Australian grape and wine industry Submission 33 Riverina Wine Grapes Marketing Board For the City of Griffith and the Local Government Areas of Leeton, Carrathool and Murrumbidgee 182 Yambil Street, Griffith NSW 2680 (PO Box 385, Griffith NSW 2680)\ Telephone: 02 6962 3944 Facsimile: 02 6962 6103 Email: [email protected] ABN: 72 739 514 203 RIVERINA WINE GRAPES MARKETING BOARD SUBMISSION TO THE Senate Rural and Regional Affairs and Transport References Committee Inquiry into the Australian Grape and Wine Industry May 2015 Brian Simpson Chief Executive Officer Wine Grapes Marketing Board Australian grape and wine industry Submission 33 Summary The Riverina Wine Grapes Marketing Board on behalf of its 345 winegrape producers welcomes this Senate Inquiry and trusts that at a time when action is needed the Senate Committee investigating the winegrape industry will be able to develop meaningful and deliverable outcomes that government will support and underpin with appropriate regulation. This submission is from a winegrape grower’s perspective from a region that has consistently received the lowest average winegrape prices across all main varieties of any region within Australia. Unless change in industry behaviour occurs and a share of the wealth is made available throughout the entire supply chain problems will continue for independent winegrape growers. This submission also refers to the many past inquiries into the industry that have occurred from which very little has occurred that has been of benefit to the producers within Australia. A lot of time and effort has gone into these submissions with little gain. It is important that these previous documents be read and understood by the Senate committee. Introduction The Riverina Wine Grapes Marketing Board (Board) is a NSW Statutory Authority legislated under the NSW Wine Grapes Marketing Board (Reconstitution) Act 2003 and Agricultural Industry Services (Wine Grapes Marketing Board) Regulation 2003. The Board has been in operation since 1933 servicing wine grape producers within the City of Griffith and local government areas of Leeton, Carrathool and Murrumbidgee. The Board is funded by an industry service charge that is compulsorily applied on all wine grape producers that produce greater than 20 tonnes of wine grapes and are independent of wineries in accordance with the regulations. The Board was formed in 1933 by a petition of wine grape producers to the NSW Government to counter the market power of local winemakers in the region. Until July 1 Australian grape and wine industry Submission 33 2000 the Board had the power to determine the market minimum price to be paid for varieties of wine grapes. This power (through vesting) was provided by the NSW Government under the NSW Marketing of Primary Products Act 1983. Post 2000, the Board’s vesting and price setting powers were removed after an extensive review of these provisions in accordance with National Competition Policy guidelines. As a transitional measure the Board retained the ability to set and enforce terms and conditions of payment annually, subject to certain provisions in the Act. This power has since ceased to be available to the Board under its regulations. The Board now operates as an agricultural industry services organisation, applying the $3.90 per tonne industry service charge on wine grape production to fund constituted services, as follows: (a) the development of a code of conduct for contract negotiations between wine grape growers and wineries, (b) the development of draft contract provisions with respect to the sale of MIA wine grapes to wineries, including provisions with respect to: (i) the prices to be paid by wineries, and (ii) the terms and conditions of payment to be observed by wineries, in relation to MIA wine grapes delivered to them by wine grape growers, (c) the promotion of private contracts for the sale of MIA wine grapes to wineries by wine grape growers, (d) the collection and dissemination of market and industry information, including the production and publication of indicator prices for MIA wine grapes grown in the Board’s area of operations, (e) the conduct of research and development into plant health in relation to wine grapes, 2 Australian grape and wine industry Submission 33 (f) the provision of education and training in relation to wine grape production and marketing, (g) the promotion (in association with organisations representing wineries) of wine made from MIA wine grapes, (h) the promotion of regional industry, including regional winemaking, within the Board’s area of operations, (i) the representation of the wine grape industry in relation to the matters referred to in paragraphs (a)–(h). The Riverina Wine Industry The Riverina region is the largest named Geographical Indication (GI) within the Australian wine industry, it is part of the Big Rivers Zone and lies within the widely know production area of South Eastern Australia. It is home to approximately 345 wine grape producing families and business. The region is also home to 16 wineries, some of Australia’s largest family owned wineries are based in the region, including Casella Family Brands, McWilliam’s Wines, Warburn Estate and DeBortoli Wines. The region produces