Submission: Wine Grape Council

To: Senate Committee Australian Grape and Wine Industry

Date: 19 June 2015

Contact: Peter Hackworth Executive Officer Wine Grape Council of South Australia Unit 4, 780 South Rd GLANDORE SA 5037

www.wgcsa.com.au

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Summary of Recommendations

Recommendation One That the Senate Inquiry recommend a review of interstate transport arrangements to remove unnecessary red tape.

Recommendation Two That the Senate Inquiry recommend a national program to assist primary producers to innovate and commercialise their innovations.

Recommendation Three: That no change to taxation of wine occur without a full economic and social impact study being undertaken.

Recommendation Four: That the Senate Inquiry support the establishment of a sustainable national biosecurity program funded by all sectors of the wine industry

Recommendation Five That the Inquiry supports the recommendation of the Competition Policy Review for Section 46 of the Competition and Consumer Act 2010 to be amended to prohibit conduct by firms with substantial market power that has the purpose, effect or likely effect of substantially lessening competition.

Recommendation Six That the Inquiry recommend greater investment in programs to partner with regional bodies to promote domestic and international tourism.

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Wine Grape Council of South Australia (WGCSA)

WGCSA represents the approximately 3,250 SA winegrape growers that contribute to the SA Grape Growers Industry Fund, a voluntary fund administered under the SA Primary Industries Funding Scheme. As such we the largest state representative winegrape industry association in Australia. WGCSA is governed by a Council of eight representing the major winegrape producing regions of South Australia. The council members are all actively involved in winegrape production. WGCSA is also the major provider of income for the national grower body, Wine Grape Growers Australia.

TOR 1: The extent and nature of any market failure in the Australian grape and wine industry supply chain:

The market failure that has resulted in over a decade of unsustainable grape and wine prices is a result of a range of factors some within the control of the industry and some not:  The steady rise of the AUD since 2007 has had a major impact particularly in the context of rapid expansion of exports from Chile, Argentina and South Africa all of which have significantly lower production costs and currency advantages. While the currency has fallen in the last two years (e.g. by 20% against the GBP and 16% against the USD) the currencies of these competitors have fallen at a similar or higher rate, reducing advantage in all but the Chinese markets  Lobbying by the wine industry saw the introduction of accelerated depreciation of vineyard assets commence in 1993 when demand was at its highest. Over the next five years plantings boomed; in SA alone plantings doubled to 55,000Ha flooding an additional circa 250,000 tonnes of winegrapes onto the market after demand had peaked;  The move by key companies in 2005 to discount their products in the UK also had the effect of downgrading the view of Australian wine in general. France by contrast took the opposite route; i.e. lowering volume and increasing value. The desire for short term market share has come at great cost to the industry;  Negative media about Australian wine has impacted sales and the move to ship wine in bulk for bottling in the UK as a cost-saving measure is likely to have reinforced that view of Australia as a producer of ‘commodity’ wine;

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 Domestic demand has been hit by the popularity of New Zealand Sauvignon Blanc with Chardonnay producers seeing demand drop almost overnight. Wineries failed to recognise that and the rapidly changing consumer preferences and failed to respond with alternative products  Australia is unique in being dominated by large listed wine companies. Unlike private companies that are able to adjust profits to allow for market and climatic fluctuations listed companies are required to deliver consistent returns to shareholders and this hampers their ability to sacrifice long term gains for short term dividends.

TOR 2: The extent to which federal and state legislative and regulatory regimes inhibit and support the production, processing, supply chain logistics and marketing of Australian wine

Interstate Transport of Grapes Appendix One outlines the complexity of regulations for transporting wine grapes across state borders. As they stand they are a barrier to trade, impose unreasonable costs on producers and processors alike and increase the risk of non-compliance. To send grapes from SA to Victoria, or through Victoria to NSW requires a Plant Health Certificate (PHC) declaring that the grapes have been grown in a state that has Phylloxera Pest Area Freedom Status. The PHC requires an inspector to travel from Adelaide to be on site when grapes are loaded. Government cost recovery arrangements means vineyards are faced with significant fees for this service. Availability of an inspector can also be an issue. Because most of the information required by a PHC is already contained on shipping cartnotes, WGCSA sought and received the support in 2012 of the Domestic Quarantine and Market Access Working Group1 to allow cartnotes to be recognised as meeting interstate certification requirements for wine grape shipments from South Australia. This operated for one vintage but the Victorian Government rescinded the arrangement because, as phylloxera is present in Victoria, that state cannot achieve the same pest area freedom status as SA and therefore grape shipment till require a PHC. This decision was not made on any scientific basis, highlighting the need for reform in this area.

