Grape and Wine Sector Regulatory Impact Analysis

Murray Valley Winegrowers Inc.
54-56 Lemon Ave., Mildura VIC. 3500
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Chris Dent, Chair
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Paul Derrico, CEO
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GRAPE & WINE SECTOR E:
REGULATORY IMPACT ANALYSIS
Consultation Response
23rd October 2024
Murray Valley Winegrowers Inc.

Murray Valley Winegrowers Inc. (MVW) is a highly regarded organisation that represents the interests of approximately 270 independent winegrape growers (excluding wineries) in the Murray-Darling and Swan
Hill regions of Victoria and New South Wales. This is Australia’s second-largest production zone, accounting for approximately 20 percent of the national annual winegrape crush. MVW is a member of The
Inland Wine Regions Alliance, a triumvirate of the Murray-Darling/Swan Hill, Riverland of South Australia, and Riverina NSW, which accounts for circa 70% of Australia’s annual winegrape production.

Based in the regional city of Mildura, MVW’s principal functions are to provide extension services, inform growers of market and industry intelligence, advocate to protect and promote growers’ interests and assist members in their commercial dealings for a sustainable future.

MVW funding is derived from access to grower levies administered under the Agricultural Industry
Development Act 1990 Murray Valley Wine Grape Industry Development (Extra-Territorial) Order (the
Order) – these levies are collected and supervised by the statutory body, Murray Valley Wine Grape
Industry Development Committee (IDC) - a lesser voluntary levy is collected at the same time. Other funding opportunities are also available through Wine Australia’s Regional Program to support Extension
& Adoption practices.

Introduction

MVW met with Dr. Emerson and staff from the Department of Agriculture, Fisheries, and Forestry on 24th
September 2024; this submission details much of what was discussed during the online meeting and other issues affecting winegrape growers in the Murray Valley region.

This submission provides an insight into the issues affecting winegrape growers in the Murray Valley region.

MVW implores Dr Emerson to provide some intervention in the wine industry to improve transparency and fair practices, strengthening the enforceability of the Code by way of mandatory provisions and providing growers with more bargaining power for a more equitable, sustainable, and productive wine industry.

Consultation Questions:

1. Beyond the Riverland, Riverina, and Murray-Darling regions, are there other wine regions in
Australia that clearly display the features of market failure in the form of weak bargaining power with wine producers that warrant regulatory intervention?
MVW has heard of other regional issues, but this is best for other wine regions to articulate in detail.

2. What improvements could be made to the quality assessment processes?
The Current Code of Conduct (“Code”) has issued a publication, Winegrape Assessment in the
Vineyard & at the Winery – this is an industry-endorsed standard procedure.

In the Murray Valley, there are very few quality assessment issues in each vintage, with the main problem facing growers being the timing of delivery of fruit in optimal condition. If fruit is left to wither on the vine there is quality deterioration and loss of weight due to dehydration which translates into a loss of weight/income for growers.

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Up until around 2010 vintage winemakers paid bonuses on quality parameters such as colour, baume`, fruit flavours, etc.: since then, there has been a move towards an unflattering commercial- grade with a focus on penalty-driven pest & disease (powdery mildew, downy mildew, etc.) and fruit exposure downgrades.

This has contributed to devaluing our regional production base and ignores the annual sale of this fruit into premium, and semi-premium wine regions, and the region’s contribution to the nationally significant Australian Alternative Varieties Wine Show.

3. What approaches should be adopted to deal with a lack of price transparency?
The Code has introduced clearer pricing announcement guidelines for signatories, encouraging more consistent and transparent contracts for those growers who are fortunate to have a supply agreement (many growers do not have a supply agreement, and must rely on the annual spot market to sell their grapes).

The timing of the price announcements is not beneficial for growers, as many will have incurred significant costs to produce a crop during the key period of the growing season (June to January).

By the time the announcements are made in December growers have little option but to accept the price on offer to recover some portion of the production input costs (key costs beyond December are primarily harvest and freight expenses).

The timing of price offers is a critical issue in the Murray Valley, growers rely on a consistent chain of communication in determining whether they should incur the cost of producing a crop for the following year, but preferably this decision should be made in May-June (December is too late) to support the financial planning required to maintain their vineyards.