approximately 320,000 tonnes of wine grapes annually from 21,000 hectares of planted area, comprising of over 50 different varieties with the main production coming from commonly known varietals such as Chardonnay, Shiraz, Cabernet Sauvignon, Sauvignon Blanc. The Board’s area of operations encompasses the City of Griffith and the local government areas of Leeton, Carrathool and Murrumbidgee. Most of the production comes from around the cities, towns and villages of Griffith, Leeton and Yenda. Production is irrigated via irrigation schemes from the Murrumbidgee River with a small portion irrigated from the Lachlan River and some via ground water licence. Irrigation availability and infrastructure is managed by a privatised organisation Murrumbidgee Irrigation (once a NSW State owned corporation) and a Cooperative in Coleambally. 75% of the total regional production in the region is produced by 3 Australian grape and wine industry Submission 33 independent wine grape growers, who fund the activities of the Board through the industry service charge that is deducted from grower payments by wineries acting under an Agency Agreement with the Board. Submission to the Inquiry The Board writes this submission to the Senate Rural & Regional Affairs & Transport References Committee Inquiry into the wine grape industry for and on behalf of all its constituted wine grape producers. The Board has also informed wine grape producers of the inquiry and recommended that they provide their own submissions. The Board requests that the Senate Committee review all past inquiries into the wine grape industry federal and state. In 2005 the Senate undertook an Inquiry which yielded very little for industry in terms of any outcomes that were adopted. To view the Board’s original submission: http://www.wgmb.net.au/images/pdf/Submissions/Submission%20to%20Senate%20Inqu iry%20August%202005.pdf The Senate Final report dated October 2005: http://www.wgmb.net.au/images/pdf/Submissions/Final%20Senate%20Report%2013-1005.pdf In NSW an Upper House Inquiry was conducted in 2010 into the “Wine grape market and prices”. The Board’s submission to this can be viewed: http://www.wgmb.net.au/images/pdf/Submissions/WGMB%20Submission%20Sep%202 010.pdf Final Report from the NSW Upper House Inquiry: http://www.wgmb.net.au/images/pdf/Submissions/101130%20Final%20report.pdf The NSW Inquiry yielded a number of recommendations which could have provided some benefits to industry but these were dismissed by the NSW Government 12 months 4 Australian grape and wine industry Submission 33 following the handing down of the final report, a copy of the Government’s dismissive response can be found at: http://www.wgmb.net.au/images/pdf/Submissions/111213%20Government%20response _Wine%20inquiry.pdf . All previous submissions highlight a recurring theme of poor business conduct within parts of the industry. All inquiries agreed that positive change was required to create a better operational business environment but no regulatory assistance was ever provided. Governments are empowered to assist business by providing a suitable operating environment. The Board trusts that this inquiry will provide benefits to the industry that are tangible and deliverable. This submission will now address the Terms of Reference provided for by the Senate Rural & Regional Affairs & Transport Reference Committee Inquiry. a) the extent and nature of any market failure in the Australian grape and wine industry supply chain; Market failure within the winegrape industry is evident of two fronts: Information failure: there is insufficient information for producers both of winegrapes and wine to make valid and informed business decisions about the pricing of winegrapes and the varieties that are needed to respond to market conditions. A market that is operating with insufficient information does not function efficiently and carries higher economic costs to participants than a fully functional market that is open and transparent. Approximately 15 years ago the industry used to come together in the main inland regions and talk about the market conditions for wine and grape production. It addressed important data such as the export and domestic sales information and the draw down on stock levels. Understanding the market in terms of the stock to sales ratios was invaluable in informing the market of the current demand for key and emerging varieties to allow for more informed business planning and decisions. 