A Radical Solution for Australia?

The last 2 years have highlighted Australia’s fundamental image problem.  There would be no talk of Australia having to play its regional quality trump cards in order to revive jaded global palates (and wallets) if there were no such image problem: that of cheap and cheerful wine produced in industrial quantities under unremitting warm climate skies, fed by irrigation in what might otherwise be a desert.  The fact that there are many other countries that do just the same thing and are not particularly castigated for the fact is, rightly or wrongly, irrelevant.  In Australia’s case it is also a victim of its own success, of believing its own press that it was riding a wave of ongoing global domination based on the ability to effortlessly produce endless quantities of “quality” (i.e., fault-free) wine that the world seemed to have limitless thirst for.

The engine room for this growth, aside from such assistance as tax breaks that meant investors could virtually earn risk free returns without producing a crop, was the large basin of flat irrigated farmland fed by the Murray and Darling Rivers, and the irrigation schemes drawing water from the Snowy Mountains.

With the Australian wine industry coming under severe pressure for its industrial wine production and cheap “critter label” wines, both heavily based on grapes drawn from the irrigated Riverlands areas, the world has been distracted from the genuine strength of the country’s long-standing “underlying” wine culture and cadre of truly quality focused producers.

The scale of this irrigated zone is significant. To illustrate, the following table shows the breakdown of the Australian crop from 2008 to that projected for 2011 (according to data published by ABARE):

Wine Grape Production – % of Australian Total
  2007-08 2008-09 2009-10 2010-11
Variety red Cabernet Sauvignon 14.0 14.1 14.2 13.9
  Merlot 6.8 6.9 6.8 6.6
  Petit Verdot 1.3 1.3 1.3 1.1
  Pinot Noir 2.4 2.1 2.0 2.1
  Shiraz 24.1 24.1 23.9 23.6
  Grenache 1.1 1.0 1.1 1.1
  Mataro (Mourvedre) 0.5 0.4 0.5 0.4
  white Chardonnay 23.3 22.8 22.6 22.7
  Pinot Gris 1.4 1.6 1.7 1.5
  Riesling 2.1 2.1 2.0 2.1
  Sauvignon Blanc 3.4 3.5 3.7 3.8
  Semillon 5.4 5.9 5.7 5.6
All wine grapes red total 53.6 53.4 53.3 52.2
  white total 46.4 46.6 46.7 47.8
        total 100.0 100.0 100.0 100.0

Sources: Data – ABARE; Calculations – Doubtless Strategic Ltd

The fact that Shiraz and Chardonnay together total almost half of Australia’s production should not come as too much of a surprise, as these have been the export growth stories from earlier in the decade.

But the next table shows the proportion of each of the varieties harvested (or projected to be harvested) from the warm climate irrigated regions:

Wine Grape Production – Irrigated Zone as % of Australia
  2007-08 2008-09 2009-10 2010-11
Variety red Cabernet Sauvignon 49.6 49.2 49.7 48.0
  Merlot 58.4 59.7 61.4 61.0
  Petit Verdot 85.1 84.3 85.3 83.8
  Pinot Noir 23.2 26.9 28.4 29.9
  Shiraz 50.5 51.3 52.6 52.6
  Grenache 39.9 39.4 39.9 41.2
  Mataro (Mourvedre) 69.6 71.0 70.2 69.7
  white Chardonnay 66.7 67.4 69.6 70.0
  Pinot Gris 66.1 70.8 71.3 64.1
  Riesling 22.1 23.1 24.6 25.6
  Sauvignon Blanc 36.0 36.3 40.1 41.7
  Semillon 65.4 64.4 64.0 64.2
All wine grapes red total 52.0 52.8 53.8 53.2
  white total 66.1 66.5 68.2 69.0
        total 58.5 59.1 60.5 60.8

Sources: Data – ABARE; Calculations – Doubtless Strategic Ltd

Interestingly, the dominance of the warm climate regions is even more pronounced for white grapes than for red. With approximately 70% of both chardonnay and pinot gris grown this way, not to mention 64% of Semillon and 40% of Australian sauvignon blanc (!), over 2/3 of all Australian white wine is produced in regions that would appear less suited to either subtle fruit qualities or natural retention of refreshing acidity.  How much does this help explain the success of NZ sauvignon blanc in Australia?

While half of Australia’s shiraz and cabernet sauvignon is not too surprising, approx. 60% of merlot should raise some eyebrows and more than a quarter of the ultimate cool climate, hands on red grape, Pinot Noir, seems extraordinary.

Of course this all begs many questions about the future of Australian wine.

To what extent will the ongoing production of significant volumes of the same wines undermine efforts to refocus the image of Australian wine?  Can that image be refocused “on the side”, rather than through a singular, concerted about face approach?  I think that given the sheer volumes of irrigated warm climate fruit still being made into wine for export, and inevitably with marketing budgets required to sell it, it would remain difficult for regional terroir-based wines to “rise above” the wider branding noise.

What would happen were Australia to decide that the Murrumbidgee/Riverlands regions should not be the place to grow grapes?  Aside from the economic costs of change (whether as a result of conscious transition, or else climatically imposed ) the process of switching off the flow of warm climate grapes would have a significant impact on the rest of the Australian wine industry.

The obvious consequence is the fact that Australia would rapidly shift back from oversupply to shortage, and the excess stock situation would correct far more rapidly than might be expected otherwise.  Moreover, the industry focus would automatically and completely shift back to the wider regional stories.  Another consequence would be stabilisation or even improvement of land values in areas making wine styles for which the markets would no longer be swamped by cheap wine.

Ironically, cutting production could materially improve overall industry profitability and return on investment, after allowance for the transitional losses.

Further, the profligate use of irrigation water in the Riverlands arguably damages Australia’s environmental credentials.  Is it “right” to use millions of litres of water to produce alcoholic beverages rather than food or other “essentials”?

So, if the Riverlands wine tap were to be turned off, what would be the effects:

  1. Within 2 years the country would shift from over production to shortage.
  2. Water used to grow grapes could be re-allocated to production of other more efficient crops.
  3. The chardonnay oversupply (and others), based on wines often completely devoid of character and reliant on dosings of sugar and acid, would disappear.

Of course, one of the problems (as is the case with most blunt stick-type approaches to solving any problems) is that of generalisation.  The Riverlands is, after all, home to a lot more than simply farmers paid to use water to grow grapes for processing into cheap and cheerful wines for the domestic and export markets.  It also includes a number of boutiques and quality-oriented producers as well, even though I suspect that proportionately these are immaterial compared to the corresponding production of the large wine companies.  These need to be considered in any process.

The large companies may be a different story, as this is a significant chunk of their business.  Notwithstanding the short-term pressure they may be under at present, they may have something else to say about the idea…

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