Industry's bitter harvest

BY BEN HEATHER

Standing before more than 100 growers and winery owners in a Blenheim hotel, Auckland entrepreneur and vineyard owner Barry Sutton argued for radical industry reform.

He proposed vineyards and wineries merge into a corporation, with everyone taking shares equivalent to the value of their property.

Mr Sutton argued the new corporation would have more clout to negotiate contracts, stabilise grape prices and give New Zealand wine a united marketing front.

That was September, before the harvest. Not one person signed up.

Nine months later, Westpac seized control of Mr Sutton's Awatere Vineyard in Marlborough, seeking to recover more than $21 million owed.

Since then others have sold up or gone under and Mr Sutton believes it is time to resurrect the debate around a more co-operative model for the wine industry.

"People weren't frightened enough about what was happening but they are frightened now."

Mr Sutton is driven by his bad experience as a contract grower. For the 2010 harvest he was paid $1300 a tonne for his sauvignon blanc grapes and limited to 10 tonnes a hectare.

"At that price you are guaranteed not to make money."

Awatere Vineyard's demise arose partly from irrigation problems causing it to miss the bumper 2008 harvest.

But Mr Sutton also blames the wineries for allowing grape prices to plummet in the wake of the much-publicised 2008 harvest glut.

The term "glut" itself is a misconception, he says, suggesting oversupply arose from unpredictable market forces, rather than big wineries failing to develop new markets and plan ahead.

Mr Sutton's views are echoed in widespread resentment among contract growers. Some feel they have been cheated by wineries wriggling out of supply contracts or imposing unworkable conditions.

The deteriorating relationship surfaced in the High Court at Auckland last month, as Goldridge Estate Vineyards, one of the country's bigger wine producers, tried to enforce a management and supply contract with Kakara Estate and Weta Estate.

The two Marlborough vineyards had cancelled the supply contract, arguing Goldridge had "mucked" them about, rejecting their grapes late in the season and forcing them to scramble for lower prices.

In 2008, sauvignon blanc grape prices peaked at about $2300 a tonne but in 2009 fell to about $1600 and to a decade-low of about $1200 this year. The decline of sauvignon blanc drags down other varieties and industry sources say this year's grape prices will inevitably lead to financial ruin for more growers.

One Marlborough grower, who declined to be named for fear of jeopardising his contracts, is scathing of the big wineries' "mismanagement" and says the once excellent relationship between wine companies and growers is now in tatters.

"The wine companies are basically crapping all over us."

His income dropped 80 per cent in the past two years and he expects a loss of more than $1m this year.

Growers' anguish was being smoothed over by industry body New Zealand Winegrowers, he says, and banks were reluctant to move against growers when land values were so low.

All growers were losing money but most would not speak up, afraid it would jeopardise their contracts.

Gisborne grower Tom Brodie has had three supply contracts cancelled in the past two years and says he is now battling the bank to keep his remaining vineyards.

One vineyard has been sold, the vines ripped out by the new owners, and Mr Brodie expects more to fall over if other contracts are not renewed.

All Gisborne growers were on "thin ice", some being paid as little as $500 a tonne for chardonnay.

But while growers' hardship cannot be dismissed, wineries are not unscathed either.

Recent financial results from big industry players do not support a picture of wineries creaming it at growers' expense.

Delegat's reported a 12 per cent decline in its net profit in the second half of 2009, despite revenue rising 6 per cent, suggesting it absorbed some pain rather than passing it on to growers.

Constellation Wines does not break down results for New Zealand but did report an operating loss in its Europe and Australia division (including New Zealand) for the first quarter of the 2011 financial year, describing New Zealand conditions as "challenging".

In the past three months Marlborough wineries Gravitas and Cape Campbell have gone into receivership.

When grape prices fell in 2009, wine prices had already been falling for at least six months as wineries offloaded excess product at a pittance despite having paid growers a premium.

In the past two years, New Zealand's bulk white wine sales increased nearly eightfold from 4.3 million litres to 34m litres. The price per litre for wine dropped from $3.99 to $2.81.

Delegat's clashed publicly with one of its Marlborough growers in March who said the winery was not carrying its fair share of the oversupply burden.

Managing director Jim Delegat is reluctant to talk about the relationship with growers but says the company has an "excellent dialogue" with all suppliers.

"It would be unfair of me to be litigating this in a public manner."

Marlborough wine industry veteran Peter Yealands, both a grower and wine maker in the Awatere Valley, is philosophical about soured relations in the industry.

"There has been some ruthless goings-on but that is the nature of business."

In 2008, wineries absorbed the oversupply pain while growers received record returns, but those prices could never be maintained as wine prices fell, he says.

"In 09 ... some wineries cast aside contracts like they were going out of fashion."

He agrees wineries were caught napping in 2008 but is confident the industry is recovering.

He is less enthusiastic about greater industry co-operation, noting the Commerce Commission often viewed such behaviour suspiciously.

In May, the commission cautioned NZ Winegrowers for potentially anti-competitive behaviour after it advised growers to limit grape yields.

The industry body played down the incident but it did highlight the regulatory hurdles to industry co-operation.

Last month, Foreign Affairs and Trade Ministry chief executive John Allen argued for wine industry consolidation in a speech to exporters in Christchurch.

He said New Zealand's big export industries, including wine, needed to embrace a Zespri and Fonterra-style model to remain competitive and the commission needed to take a more relaxed approach to "collaboration".

Co-operation has been tried before in 1991, when the New Zealand Grape Growers Council tried to gain approval to bargain collectively, including fixing grape prices. Back then New Zealand was producing only 70,000 tonnes of grapes a year, mostly for the domestic market, and the application was rejected as anti-competitive.

NZ Winegrowers chairman Stuart Smith says he is not about to try again. While he concedes relationships between growers and wineries have been strained, radical reform was not the answer.

Co-operative models might work for commodity-based industries like dairy or kiwifruit but wine was all about selling a brand.

"Zespri is one brand whereas New Zealand has 625 wineries and more brands than that ... I don't see how it would work," he says.

Rather than throwing out the rulebook, the industry should concentrate on rebalancing supply to demand, allowing a return to economically viable prices for both growers and wineries, he says.

Early signs for 2010 were encouraging, with the growers heeding advice and reducing the harvest by 7 per cent to 266,000 tonnes.

The value of wine exports also grew 5 per cent to $1.04b, although the average price for a bottle of wine continued to fall, down 11 per cent to $8.70 per litre.

Back in Gisborne, Mr Brodie and 33 other growers are setting up a collective, GroCo, to buy and bottle their own grapes.

GroCo shareholder/growers each bought shares in a co-operative that gives them the right to supply a relative grape tonnage to GroCo.

For many Gisborne growers 2009 was disastrous, with Pernod Ricard pulling out of the region and leaving about 40 growers in the lurch.

Warwick Bruce, ironically a former Pernod Ricard manager, is GroCo's general manager and only employee.

He is hopeful lower overheads would keep it competitive with bigger wineries while still giving growers a better return.

But the co-operative is a gamble. None of the shareholders has been paid for grapes and will not receive a penny until the wine is sold, if it can be.

"It might not be until next year that sales are generated."

Mr Bruce says there has been some interest in the model from Hawke's Bay growers yet stops short of recommending the model to others.

"But it does mean we are a bit more in control of our destiny." Whether co-operation will catch on is uncertain but it is more likely to come from the ground up than through a sweeping Fonterraesque shake-up.

But for Mr Sutton, and many others teetering on brink of ruin, any change for better or worse will come too late.

- © Fairfax NZ News