5 Australian grape and wine industry Submission 33 These meetings provided a valuable outlook on the industry and enabled growers to respond to market conditions with more certainty than currently exists. However the application of competition law principles on these meetings has meant that the industry no longer meets collectively to talk about market demand and winegrape supply issues openly. Market Power Issues: In general, growers are concerned that should they dispute prices, fruit grading or grape quality score that they are given by their winery they may be negatively impacted upon in terms of the business relation they have with their winery. Wineries in general can and have exerted their market power in a dictatorial manner and growers dealing with a perishable product are often forced to accept this behaviour. Some of the negative impacts that growers may be faced with for example are: contracts not being provided to these growers in future vintages; a fruit quality downgrading which results in a lower financial returns being received by the grower; growers required to undertake potentially protracted dispute processes that can impact on fruit quality and yield potential (due to losses caused by the dehydration of grapes at maturity). The market does not have appropriate systems to deal with disputes unless the transaction is covered by a contract provided by a signatory to the current voluntary Australian Wine Industry Code of Conduct many growers are realistically fearful. Discriminatory behaviour and “black booking” is acknowledged to regularly occur within the Riverina region, home to many of the top 20 wineries within Australia and some of the largest family owned wine business within the country. The industry needs a mandatory code of conduct that provides growers with the opportunity to dispute prices and have protection from being arbitrarily dropped by a winery is required within the industry. The code must contain set terms and conditions of payment. The Riverina has evidenced a massive dilution of these terms over past years since state regulation expired. The regions’ growers used to receive their payments in an orderly structured manner that was managed by the Board. Following a number of 6 Australian grape and wine industry Submission 33 regulatory reviews and disputable interpretations of competition policy, Riverina growers have had this ability of enforcement removed from the role undertaken by the Board. Upon the removal of terms and conditions of payment - the accepted industry standard of three payments, one third in May (following harvest) a second third in June with the remaining payment in early October - changed to a multitude of payment structures, as noted in the NSW Upper House Inquiry “Final Report” p53, Chapter 6.33. In the worst instance some growers are required to wait until the following year to receive full payment for their winegrapes. Growers in the absence of any working legislative instrument are not able to dispute late payments with the winery for fear that their following seasons production will not be purchased. The industry needs a federal regulatory authority monitoring the wine and winegrape payment system within Australia to ensure compliance and to eliminate the problems associated with tardy or nil payment and allow for the calculation of any applicable interest. We cannot afford as an industry to continue to receive payments over a number of seasonal instalments as described. Prompt payment procedures need to be developed and as mentioned, regulated. b) the extent to which federal and state legislative and regulatory regimes inhibit and support the production, processing, supply chain logistics and marketing of Australian wine. WET Rebate: The current WET Rebate is impacting on industry profitability throughout the entire supply chain. The rebate designed to support wineries and regional tourism and development has become a disruptive force within industry. Many growers and small to medium wineries rely heavily on the funds coming from the rebate to provide a financial return. However in recent years more and more growers have been participating in the manufacture and sale of wine and are therefore eligible to receive the rebate. 7 Australian grape and wine industry Submission 33 The current market is now open to allow growers looking at getting their winegrapes processed into wine and selling this either as finished product or as bulk wine. They are claiming the rebate to supplement their incomes as the market for winegrape has contracted. The Board has noted a significant increase in the number of growers that now have a state based producer wholesaler licence to enable them to claim the rebate from Government. Having the opportunity to transition into the manufacture and sale of wine is important for growers in an entrepreneurial sense as it allows development and growth of the industry and its continued diversity. However, this transition has become increasingly exploited as it provides the opportunity for up to $500,000 per annum windfall via the rebate. The effects of the Rebate are now being strongly evidenced within the wholesale channel for wine. The Board has been advised by numerous rebate claimants selling wine to the retailers in Australia that the process is corrupted. Retailers are benefiting from this process by being able to capitalise on the rebate value and reduce the price that they pay for the wine. By inference the WET Rebate in many transactions is effectively subsidising low priced wine products being made available to consumers. Obtaining a united industry position on the WET Rebate is challenging but until change occurs the wine grape industry is not likely to recover as the rebate is effectively a subsidy. The Board welcomes moves by the Government to call for a discussion paper into the WET Rebate. Code of Conduct: on behalf of the winegrape producers in the Riverina the Board has been promoting the adoption of the Australian Wine Industry Code