Grape and Wine Sector Regulatory Impact Analysis

Grape and Wine Sector Regulatory Impact Analysis
Riverland Wine Submission

Contents
Introduction .................................................................................................................... 2
Executive Summary ......................................................................................................... 3
Grower and Winemaker Relationships ............................................................................... 3
Market Forces .................................................................................................................. 4
Retail .............................................................................................................................. 5
Response to Inquiry Questions ......................................................................................... 5
Riverland Wine key Recommendations ............................................................................ 10

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Riverland Wine – Grape & Wine Sector Impact Analysis
October 2024
Introduction
Riverland Wine is the joint industry representative body of the Riverland Winegrape Growers
Association Inc (Growers) and the Riverland Wine Industry Development Council Inc
(Winemakers).

Riverland Wine represents 900 growers and dozens of winemakers who collectively produce the equivalent of 450 million bottles of wine every year, the majority of which is exported around the world.

The relationship between growers and winemakers can at times be fraught, particularly in times of oversupply when demand and prices for both wine and fresh grapes declines. However, when it comes to matters of policy, advocacy and industry stewardship, Riverland Wine firmly believes the industry is best served when growers and winemakers collaborate and speak with one voice. There are far more issues that bring growers and winemakers together, than what sets them apart. For the industry and indeed the Riverland community more broadly to prosper, both links of the wine supply chain need to be strong and profitable, and one cannot succeed at the expense of the other.

In collaborating as both growers and winemakers, Riverland Wine also believes in collaboration with other regional, state and national associations. As this inquiry focuses on the wine industry from a national perspective, we support and endorse the submission of the industry peak body,
Australian Grape & Wine.

The Riverland Wine Management Committee members (October 2024)

- Jim Markeas - Acting Chair (RWIDC Chair and winemaker rep)
- Ashley Ratcliff – (RWGA Chair and grower rep)
- Brigid Nolan – (Winemaker rep)
- Jack Papageorgiou – (Grower rep)
- Jim Godden – (Winemaker rep)
- Henry Crawford – (Grower rep)
- Peter Hill – (Grower rep)

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Executive Summary
• The Wine Industry Code of Conduct must cover all links in the supply chain. This
includes growers, winemakers and distributors/retailers.
• Price negotiations are the most common conflict observed between growers and
winemakers. Contracts without pricing or a transparent price discovery mechanism
should be phased out.
• Standard payment terms for wine grapes should not extend beyond full payment by the
30th of June in the year of harvest. Full payment for branded and bulk wine sales not
more than 30 days after the month of delivery.
• Wine Industry Code of Conduct must not distort market signals and slow or prevent
supply and demand rebalancing.

Grower and Winemaker Relationships
Not all grower and winemaker relationships are the same. Some growers, and indeed winemakers prefer long term supply agreements whilst others prefer short term or annual contracts. Increasingly winemakers have also moved to procure a percentage of their requirements as bulk wine. Each model has its own risks and rewards for both grower and winemakers, however fundamentally this is about winemakers maintaining flexibility to best match stock to sales at both a variety and volume level.

This flexibility should be seen as positive as when a winery’s stock levels becomes too high, they invariable run short on cash and debt levels increase. That situation is problematic enough for the individual business, not least of all solvency issues where grape grower suppliers are unsecured creditors. But also, it generally leads to the winery dumping excess wine stock on the market at prices below cost, forcing the value of wine down for all producers. Vis a vis, the wine market in recent years.

The largest grower and winemaker relationship in the Riverland is that between Accolade Wines
(owner of the Berri Estate Winery) and the CCW Co-Operative. CCW has approximately 600 grower members who collectively supply an average of 180,000 tonnes per year to the Berri winery. The relationship is built around a 15 year rolling supply contract, the scale of which means a significant level of dependence of each party on the other. It is certainly the largest grape supply agreement between a winemaker and grower in the Australian wine industry. The relationship between the two parties can often be strained, particularly during price negotiations, with dispute resolution processes enacted on numerous occasions. In response to changing market conditions, Accolade Wines sought to renegotiate aspects of the CCW contract however this was rejected by the grower members.

The CCW and Accolade agreement exemplifies a fundamental challenge with many grape supply agreements, that is they are negotiated and agreed to in the absence of the single most critical and contested term – price. If the price a contracted grower receives is determined by the winery immediately prior to harvest and simply reflects the current grape and bulk wine spot market, then it begs the question, exactly what value is the contract and who is it benefitting?

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The uncomfortable truth of long-term grape supply agreements is they provide largely zero financial benefit to growers over and above spot market pricing, and during times of excess supply facilitate the harvest of grapes that would otherwise be left on the vine. The extension of this is lower grape prices for longer for all producers as it slows the supply demand rebalancing.

