer €75 per hectoliter. Bordeaux, a famed red-wine region, received added funds supporting the removal of 9,500 hectares of vineyards. Yet even these drastic measures couldn't adequately address the supply glut. France ascended to become the world's leading wine producer in 2023, but the desire for the ethanol scheme was so overwhelming that participating farmers could only dispose of half the volume they intended, explained Chateau.

January saw Bordeaux's grape farmers join a broader agitational movement across France, protesting the rescission of fuel subsidies and EU green policies by blocking roads. The grape-growing constituency eventually secured an additional €150 million to facilitate uprooting vines and transitioning to alternative crops.

However, adaptation in the wine sector is especially challenging. Many vineyards carry on long-held familial traditions, and viticulture by nature requires foresight and patience. Adjustments necessitate a long-term perspective; a well-tended vine can thrive for more than 50 years, signifying investments that span generations, Halstead points out. Consequently, when market conditions shift, the industry's ability to respond is dramatically constrained.

The obstacles faced are compounded by the brands' lagging response to changing consumer trends. According to Spiros Malandrakis, industry manager of alcoholic drinks at Euromonitor International, the industry's emphatic development of premium brands amidst a time when budgets are tightening alienates potential new wine enthusiasts.

"If consumers lack access to affordable, dependable wine brands, they are more likely to switch to alternatives such as ready-to-drink cocktails, beer, or cost-effective spirits," asserts Malandrakis. He also opines that the growing acceptance of cannabis by Gen Z detracts from wine's allure.

For many growers, such as those surveyed by Riverland Wine in 2022, the cul-de-sac seems inevitable with approximately a quarter indicating their intention to exit the industry within three years.

As for Townsend, the forthcoming vine removal resonates with the resolve to transform his estate. "The monetary losses we narrowly avoided will be transcended by the joy we'll rediscover once the native flora and fauna reclaim their space on our land," he mused.

In conclusion, the struggle of grape farmers like Townsend echoes throughout the global wine industry. From Riverland to Bordeaux, the traditional pursuit of viticulture faces an unprecedented conundrum. As the landscape of consumer demand transforms and economic pressures intensify, agriculturalists are being compelled to rewrite their narratives to align with an evolving market. The wine industry's resilient core now hangs in the balance as it attempts to navigate these turbulent tides.

Townsend’s story, though a reflection of a solitary struggle, serves as a microcosm of a broader disquiet that looms over one of the oldest agricultural crafts known to civilization. It’s a tale of a changing palette of tastes, climatic adversity, and the relentless march of time, challenging the very grapes that have, for centuries, been lovingly turned into one of humanity’s most storied beverages. The wine industry now stands at a crossroads, contemplating its next move in a world that’s increasingly asserting different preferences and priorities.

--With assistance from Nayla Razzouk.

©2024 Bloomberg L.P.