1 The DMQAWG brings together plant health regulators from all states and territories. 2 | P a g e

Recommendation One That the Senate Inquiry recommend a review of interstate transport arrangements to remove unnecessary red tape.

TOR 3: The profitability of wine grape growers and the steps industry participants have taken to enhance profitability:

Since 2001 the Australian wine industry has been impacted severely by falling demand, a disadvantageous exchange rate, declining global wine consumption and increasing competition from international competitors:  one in every ten bottles of wine sold in Australia is New Zealand Sauvignon Blanc  imports now represent 22% by value of wines consumed in Australia. The drivers of the 1987-2001 boom – low dollar, market opportunity, high regard for Australian wine, deregulation of UK liquor laws, etc. – are unlikely to re-occur and grapegrowers are dealing with the new norm of low demand and low prices. Total farmgate prices have declined significantly (refer Chart One). It should be noted this decline is not related to vine removals; only 2,700Ha was removed in SA between 2004 and 2014. Chart One highlights the decline in value while production has remained steady. Chart One: SA Winegrapes: Farmgate Value and Tonnes (Purchased Grapes Only) and 1998-2014

Farmgate Values and Tonnes Purchased, SA 2001 -2014 800 $650 $600 700 $550

600 $500

$450 500 $400 $m

'000 tonnes '000 400 $350 $300 300 $250 200 $200 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Purchased Tonnes Purchased $

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Industry Response – Vineyard Owners

Vineyard operations are at peak efficiency following a decade of slashing inputs, e.g. research by WGCSA in 2013 found that full-time employment of vineyard workers fell by 35% in the period 2008-20132. This impacts directly and negatively on regional economies. Declining investment in vine replacement and vine health is now showing through in declining yields which in turn increases the impact of lower grape prices. Producers are being hit by consistently declining prices and consistently increasing costs. Chief amongst these are the cost of employing casual labour particularly the impact of penalty rates on public holidays and during harvest. Changing climatic conditions is now requiring more varieties to be picked at nights triggering penalty rates. Many wineries are now not taking in grapes on public holidays to reduce their wages costs. This means that growers wear that burden; they have to pick on the public holiday so they can deliver the following day. Despite nearly 15 years of declining prices the only significant removal of vines in SA has occurred in the Riverland and that largely because of assistance provided by the Murray-Darling Basin Small Block Irrigators Exit Grant Package3. To understand why so few have left the industry WGCSA undertook both qualitative and quantitative research and found a range of economic, social and emotional reasons why vineyard owners were not removing vines:  many have sought off-farm income; a survey of our members in 2012 found that 75% now rely on other income sources to survive. This income off-sets winegrape losses  the collapse in vineyard land values and lack of vineyard buyers – for many the farm is their superannuation  high cost of removing vines and associated infrastructure  lack of alternative full-time employment opportunities  lack of alternative commodities and/or capital to invest  for most the vineyard is also their home and their home is in their community making the impact of leaving far greater socially and emotionally  fear of being seen as a failure and quitting while the going is tough  the view that grape growing is farming and like other commodities grape prices will inevitably come back; as one interviewee said, ‘look at wool’ However it is not all gloom. There are an increasing number of producers that are seeking to create a niche by planting new varieties, changing vineyard management

2 Wine Grape Council South Australia, WGCSA Industry survey 2013 – report of findings, September 2013 3 176 of the approximately 1020 eligible vineyard owners received a grant (Centrelink, pers. comm., August 2013) 4 | P a g e practices to reach higher grades, by diversifying their customer base and by targeting the optimum buyer for each parcel of fruit.