Market Forces
With much of the Riverland’s wine production exported, the prices paid for grapes broadly reflect base level global bulk wine prices, adjusted for freight costs and currency exchange rates. There is in the main no discernible premium for Australian produced commercial wines.
For international retailers and consumers, entry level wine products are extremely price sensitive and largely interchangeable from one country of origin to the next. Australia’s competitiveness on the global market is undermined by our high costs of inputs including (but certainly not limited to) labour, water and increasingly sea freight. In addition import tariffs and alcohol duty of destination markets also have a significant impact.

A fair benchmark cost of production for a Riverland vineyard is $10,000 per hectare. The average yield across the Riverland in the last 5 years is approximately 23 tonnes per hectare implying a break even cost of $434 per tonne. The weighted average grape prices over that period has been approximately $420 per tonne and over the last 3 years post Covid and the Chinese import tariffs, approximately $350 per tonne.

There is of course a lack of nuance to these numbers, and individual business could be performing significantly better or worse depending on individual varietal mix and yields and customer base. But on the whole, the regions growers are loosing money, year after year.

Pertinent to these statistics is what it means in global wine markets. At an extraction rate of 750 litres of wine per tonne, the cost of growing is about 58 cents per litre. With the cost of winemaking at 30 to 40 cents per litre and freight costs (generally worn by the winemaker of another 20 cents, the wine needs to achieve $1.10FCA to $1.20FCA (US$0.74 to US$0.80) per litre just for growers and winemakers to make a margin.

What is not well understood is that most of the current export demand exists only at a globally competitive price. That is to say, Australia having a small harvest doesn’t necessarily translate into higher prices for our wine globally. Noting the above quoted breakeven price of US$0.74-
US$80, the October 2024 Ciatti Global Market Report quotes in US$ terms Australian Dry White from $0.57 to $0.64 and Dry Red from $0.37 to $0.44. Argentinian Generic White from $0.45 to
$0.55 and Generic Red from $0.50 to $0.60. South African Generic White at $0.45 and Generic
Red from $0.51 to $0.57. Spanish Generic White from $0.55 to $0.71 and Generic Red from
$0.41 to $0.65.

It is a mistake to believe that winemakers in Australia are using market power to artificially suppress wine grape prices in inland regions and profiteering from that power.

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Retail
Whilst much of the Riverland’s commercial wine production is exported along with that of
Murray Valley and Riverina, it is still a large player in the domestic retail scene. As such the relationship that exists between major wine retailers or distributors and winemakers is materially significant for inland producers.

Any reduction in the value of wine via abuse of power by major retailers directly flows through to growers as winemakers are left with little option but to pass these losses through.

If the expectation is winemakers treat growers fairly through the application and adherence to a code of conduct, it is only reasonable that the key negotiating and trading terms also apply to retailers and distributors in their dealings with wine suppliers.

Response to Inquiry Questions
Riverland Wine broadly supports the responses provided by the peak national representative body, Australian Grape & Wine. Additional comments are provided for context.

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?

Riverland Wine is not in a position to speak on behalf of growers and winemakers in other regions. In
response to this question, we refer to the submission of Australian Grape and Wine.

2. What improvements could be made to the quality assessment processes?
“Quality” tends not to be rewarded (or penalised) in Riverland Vineyards with wineries generally paying
generic variety pricing across all their growers. However, price penalties are applied in some
circumstances for disease and other defects. Penalties for defects are not unwarranted, however they
are contentious because they can be subjective and usually a grower is only informed late in the
season, just prior to harvest. In some extreme cases it can be after the grapes are harvested and
delivered to the winery. These assessments can be subjective, particularly in determining severity and
late notification limits a growers opportunity to dispute the penalty or seek alternative buyer.

Notwithstanding that, it is reasonable to expect growers to monitor their own vineyards for disease. If
a winemaker does reject a vineyard for disease, it shouldn’t be a complete surprise to the grower as
many defect issues become apparent early in the season. Generally when a grower identifies a disease
issue early and communicate with their winery customer, management and intake plans can often be
implemented to give the fruit the best chance of avoiding rejection.

An improvement to the system could be that growers are required to complete pest and disease
reports and notify their winery customers as soon as issues arise. It could also be mandated that
wineries are to conduct their preharvest assessment and notify the grower of any defect issues and
price penalties by a certain period ahead of harvest, say 30 days or before the fruit reaches 10 Baume.
Issues that arise after this (excluding MOG) become a shared risk.

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A frustration of growers is that quality assessments will often contain Baume ranges. If the Baume is exceeded it is generally the fault of the winery for not being able to process the grapes in a timely manner. When this occurs, there can be a loss of weight in the fruit which means the grower is penalised. Winemakers could be mandated to make penalty payments to growers when the fruit is harvested over Baume specification.

3. What approaches should be adopted to deal with a lack of price transparency?

Riverland Wine supports the submission of Australian Grape & Wine on this matter. There already exists numerous indicators to guide growers including ABARES forecasts, Wine Australia
‘Dashboard’ and bulk wine price reports such as Ciatti’s monthly global report.

Forcing wineries to release indicative pricing could undermine the market with initial indicators likely to be conservative.

