Submission: Wine Grape Council South Australia 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 0 | P a g e 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. i | P a g e 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 Australian wine 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; 1 | P a g e 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 $ 3 | P a g e 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.