Industry Response – Wine Grape Council South Australia

Cost of production analysis In addition to undertaking research to better understand the impact of the 15 year downturn, WGCSA has taken a lead in South Australia in delivering up-to-date market information to winegrape producers. Annual regional vineyard profitability analyses are produced and distributed (refer Appendix Two) to provide SA grapegrowers with an important tool for benchmarking costs and to identify which varieties are seeing increased/decreased demand. The analyses reveal that few varieties are achieving a cash profit from winegrapes4. Even in premium regions like the Barossa losses are common; only Shiraz and returned a cash profit in 2014 while Chardonnay was sold on average at $630/t ($2,961/Ha) below the cash cost of production. WGCSA will continue to provide SA grape growers with resources to enable them to make informed business decisions about the opportunities of the vineyards. SA Annual Industry Summit WGCSA conducted an inaugural Grape Grower Summit at the Adelaide Oval on 27 June 2014. The aim of the Summit was to provide participants with early season information on the outlook for wine grapes to aid their planning leading into the 2015 vintage and beyond. Over 200 attendees from across the state came to interact with experts on a range of market supply and demand issues as well as emerging technologies with the potential to lower the cost of production. A unique aspect of the Summit is the results of a qualitative survey of the major processors which seeks to provide an insight as to the confidence of processors, their expectations of the coming 12 months and what that means for grape demand. With the success of that event WGCSA has resolved to make the Summit an annual event. Promoting Vineyard Innovation In 2015 WGCSA has introduced an annual ‘Vinnovation Award’ to recognise these people who are making strides to develop new approaches to grape production. It has been a slow start – farmers are the ultimate in hiding their light under a bush – but we have uncovered people that are developing mechanisms to delay harvest so fruit ripens in cooler conditions, developed software to identify and reduce in-vineyard quality

4 the analyses only address cash costs, return on capital, interest on loans and depreciation are not included because of the difficulty in calculating these. It does suggest that the results are potentially understating losses. 5 | P a g e variation and modifications to machinery to maximise returns. We hope that in time this might become a national award that encourages further innovation. The solutions are going to come from entrepreneuarial producers and processors and we need to encourage, reward and promote their efforts. Recommendation Two That the Senate Inquiry recommend a national program to assist primary producers to innovate and commercialise their innovations.

TOR 4: The impact and application of the wine equalisation tax rebate on grape and wine industry supply chains:

Wine Grape Council South Australia defers the matter of the Wine Equalisation Tax to its national industry partner, Wine Grape Growers Australia. WGCSA is however concerned at the speculation of replacing the current ad valorem basis for taxing alcohol wine with a volumetric alcohol tax. Such a change would have horrendous repercussions for the Riverland wine region of South Australia and the SA economy. This region has 1018 vineyards, the majority of which are family-owned. Changing the tax would destroy most of those businesses, see land values plummet with a massive flow-on impact to the regional economy. Regional wineries would no longer have the throughput to maintain viability and would likely close. This would impact also on producers from other regions whose grapes are processed in the Riverland. WGCSA is concerned that the health lobby has not considered the impact on the social, economic and personal health of Riverland residents from a change to a volumetric tax. Recommendation Three: That no change to taxation of wine occur without a full economic and social impact study being undertaken.

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TOR 5: The extent to which grape and wine industry representation at regional, state and national level effectively represents growers and winemakers with respect to equity in the collection and distribution of levies

Industry Representation

Industry representation is complex and confusing for many producers and processors with a multitude of associations including 18 SA regional, two state and two federal organisations. (Refer Appendix Three for a chart of industry bodies as they relate to SA Wine Grapegrowers) At the state level WGCSA and the SA Wine Industry Association are cooperating on developing a State Wine Industry Plan and have prepared a draft vision and values statement which they are currently consulting regional associations with as a precursor to finalising the plan that, in addition to setting priorities, will clarify roles and responsibilities and examine optimum structure to progress the industry in South Australia. Future funding arrangements will also be considered. Nationally, preliminary discussions have been held on a future national structure and WFA and WGGA are co-sponsoring a national industry meeting, ‘Grape and Wine 2015’, in August t and WGCSA is supporting this initiative. These are examples of the wine industry taking responsibility for addressing its issues.

