Australis Research Solutions

Riesling makes a come-back

By Don Hog

IN 1985 the South Australian Government offered the state's 3,000 wine-grape growers $3,500 for every hectare of vines they pulled out. The rationale underlying the scheme was that there was an oversupply of grapes to a winemaking industry already carrying big stocks. Grapes were often changing hands at less than the cost of their production.

Growers, particularly those in the high-yield, irrigated Murray Riverland region centred on Berri, Renmark and Loxton, were the scheme's primary targets; they had suffered hard times for years. The Government was telling them to get out of wine grapes, stay out of them and find alternative crops.

The industry expected hundreds of hectares of the lesser varieties pedro, grenache, doradillo and palomino to vanish almost overnight. And so they did, but along with them, and here's the rub, went shiraz, rhine riesling, some cabernet, even chardonnay.

In hindsight it was hardly surprising that growers wanted to divest themselves of at least some of their shiraz and riesling plantings. They were no longer fashionable, despite the fact that the Australian table wine industry had been built on them. Indeed, in 1985 those growers lucky enough to find buyers for their riesling could expect no more than $210 a tonne, while shiraz brought no more than $300.

Some of the best riesling and shiraz vines in the state fell to the grubber and were burnt on giant bonfires. Their owners were happy to be rid of them and the Government and the winemaking industry just as happy to see them go.

Surprise, surprise, for this vintage and the one before, winemakers across the country were fighting to buy every last berry of any and all varieties and, in the competition for Rhine riesling fruit from the 1989 vintage, winemakers paid an average of $750 a tonne, with as much as $850 being paid for the most desirable.

In the case of rhine riesling, it seems that demand is based on more than the recent upswing in the export fortunes of Australian wine. Indeed, it seems the Australian consumer is slowly but inexorably coming back to this white wine style, once regarded as its darling.

Which is not to say that rhine riesling had ever been totally rejected by our nation of fledgling wine consumers. Rather, its image had taken a battering at the hands of the Johnny-come-latelys - chardonnay, sauvignon blanc and the hatful of verdelho that finds its way to the market.

When the demand for chardonnay struck, the winemakers knew they were on a good thing. There wasn't enough of it planted to scratch the surface of demand. Supply would remain restricted for some years and in the meantime they knew they could get silly prices for the stuff. They did, and still do.

As all this was happening rhine riesling continued as the biggest selling white variety by litre, but a higher percentage was finding its way into the bulk containers, casks and flagons.

Recently, some wine marketers have been quietly talking of price resistance among consumers - what's more, resistance to the prices asked for their chardonnays and sauvignon blancs.

They says that because people are now looking for a more affordable white they are turning their attention back to riesling and, in the process, re-inventing the wheel.

Some winemakers, particularly those in the viticultural regions where Rhine riesling does best - the Eden Valley, Clare Valley, Coonawarra, Mount Barker in Western Australia and Nagambie in Victoria - are leading in the restoration of the variety as one of Australia's finest and most highly developed white wine styles.

From the consumers' point of view, the re-emergence of Rhine riesling as a force in the market-place is good news indeed.

And it is even being whispered that one or two of the major companies are actually planting the stuff. So much for the 1985 vine pull.

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Financial Review 8 September 1989

It is now mid-1986, James passed away last summer after a brief illness. His will has recently completed the probate process and Duloc is now jointly owned by Zoë and Matthew. But these are tough times for the wine and grape growing industries in the Southern Vales. The recent glut of table grapes and now wine grapes has seen a collapse in grape prices and an expansion of the vine-pull scheme.

