Wine's trail of joy and gloom

Should winegrowers rip up their vines, or wait for the tide to turn? Greg Ninness asks the questions. This year's huge sauvignon blanc vintage is putting pressure on winemakers' profits – and widening a rift over how to restore the sector's financial health.

The industry is a house divided, with some arguing for increased production, while others want to see vines ripped out to limit supply. Whatever position they take on the issue, something most wine companies and vineyard owners will have in common is that their profits have been hammered by the international financial crisis, bumper vintages in 2008, 2009 and again this year, and the high New Zealand dollar.

Those effects are showing up in the accounts of both huge multinational wine companies and smaller niche players. Two months ago Pernod Ricard, this country's biggest wine company, released its accounts for the year to June 2010, and they weren't pretty reading.

Revenue declined 2.9 per cent to $337 million, while the cost of sales was up 11.6 per cent, reducing gross profit to $92.1m from $127.6m in 2009.

But that was more than wiped out by a $170m hit to its balance sheet as it wrote down the value of its Montana operations (since renamed Brancott), which helped push the company to a bottom line loss of $183.2m. The pain hasn't ended there.

Last December the company sold five Gisborne vineyards and 12 of its best known brands, including Lindauer, Corbans and Saints, incurring an $87.8m loss for this year's accounts.

By comparison with Pernod Ricard, NZAX-listed The New Zealand Wine Company (NZWC) is a market minnow (revenue for year to June 2010 $13m), but its accounts for the six months to December 2010 released at about the same time as Pernod-Ricard's, show it is facing similar pressures.

Revenue declined by 6.5 per cent compared with the same period in 2009, while higher costs and a substantial downward revaluation of assets pushed it to a loss of $1.1m for the half year.

In the directors' report accompanying those figures, NZWC chairman Alton Jamieson set out what he believes caused the company's trading difficulties and suggested a radical solution.

Large increases in the grape harvests in 2008 and 2009 had resulted in so much wine being produced, many wineries were forced to sell into the bulk wine market. That is wine destined for sale in casks under retailers' house brands. Such wine is nearly always sold at a much lower price. That in turn reduced the prices of wineries' own premium brands.

"The oversupply of wine has become a crisis business outcome for the New Zealand wine industry," Mr Jamieson said. "The sheer volume of bulk wine export sales has negatively impacted the net earnings and balance sheets of all New Zealand wine companies and grape growers," he wrote.

Looking ahead to this year's vintage, NZWC's directors endorsed a NZ Winegrowers report issued at the end of last year, which suggested a grape harvest of around 265,000 tonnes would "maintain progress with clearing the bulk wine surplus to match the demand for branded New Zealand wine".

But a harvest of 300,000 tonnes would lead to "a large ongoing bulk wine surplus that would take the industry backwards".

If the harvest came in at the upper end of those estimates, NZWC's directors recommended the industry look at funding options to start ripping out vines.

When the harvest was finally gathered, it exceeded even the worst-case expectations, coming in at 325,000 tonnes, with sauvignon blanc, the main export variety, up 29 per cent on last year.

The idea of pulling up vines to reduce supply and shore up prices is not new, but many oppose it.

It would be difficult to find someone with a more expansive view of this country's wine industry than Marlborough viticulturist Peter Yealands.

Originally a contract grape grower, his Yealands Estate is one of the largest vineyards in the country, with 700ha planted in sauvignon blanc, 100ha of pinot noir and 100ha of pinot gris.

In 2008, Mr Yealands made the switch from contract grower to winemaker, and now uses all of the grapes grown in his own vineyards plus some bought in, to produce wine in his own winery. This year he processed 14,500 tonnes and believes that could increase by another 2000 tonnes as his younger vines mature.

The move from contract grower to winemaker carried huge risks and Mr Yealands said that after his first vintage in 2008 he had nearly four million litres of wine in the winery and not one customer.

That situation did not last long and although his production doubled this year, all his wine is committed, he said.

Mr Yealands is now planning to expand and is looking at what he described as non-organic growth opportunities, suggesting acquisitions or partnerships.

He acknowledges prices have fallen, although he believes that has an upside. "Our average sale price has come down far too much, across the board," he said.

"Everyone's out for a bargain and nothing sells wine like a cheap price. But it's going into markets like Germany that have never been able to take it because it's been priced too high. So we've got this expansive growth for Marlborough sauvignon."

However, he said he was making money, in spite of the lower prices and the compounding effect of the high dollar. But he said many others will be doing it tough.

He said the average price paid to growers for sauvignon blanc grapes this year was around $1100 a tonne, but growers probably needed $1500 a tonne for sustainable production.

Many smaller wineries and vineyards were becoming uneconomic, he said. "There's a lot of consolidation going on in the industry. You need volume, so you can get economies of scale. Today you need to be a low-cost, high-quality producer."

Because there has been no significant new planting of sauvignon blanc vines in Marlborough since 2008, and export demand is continuing to grow, he believes by 2013, demand will once again start to outstrip supply.

"As supply plateaus and prices improve, people will start thinking about planting again, but it will take two to three years for that planting to come on. They could be the golden years," he says.

He also believes many small vineyards around 8ha might not survive long enough to see it. "A lot of them are becoming uneconomic and the trouble is, there's probably not a lot of appetite for the stronger ones to gobble them up. My hope is that the price will lift enough so that they have a bit more of a life, but ultimately, I don't think they have a great future," he said.