Industry Funding

Refer Appendix Four for a list of industry funds collected nationally and in SA. Identifying a truly equitable system for collecting levies has been a long debate in the wine industry and there is no silver bullet. One person’s definition of equitable is another’s of unfairness. There are four models industry contribution being deployed in the Australian wine industry; volumetric, ad valorem and productive land. Volumetric Examples include the compulsory National Grape Research Levy ($2/tonne) and the SA Grape Growers Industry Fund ($1/tonne of grapes sold to a processor). Some producers in the warm inland regions (Riverland, Sunraysia and Riverina) argue that this system is inequitable for because the levy represents a higher proportion of their grape payment than cool climate producers. Others in cool climate regions believe the inequity is not so great given their 60-80% higher production costs and higher risk of crop reduction or failure from frost, hail and disease.

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Ad Valorem Examples include the National Wine Export Charge ($0.2% by value of wine) and Riverland (0.5% of amount payable to grower for delivered grapes). It is considered a fairer system by producers in the warm inland regions, although late season bonus payments are unlikely to have been distributed when the levy is required to be remitted. Productive Land In South Australia this is the basis for the compulsory biosecurity levy imposed by the Phylloxera and Grape Industry Board of South Australia and rated at $9.50/Ha. Many consider this to be the fairest system for collecting industry funds as the average gross return per hectare reasonably even between regions. While this was the case during the boom years it isn’t now (Table One).

Table One Average Gross Returns Shiraz 2014 Major SA Wine Regions

Region Ave Gross $/Ha Ave COP $/Ha Net $/Ha

Adelaide Hills $8,528 $10,500 -$1,972 $7,396 $6,750 $646 Clare Valley $6,812 $6,750 $62 Coonawarra $8,736 $8,250 $486 Langhorne Creek $7,749 $6,000 $1,749 McLaren Vale $8,793 $6,750 $2,043 Padthaway $6,564 $6,000 $564 Riverland $7,093 $5,750 $1,343 $8,432 $6,000 $2,432

WGCSA believes that it is important to recognise that there is no simple solution to developing an equitable collection system and how industry funds are collected should be determined by those that pay and not by government. The role of government is to ensure regulations and legislation is in place to facilitate such collection.

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National Biosecurity Funding

Wine Grape Growers Australia has responsibility for national vine biosecurity but is receives no funding from the Winemakers Federation of Australia representing processors. This is clearly inequitable; the cost of protecting the industry from pests and diseases should be shared by all that benefit. The most appropriate mechanism is the Emergency Plant Response Levy which is currently set at $0/t. Recommendation Four: That the Senate Inquiry support the establishment of a sustainable national biosecurity program funded by all sectors of the wine industry.

TOR 6: The work being undertaken by the Australian Grape and Wine Authority pertaining to levy collection information

WGCSA made a submission to the Australian Grape and Wine Authority draft strategic plan. The following is the summary of our recommendations: 1. That the AGWA Board seek an amendment to the AGWA Act enabling it to redirect funding streams beyond current limits on an annual basis such that they are on average retained over a five year rolling period. 2. That the strategic plan:  clearly define ‘fine wine’;  provide the evidence for the proposed strategy ;  show what new measures will be used to underpin the ‘halo effect’ strategy and the estimated timeline for the effect to flow through to C-F grade wines; and  focus marketing on building from Australia’s characteristic strengths 3. That AGWA ensure that compliance requirements beyond those of our competitors do not increase unnecessary red tape and costs to industry. 4. That the use of external advertising agencies be considered for specific campaigns. 5. That AGWA review its role in delivering extension services with a view to decentralising them to states and regions. 6. That the administration of Regional Grants Program also be reviewed with the intent to reduce red tape.

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TOR 7: The power and influence of retailers of Australian wine in domestic and export markets

The dominance of Coles and Woolworths through their ‘big box’ format stores is clearly demonstrated in Chart Two. Chart Two: Large format stores vs. market share (cumulative) by financial year

Source: Woolworths Liquor Group, 2014

Only wine producers with ‘must have’ product are able to withstand the pressure to discount and only rarely, e.g. in 2011 when the Fosters Group (now Treasury Wine Estates) stepped in to prevent discounting of it Bin 389 wine. While discounting has been good for consumers it has been a major factor in reducing profitability and regional sustainability. Recommendation Five That the Inquiry supports the recommendation of the Competition Policy Review for Section 46 of the Competition and Consumer Act 2010 to be amended to prohibit conduct by firms with substantial market power that has the purpose, effect or likely effect of substantially lessening competition.

