Chinese wine drinkers had developed a fondness for Australian reds, particularly Shiraz and Cabernet Sauvignon. Much of this is produced in the prestigious wine regions of Riverina, Riverland and Murray Valley. This belt of warm interior regions in southeastern Australia is the beating heart of the country’s wine production, creating over 70% of Australia’s wine each year.

But as of November 2020, the wine once aimed at Chinese drinkers has nowhere to go. Export volumes fell by 628 million litres, an amount exceeding Australia’s total domestic consumption (500 million litres).

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The door was closed as 2021 delivered an exceptional vintage. The wine barrels are overflowing. In the past season, some winemakers harvested grapes only to let them rot because there were no buyers and nowhere to put them.

Winemakers must weigh whether to hold on for a few more years, or do like Bellato and get away with it.

“Independent winegrowers, particularly in inland regions, will face extreme price pressure over the next 12 months,” said Tony Battaglene, head of Australia’s leading body Grape & Wine.

“So in 2023 I think we’ll probably see a number of those who decide to leave the industry…anyone who exports is under pressure.”

The high price of growing wine grapes

Australia’s domestic oversupply has depressed the value of commercial red wine grapes, and the cost of growing them has now exceeded what winemakers will pay for them.

It costs Bellato $8,000 per hectare to produce red grapes, but he expects to make a return of only $4,000 to $5,000, which means losses of up to $4,000 for the next vintage. “Growing red grapes this year is losing money,” he says.

It hasn’t helped that the cost of production itself has also risen, thanks to another geopolitical disaster that erupted earlier this year some 6,450 kilometers from Beijing.

Russia’s war against Ukraine has put pressure on farmers around the world: prices for fertilizers, tartaric acid, oak barrels and even bottles, labels, caps and cork have risen 20 to 30%. As in many other industries, labor is not only more expensive, it is harder to find.

“Producers exposed to [shiraz and cabernet sauvignon] grape varieties and dependent on export markets are producing wine at significant loss,” says Tim Mableson, national head of wine advice at KPMG.

The outlook for next year looks even bleaker. There have been discussions in the industry that major wineries have told grape growers they will only need 50% of their normal intake for the 2023 season. will come out, but others won’t.

“Too many of them are still making wine,” says Mableson. “What that means is if they can’t sell it, they’ll try to hoard it for a bit and hope the market improves. In the short to medium term, that simply won’t be the case, and that’s because the Chinese export market won’t return for the foreseeable future. »

The basic rule of supply and demand is that prices fall accordingly. But the Australian consumer is unlikely to ever feel the effects of the national glut of red wine: prices for local bottles are not falling, as the brands consumed by the Chinese market and the brands that Australians are familiar with do not tend to ride.

The Chinese tariffs are closing a chapter on a generation of farmers and vineyard owners and have precipitated a lasting change in the landscape of the industry. “What’s starting to happen is that there’s going to be more and more consolidation in the industry in terms of wineries and brands,” Mableson says.

It’s already happening: Australia’s largest family-owned wine company, Casella Family Brands, is selling 35 of its vineyards as part of a strategy to focus on brand building rather than viticulture. Meanwhile, major beverage retailer Endeavor Group recently acquired Tasmania’s Josef Chromy to expand its private label portfolio.

“This strategy could begin to reduce shelf space for small and medium-sized wineries at major national retailers.”

In these transactions, Bellato, Battaglene and Mableson all agree that the retailers have the upper hand. “Farmers are price takers, not decision makers,” says Bellato.

Diversification: the post-Chinese future of Australian red wine

Chinese tariffs have forced many producers to get creative. Ashley Ratcliff, winemaker and owner of Ricca Terra Vineyards in the Riverland region of South Australia, plants 42 different varieties. Ricca Terra’s cask and collab-branded wine business, house-brand wines made exclusively for select restaurants, is “booming.”

“Diversification has actually opened up a lot more opportunities to engage with small and medium wine producers in Australia,” Ratcliff said.

Ricca Terra has not been immune to the pressures experienced by other winegrowers. But the blow was cushioned by some clever moves from Ratcliff years ago, who drew inspiration from Warren Buffett’s famous investment quote: “Be fearful when others are greedy, and greedy when others are fearful.” “.

Three years ago, Ratcliff’s sightings of winemakers grubbing up Chardonnay vines to plant Syrah and Cabernet prompted him not to do the same but to buy Chardonnay vineyards.

“We knew that over time there would be a point where some of these varieties would become undersupplied because too many were replaced by Shiraz or Cabernet.”

Investing in relationships with two of its biggest clients, ASX-listed global wine giant Treasury Wine Estates and Barossa-based Yalumba, has also paid off. “When China was at its peak…we stayed loyal.”

Bellato makes his own pivots. In the years that followed before his retirement, he worked as a grape picker for other vineyards on a contract basis, and continued to use his semi-trailer delivering wheat and rice to grain growers.

But he is aware that his counterparts who remain in the industry face tough decisions: do they plant different varieties? This process takes two to three years. Should they grow nuts, like almonds, instead of grapes? This requires an entirely different irrigation system and costs hundreds of thousands.

Farmers “don’t want help,” but perhaps government financial assistance for hard-hit growers is warranted.

“Some sectors have suffered,” Bellato says, referring to former Prime Minister Scott Morrison and his government, under which relations with Beijing hit an all-time high.

“What he did created this problem for us coal farmers, barley farmers, wine grape farmers, multiple industries. And there was no compensation, not even a pardon, or any financial help, or any form of help whatsoever.

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Battaglene drafted an exhaustive list of 21 recommendations to Albania’s new government in a pre-budget submission and says our international reputation has been tarnished by our shocking bushfires and lagging approach to climate change. This has resulted in a real consumer shift towards “low intervention” natural wines and lower alcohol options.

For Ratcliff, this is the next big opportunity for growth; but Bellato will have to profit from it as a consumer, not as a producer. “I’m actually quite happy to see the back of these disappear.”

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