The other concern with the timing of price announcements is the proximity to the Christmas and New
Year holidays. MVW’s experience has been that once growers are advised of the forecast prices for the ensuing vintage, they generally communicate with their purchaser in the following weeks. By the time they could/should lodge a dispute under the Code, the key decision-makers are off on their holiday break, and nothing can be sorted until mid-January.

MVW argues that every winery would have forecast its financial budgets for the coming year(s) in
May-June, and therefore they have an idea of what they intend to pay – this should be communicated to growers in June, with periodical and simple updates provided as and when required, when market forces necessitate a price offer review (any review would be clearly measurable, as the key issues would be transparent for all to observe).

The current timing of price announcements is not working as intended; invariably one major winery releases its price offer up to a week before the required date (the second Wednesday in December), and then most other wineries follow the offer that has already been signalled to the market - this is not a fair or competitive process (a better option would be to have a mandatory Code with all buyers/winemakers announcing their prices at an industry forum simultaneously, or to have them provided to an independent body for a synchronised release).

4. Should the unilateral variation of supply agreements be prohibited?
No - for many growers, contract uncertainty remains a concern, especially when terms and conditions are subject to change after agreements are made (i.e. uptake of Sustainable Winegrowing

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Australia accreditation, caps/limits on production/yields, late harvest of grapes outside of the winemakers stipulated fruit maturity).

Noting that penalties have been applied on occasions if the fruit is delivered lower than the specified
Baumé/maturity condition, even when circumstances are beyond the control of either party.

While the Code stipulates timely contracting and fair dealings, there is insufficient guidance on how to handle changes in contract terms, which can be detrimental to both parties in the event of heat waves and/or inclement weather potentially impacting fruit maturity and purity conditions.

5. What are reasonable payment times for grape growers?
Under the current Code, it is a requirement that the terms of payment should be no less than one- third being paid within thirty days from the end of the month of delivery, one-third by 30th June, and the final one-third no later than 30th September in the year of production.

It is interesting to note that during better times in the wine industry (i.e. vintages 2020 & 2021), there was more competition amongst buyers for the fruit and it was not uncommon for growers to receive full payment within thirty days from the end of the month of delivery, on prices that were $600-$700 per tonne. Conversely, in the current environment, many wineries have reverted to the three-tier payment system concluding on 30 September for grape prices as low as $150 per tonne.

Growers have indicated they should not be a winemaker’s banker, and they would be more understanding of the delayed payment schedule if ALL others in the supply chain were on the same payment terms as growers.

It is noted the Australian Competition & Consumer Commission (ACCC) Wine Grape Market Study
2019 recommended that long-term payment periods should be phased out and that thirty-day payment terms be implemented across all wineries, including subsidiaries, of over 10,000 tonnes.

6. Should unilateral termination clauses be prohibited or permitted only in prescribed circumstances?
Unilateral termination clauses should only be permitted in prescribed circumstances and an independent body should be enacted to oversee disputes arising from questionable terminations
(i.e. to reduce costs for growers and to provide a balance of power).

7. What other issues are being faced by grape growers when dealing with winemakers?
The current framework does not address the significant power imbalance between winemakers and small-to-medium vineyard owners. In many cases, growers in the Murray Valley feel pressured to accept terms that favour larger buyers, as they have few other options for selling their produce.

This disparity may undermine the effectiveness of protecting growers from coercive purchasing practices. Growers have an ongoing fear of retribution if they speak out or have any disagreement with a winemaker regarding pricing, fruit quality, and general winery practices.

Interestingly, in the Code’s Annual Report, there are very few Notices of Dispute recorded each year.
This is not a true reflection of what occurs, with regional organisations often intervening to broker a resolution with growers not wanting to go through the formal dispute process and/or making “too much noise” for fear of reprisal.

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Some growers have a clause in their Grape Supply Agreement that provides for an upward adjustment to reflect the Weighted District Average (WDA) as detailed in the annual Wine Grape
Crush Report for the Murray Darling & Swan Hill Regions (produced independently by Wine Australia) if the vintage offer price is below the WDA.

There have been occasions where a winery’s vintage price has been “low-balled” and this has materially affected the WDA calculation – in these circumstances, the purchasing winery’s values should be excluded from the WDA.

For clarity, it should be noted that Grape Supply Agreements rarely have a fixed price. In some instances, growers may be fortunate to have a fixed minimum price, although they still receive an annual price offer subject to market conditions. Otherwise, most Grape Supply Agreements have an annual pricing mechanism.