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TOR 8: The adequacy and effectiveness of market intelligence and pricing signals in assisting industry and business planning: In a buyers’ market where a significant majority (80+%) of wine grapes are being sold below the cost of production, processors have a major advantage and in the last ten years many growers have not known what they will receive for grapes until late in the season when most production costs have occurred. They have no choice then but to take whatever price they can and inevitably that will be selling to bulk wine producers competing on price not quality and whose business models require fruit to be bought at well below the cost of production. If processors supplied market intelligence before producers commenced pruning then the latter would be in a position to, if the signals were for falling demand, mothball or remove unprofitable varieties. In-vineyard quality assessment varies enormously between processors and fruit from the same block can be assessed as being at very different grades. Others complain that fruit that has consistently achieved the same grade for years has been downgraded when in their view the quality is unchanged, apparently for supply reasons. Later ripening cool climate regions may find that quotas have been reached and fruit assessors come under pressure to downgrade fruit. The industry has no clear objective measures for quality and there appears to be reluctance on the part of many processors for such assessments to be developed. While the Australian industry has generally derided the French system of appellation d'origine controlee it is does at least provide standards for producing winegrapes by variety and region. These issues - lack of early-season market signals and objective quality measures - are major barriers to market adjustment and were a motivator for WGCSA creating our annual SA Winegrape Growers Summit. The recent initiative by AGWA to combine a number of price and production surveys should be applauded as it will reduce the burden on processors and likely lead to more accurate information.

TOR 9: The extent to which the Australian grape and wine industry benefits regional communities both directly and indirectly through employment, tourism and other means: When Mitsubishi ceased production in Adelaide in 2008, it resulted in the loss of 1,210 jobs, including 280 supplier positions. In the period 2001 -2011 the SA wine industry saw 3,305 jobs lost, most of these in regional areas. This does not include related employment. The SA and Federal governments announced a support package to aid displaced workers and convert the idle factories. No such package has been provided to assist restructuring for the wine industry.

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In the period 2004 to 2014 annual farmgate income from winegrapes in SA has fallen by 47%, from $588.4m to $277.2m. This is money that has been removed almost entirely from regional economies and while regrettably we are unable to quantify the impact, the flow-on effects are significant for suppliers, retailers and service providers have undoubtedly been significant. The wine industry provides high levels of unskilled and seasonal casual work and quite uniquely career pathways, supported by accredited training, from vineyard hand to vineyard manager and owner. Recommendation Six That the Inquiry recommend greater investment in programs that partner with regional bodies to promote domestic and international tourism.

TOR 10 Any Related Matters

The Australian wine industry faces major vine health issues that have seen yields declining, a combination of many wineries seeking higher sugar levels in red wine grapes and lack of funds on the part of producers to invest in vine health. In terms of the former, higher baumé's means red wine grapes are being harvested later with less or no time available to replenish carbohydrates in storage systems. Higher baumé’s also equates to lower weights which impacts on the return paid to producers. Chart Three highlights the decline in yields in three cool climate regions (Barossa Valley, Coonawarra and Adelaide Hills); the results are the same across all cool regions. The increase in the Riverland is the result of producers responding to unsustainable grape prices by boosting yields to improve gross returns.

Chart Three: Yields (t/Ha) Selected SA Regions 2004-2014 25.0

20.0

15.0

10.0 Tonnes/Ha 5.0

0.0 2004 2006 2008 2010 2012 2014

Barossa Riverland Adelaide Hills Coonawarra

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APPENDICES

APPENDIX ONE Interstate regulations for the Transport of Winegrapes

APPENDIX TWO Regional Profitability Analyses – Major SA Wine Regions

APPENDIX THREE Industry Structures as they relate to SA Winegrape Producers

APPENDIX FOUR Industry Levies as they relate to SA Winegrape Producers

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