Profits withering on the vine for Australian grape growers

Grapes are more than just the sweet snacks in the fruit bowl. The Australian grape growing industry is highly dependent on the downstream winemaking industry, with about 89% of production heading that way.

The remaining output is sold as table grapes or dried grapes (e.g. sultanas). The industry is highly volatile due to significant uncertainty surrounding future conditions and its dependence on external variables.

The main issues affecting the industry are water availability and rainfall, activity in the downstream markets and wine producers' use of wine grape contracts. In the five years through 2012-13, industry revenue is expected to decrease by an annualised 11.7% to total $1.06 billion.

The industry is dependent on downstream wine exports, which contribute over 38% of revenue to wine manufacturers each year. The value of the Australian dollar has therefore played a prominent role in the past five years.

Since the global economic downturn, the rapid rise in the value of the Australian dollar has meant that demand for Australian wines has decreased on the global market. This has caused difficulties for wine manufacturers and growers alike.

Moreover, weaker demand for wine in significant export markets such as the United States and the United Kingdom is affecting Australian growers, in the form of lower prices received. As a result, industry revenue is expected to increase by only 2.3% in 2012-13.

The industry has wavered between conditions of over and under supply due to a number of factors, though largely influenced by the huge number of growers and the onset of drought-ridden growing conditions.

Recently, high levels of production caused a glut of wine grapes and put downward pressure on prices. Prices in some spot markets are still below production costs, resulting in some growers making large losses.

The combined effect of volatile production levels and changes in downstream wine manufacturing demand is expected to cause industry revenue to decline by an annualised 1.8% over the five years through 2017-18, to a total of $967.5 million.