As alluded to earlier in this submission, a failure of many grape supply contracts is that price isn’t dealt with within the agreement either with price minimum’s, fixed prices or transparent price discovery mechanisms.

4. Should the unilateral variation of supply agreements be prohibited?

No. Riverland Wine understands such variations are prohibited under the recent enacted Unfair
Contract Term provisions.

5. What are reasonable payment times for grape growers?

Riverland Wine considers that minimum payment terms for growers should be 50% payment 30 days after the month of delivery and full payment by June 30th in the year of harvest. Similar payment provisions must also be applied to purchases of bulk wine and finished product purchases. Given finished wine purchases (as either bulk or packaged), are much closer to final sale to consumers and require minimal further processing expenses, full payment within 30 days after the month of delivery is appropriate.

6. Should unilateral termination clauses be prohibited or permitted only in prescribed
circumstances?

Riverland Wine supports the response of Australian Grape & Wine to this.

7. What other issues are being faced by grape growers when dealing with winemakers?
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There always will be issues faced by growers and winemakers, and indeed winemakers and their customers. Perhaps more important than anything else is how those disputes are resolved. Sure there are processes in place, but when timing (i.e. eve of harvest), fear of retribution and legal/financial strength come into play, growers and winemakers often feel powerless or compelled just to accept what is put in front of them by their customer.

8. Does market concentration in the domestic retailing of wine warrant regulatory intervention?

Yes. Riverland Wine refers to the response of Australian Grape and Wine and would go further by suggesting a code between winemakers and growers must be matched by an equivalent code between retailers/distributors and winemakers.

9. How does the oligopolistic nature of wine retailing in Australia affect independent wine
producers?

Riverland Wine supports the response of Australian Grape & Wine.

10. What are the options for intervention in the domestic market for wine retailing?

Riverland Wine supports the response of Australian Grape and Wine, however would also add that regulatory measures (or indeed deregulatory measures) to increase opportunity for alternative avenues to market should be considered. This could include, but not limited changes to liquor licencing to allow/encourage more wine retailers or tax changes to promote greater ‘direct to consumer’ sales.

11. What are the prospective costs and benefits of such interventions?
Unknown at this time.

12. What other objectives, if any, should guide the Code to improve relations between wine
producers and their suppliers?

Refer Australian Grape and Wine response.

13. Is the membership of the Code adequate to achieve its objectives?

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Refer response of Australian Grape and Wine. Riverland Wine welcomes that being a signatory to the code will require the winery to be SWA Accredited. The system is undermined when not all wineries are signatories.

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 primary dispute between winemakers and growers is price. Riverland Wine accepts that current low pricing is a function of global wine markets, and very little to do with bargaining power imbalances. Apart from some wineries shortening their payment terms, the current code has had little impact on winery and grower relations. The most high-profile dispute of recent times has been between Accolade and CCW (price related) and this was handle outside the current voluntary code dispute resolution processes. If the code is to be strengthened, it needs more meaningful and tangible requirements instead.

15. Have dispute resolution provisions in the voluntary code been effective in practice?

Refer to Australian Grape and Wine response

16. Should the Code be retained as a voluntary industry code, or made a prescribed voluntary code,
or a mandatory code?

Riverland Wine believes the code should be made mandatory subject to a thorough consultation process with industry on key terms and that a mandatory code is also enacted between winemakers and retailors/distributors.

17. Should the Code be extended to cover the relationship between winemakers and retailers?

Yes

18. What legislation, federal or state, could be invoked in addressing market failures in the
Australian wine industry?

Refer Australian Grape and Wine response. Additional opportunities.

- Wine taxation and liquor licencing as a mechanism to generate increased competition at the
retail level.

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- Tighten competition law around vertical integration between multiple sectors e.g. from retail<
marketernot be detrimental or inhibit new entrants at each individual sector level to be competitive.

- Moratorium on new vineyard plantings.

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?

Refer Australian Grape and Wine response.

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

Refer Australian Grape and Wine response.

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?

Refer Australian Grape and Wine response.

22. What measures should be contemplated to deal with supplier fears of retribution?

Refer Australian Grape and Wine response.

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Riverland Wine key Recommendations

1. Implement mandatory code of conduct, subject to
i. extensive consultation process on key terms, and
ii. implementation of similar mandatory code between retailers/distributors and
winemakers.

2. Minimum payment terms for winemakers to growers, 50% at 30 days after the month of
delivery and remaining 50% no later than June 30th in year of harvest.

3. Minimum payment terms for retailers and distributor payments to winery suppliers or
wineries to bulk wine suppliers, full payment 30 days after the month of delivery.

4. Grape and wine supply contracts required to have reference to pricing. Either minimum
pricing, fixed pricing or a transparent pricing mechanism.

5. Winemakers required to notify growers of quality assessment issues or defects (except
for MOG) at least 30 days prior to harvest or before fruit reaches 10 Baume.

6. Growers required to monitor and report disease issues as season progresses.

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