Winemakers are now tending to target larger parcels of fruit (min 200t) and ignoring smaller producers. This makes a mockery of winemaker demands on growers for Sustainable Winegrowing
Australia (SWA) accreditation and industry noise about quality and diversity of supply agreements, etc.

8. Does market concentration in the domestic retailing of wine warrant regulatory intervention?
MVW is aware of ongoing issues between winemakers and the retailers, including competition from retailers' “Buyers' Own Brands” that are not specific regarding the true ownership of the brand and/or deceptive marketing to entice consumers into thinking certain products are “Estate Grown”, and/or a “Boutique operation” when the truth is quite the opposite (i.e. Vertical Integration).

We have also been made aware of retailers’ retribution when winemakers have sought price increases, moving the winemaker’s product to an inconspicuous shelf space.

Overall, this is best left to winemakers to comment on and to provide specific details.

9. How does the oligopolistic nature of wine retailing in Australia affect independent wine producers?
Fundamentally, the responses noted in questions 8 and 10 provide the background to the issues that ultimately influence winery decisions that impact growers.

10. What are the options for intervention in the domestic market for wine retailing?
Transparency and clarity in retailers' sales and marketing programs, and improved payment terms to wineries (this is sometimes used as a justification for delayed payment terms to growers).

11. What are the prospective costs and benefits of such interventions?
No MVW response

12. What other objectives, if any, should guide the Code to improve relations between wine producers and their suppliers?
The administration of the Code is reasonable, although there has not been a great deal of traction relating to key issues (i.e. price announcements and payment terms) for fear of discouraging potential new signatories.

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With all respect to the Winemaker representatives on the Code Management Committee, it is concerning that three of the four representatives are their company’s legal counsel. Winemaker representatives with experience in grower relationships and operational matters may be of benefit to the Committee and the Code - It would also improve the external optics of the Code Committee.

The penalties for a breach of the Code are barely a deterrent (removal as a Code signatory).

It is noted within the ACCC Wine Grapes Market Study 2019 that the ACCC recommended that the
Code should be substantially strengthened and that ALL winemakers that purchase grapes from growers become signatories to the Code.

MVW notes the improvement in the number of Signatories to the Code; however, it is important to state that many of the signatories do not operate within the key inland regions where the vast majority of wine grapes are produced (circa seventy percent of the national production).

While the Code encourages fair practices, it remains a voluntary instrument, limiting its power to enforce compliance. As a result, growers who encounter non-compliant buyers often have limited recourse, as enforcement largely depends on voluntary participation. This lack of enforceability can disadvantage growers when buyers fail to follow the Code, especially those less able to afford the cost of dispute resolution.

Due recognition of the grower’s role in the winemaker’s SWA accreditation, without this winemakers would have a limited capacity to promote their credentials and product certification – growers receive no financial benefit for their SWA accreditation, yet it costs them thousands of dollars to achieve and maintain.

13. Is the membership of the Code adequate to achieve its objectives?
No, the Code seems more intent on increasing the number of signatories rather than delivering fairer and better outcomes for growers.

Put simply, even if there were more Code signatories from the inland regions, there is little penalty for a breach of the Code, and some unscrupulous operators will take advantage of this situation – the
Code is currently keeping the good guys relatively honest.

14. Does the Code effectively address issues between winemakers and their suppliers in the irrigated inland wine regions of Australia and elsewhere in the wine grape industry stemming from bargaining power imbalances?
The Code does not address the inequity in the balance of power between growers and winemakers.
Whilst there have been some improvements for growers, the key issues of payment terms and price notifications have not been adequately addressed in the five years since the ACCC Wine Grapes
Market Study.

15. Have dispute resolution provisions in the voluntary code been effective in practice?
The Code’s structured dispute resolution process allows growers to address grievances without necessarily incurring high legal fees, which is particularly beneficial for smaller vineyard owners.
This can empower growers to seek mediation for contract disagreements and allow both parties to arrive at fair resolutions without the need for lengthy litigation.

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However, we note the Code provides costs for the dispute resolution process to be borne equally between the parties, therefore being advantageous for wineries who have a much greater capacity to absorb these costs.

Grower outcomes seem to be dependent on the ability of the grower to articulate a convincing, evidence-based, argument to support their position, whilst winemakers have little to fear and no reason to concede to a grower unless they are important to the winemaker.