Zoë and Matthew are faced with a dilemma about what to do with Duloc. Last season the glut was so extensive and prices so low that they eventually sold their crop at a lost. Their entire shiraz crop, some of these vines are 130 years old, were left on the vine so long that they almost resembled sultanas were eventually sold to a winery to make port! This year things look even worse. Prices are even lower and it looks like previously reliable customers for their grapes are no longer prepared to buy them. Some wineries are engaging in sharp practices. They are prepared to pay the minimum regulated prices, but they are engaging in cost shifting exercises that will force Zoë and Matthew to absorb costs that are usually borne by the wineries, mostly transport and storage costs. Not surprisingly, they are thinking about applying for assistance from the vine-pull scheme to remove some of their older, less popular and less productive vines.
Despite the strong demand from growers, Zoë and Matthew think they have a good chance of their application being approved as the State and Federal governments have allocated sufficient funding to pull out ten per cent of the State’s vines. The scheme offers to provide a substantial windfall to Duloc. The government will to pay Matthew and Zoë $5,000 per acre, and Zoë has arranged to pay a cousin, David, $1,500 per acre (which seems to be the going rate any way) to remove the vines. However, there is a catch. The vine-pull scheme will only fund the removal of all of the vines from a whole vineyard. But the vines that Zoë and Matthew want to remove are mixed in with popular varieties that they can reasonably expect to sell for a profit in the near future. So, they will either be forced to pull out all 80 acres of vines and leave the industry altogether for at least five years, or not apply for vine-pull scheme funding and pay to restructure their grape growing operations themselves.
The South Australian Government is largely being blamed for this oversupply as a result of their price support scheme, which was essentially an attempt to impose a binding price floor on the industry. But there is another contributing factor. Grape vines usually take 3 to 5 years before they begin to produce grapes, but it may take as many as 7 years for vines to fully mature and hence produce grapes that are suitable for wine production. So, many of those vines that are contributing to the present over supply were planted in the late-1970 and early-1980s. Long lead times like this are often the cause of boom-bust cycles in agriculture. This surge in planting in the late-1970s and early-1980s was driven by a strong increase in demand for red wine domestically and as a result of the re-opening of export markets to the UK and the USA.
But this is not the whole story. The worldwide recession from 1981 to 1983 was the worst recession to affect Australia since the Great Depression of the early-1930s. The consequent reduction in incomes in Australia and our export markets led to a collapse in demand for wine.

Topic 2

Week 3

The economising problem

Questions

Hints

What are economic resources, which are sometimes called factors of production? Illustrate your answer with some examples that relate to the grape growing and wine making industries. What is the economising problem? Explain how each of the questions will influence the decisions that Zoë and Matthew will make now that they are running Duloc. What are the goals that Matthew and Zoë have for Duloc? Assume for now that Duloc can only produce red or white grapes. Would the production possibility curve for Duloc be a straight line or a curve? Explain why. What do points inside the curve show? What do points on the curve show? Do you think that Duloc is operating inside or on its PPC? Why? Why do PPFs tend to bow out from the origin? Show the effects of the vine-pull scheme on the market for grapes. Show the effects of the vine-pull scheme on the wine industry. Why where so many new vines planted in the late-1970s and early-1980s? Why did the recession of the early-1980s affect wine production in the Southern Vales more than the Riverland? Do you think that Zoë and Matthew should apply for vine-pull scheme funding and hence exit the industry or tough it out? Explain your answer.

Review the concept of factors of production and apply them to this question. Review the concept of scarcity and apply them to this question. You need to be clear about Matthew’s and Zoë’s goals for Duloc and the strategies that they will develop, are they complementary or conflicting. For a firm or a country to be on its PPF three conditions need to be met; Full employment; Allocative efficiency; and Productive efficiency, i.e. the least cost method of production. Are these conditions being met? Explain the law of increasing opportunity costs and explain the conditions under which the PPF would be a straight line. Use a supply and demand diagram to explain these effects, be clear about and apply the non-price determinants of supply. Use a supply and demand diagram to explain these effects, be clear about and apply the non-price determinants of supply. Read ahead in your textbook to learn about the role of normal and supernormal profits in market adjustment. This is a highly segmented market, think about the Income Elasticity of Demand for each market segment in relation to the non-price determinants of demand. Think in terms of applying the concepts of inferior, normal and superior goods. The article and the case study allude to factors that may affect demand and supply and hence may affect grape prices. Model these effects and then draw conclusions about expected future prices, quantity, total revenue and profits. Then compare the net present value of the expected income stream with the windfall profits from the scheme. Outline a business case whereby Matthew and Zoë decide to stay in the industry and not exit.

Topic 3

Week 4

Supply