Maybe, some form of collective dispute resolution is an option.

16. Should the Code be retained as a voluntary industry code, or made a prescribed voluntary code, or a mandatory code?
To strengthen the Code, it would be beneficial to introduce a tiered mandatory compliance system, where non-compliant buyers face penalties or loss of market reputation. This would encourage adherence and provide growers with greater confidence in the Code’s effectiveness.

Establishing a regulatory body dedicated to monitoring Code compliance could provide grape growers with additional support and ensure more objective oversight. This body could offer mandatory audits and manage a review board that would oversee disputes and enforce Code provisions.

17. Should the Code be extended to cover the relationship between winemakers and retailers?
MVW believes it would be beneficial for the wine industry to have a Code between winemakers and retailers, however this should be kept separate from the winemakers and growers' Code.

18. What legislation, federal or state, could be invoked in addressing market failures in the Australian wine industry?
Intervention is required to balance the scale of inequality between retailers and winemakers.

Given that Wine Australia is a statutory body, and the Federal Agriculture Minister makes Board appointments, it would be appropriate to have representation from the inland regions on the Wine
Australia Board, especially given the inland regions produce approximately seventy percent of the nation’s wine grapes and most of the levy income.

19. Are the recently amended unfair contract laws relevant to dealings between wine grape producers and winemakers and/or winemakers and large wine retailers? If not, why?
Whilst the unfair contract laws have improved Grape Supply Agreements (GSA), there are still many ways that winemakers can influence the impact on growers up to and during harvest; growers will rarely dispute these matters (as detailed in this submission) for fear of retribution, including the potential for non-renewal of their GSA.

There have been instances in the Murray Valley where verbal agreements have led to disputes between wineries and growers, where a grower believes that they have not been paid for the fruit they delivered, and the winery insists they informed the grower that payment would be made when/if they sold the wine produced from the grower's fruit.

There should be a mechanism similar to the Horticulture Code whereby terms and conditions of sale are a prerequisite of the transaction. This would protect both parties in the instance detailed above.

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Another issue that has impacted growers is the late notice of non-renewal of Grape Supply
Agreements and/or the signalling of the intent to renew a GSA only to be advised later, close to harvest, that the GSA will not be renewed.

20. Are the proposed policy options relating to unfair trading practices potentially relevant to dealing with bargaining power imbalances in the wine industry?
As detailed in the response to question 19

21. What are the non-legislative obstacles to small producers of wine grapes engaging in collective bargaining with large wineries? Are they fearful of retribution?
Collective bargaining would be more powerful in a market on an upward trajectory.

Many growers have a mix of grape varieties, and with red grapes not attracting much interest in the current environment, it is common for growers to seek individual negotiations with winemakers in the hope of attracting some advantage for their smaller quantity of reds as opposed to trying to offload a large collective parcel.

Collective Bargaining might be a possibility sooner rather than later for smaller growers. We have witnessed in recent vintages that winemakers have requested minimum volumes of fruit by variety for intake purposes (i.e. 200-tonne consignments).

22. What measures should be contemplated to deal with supplier fears of retribution?
In essence, there is very little that can be done to overcome the fear of retribution; quite simply a return to a market where improved prices and demand for fruit drive competition amongst winemakers, enabling growers to have hope and expectation they can readily sell their fruit to an alternative purchaser is the key to conquering the fear.

Also, see the response to question 6 in support of growers' fears on contract non-renewal, albeit it is very difficult to prove the retribution argument.

It is very difficult to prove that a GSA has not been renewed due to a complaint by a grower against a winemaker, the same issue arises for negative influences that a winemaker can impose on growers at harvest.

Implementing incentives for buyers to enter multi-year contracts could provide growers with more
financial stability and confidence. These contracts should offer protections against sudden term changes, giving both growers and buyers the security to plan their operations without unexpected
financial disruptions – this will provide not just a financial benefit, but also assistance with longer- term planning and surety.

Conversely, when the industry finally recovers from its current dilemmas (and it will), there needs to be some disincentive for the corporate playmakers who see an opportunity to enter the grape production arena (using “Other People's Money”) and achieve solid earnings when better prices return, thus bringing the industry back into an oversupply situation to the detriment of those that have fought through the battles of the past two decades of uncertainty and challenge.

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