of Conduct. The Board was involved physically and financially in its development and introduction. The ongoing management of the Code is part funded by the Board in accordance with its industry services. Unfortunately the Board has seen little evidence of adoption of the Code within its area of operations. One winemaker, Pernod Ricard Winemakers signed the code but now only buys winegrapes from a small number of growers in the region and has signalled 8 Australian grape and wine industry Submission 33 that they are no longer going to continue their contractual relationships with regional growers when these expire (following this current season). The rest of the Riverina regions wineries have declined to sign onto the Code for various reasons, which is disappointing. The Code needs to be transitioned to a mandatory instrument managed by the ACCC. This would allow for a higher level of transparency within the business operating environment of the industry. The Code would support sound business practices and work to prevent the ongoing poor behaviour and bullying that anecdotally is said to occur regularly within the industry, particularly in the Riverina. As noted prior there is a real fear of retribution against growers that are vocal and/or seek alternative purchasers of their grapes when they are not happy with the price paid (see NSW Upper House Inquiry “Final Report” pp30-31 Fears of retribution, Chapter 4.16 – 4.23). c) the profitability of wine grape growers, and the steps industry participants have taken to enhance profitability The overwhelming majority of growers are no longer running profitable business operations. Within the Riverina declining average yields and low grape prices have led to per hectare returns being drastically diminished. Industry analysis by the Winemakers Federation of Australia (WFA) indicates that declined vineyard profitability is presently impacting on approximately 80% of all winegrapes produced nationally http://www.wfa.org.au/information/vintage-report-/ In an attempt to increase profitability growers have reduced inputs into vineyards such as fertilisers and in some instances cut back on the applications of fungicides. The industry has also increasingly adopted mechanisation on farm to increase workplace efficiency and reduce labour costs. Many growers have developed their properties irrigation systems to enable better control of water application and efficiency. 9 Australian grape and wine industry Submission 33 Many growers have sought off farm income where possible as a means of providing for their families. Such activity can often mean that they become ineligible for Government primary industries targeted funding opportunities or grants as their off farm income invariably exceeds their on farm returns. Perhaps government needs to consider amending the percentage of off farm income allowed within future criteria for assistance funding. Growers are mindful of the quality parameters of wineries and strive to obtain the best possible return for their fruit by producing winegrapes to suit winery intake requirements however, successive years of receiving gross returns well below production costs are now resulting in threats to the quality of wine grapes being produced. This is now being recognised by wineries. As a representative body the Board has in the past studied the costs of production within this region and has determined that current grape prices couple with the constrained yields are not providing anywhere near sustainable returns to growers. The Board uses this information to inform growers and the market that the current offer prices are not covering the studied costs of production. The Board also can offer education to growers to enable them to study their own on farm costs. An industry developed program called VineBiz provides a sound and structured process of understanding input costs in vineyards. d) the impact and application of the wine equalisation tax rebate on grape and wine industry supply chains; The impacts of the WET Rebate are being felt throughout the entire industry in terms of retail price offers, bulk and unbranded bottled wine prices through to the price that growers receive from their buyer. One major winery within the Riverina has stated that the rebate’s impact is continuing to drive down farm gate prices to growers and until the rebate is removed there will not be a profitable market for winegrapes in this region. The increased development and evolution of the WET Rebate was first evidence in the Riverina when the state licencing regulations were amended to allow holders of NSW 10 Australian grape and wine industry Submission 33 Producer and Wholesalers licences to sell quantities of wine in volumes greater than 45 litres per transaction. It was argued at the time that 45 litres - which amounts to 5 cases - was an insufficient transaction size and that this was limiting the market opportunities of NSW producers in comparison to other states regulations. Once licence holders were able to sell in larger volumes the amendment paved the way for more than just wineries with legitimate cellar doors to access and claim the available WET Rebate. The numbers of producers within NSW increased exponentially following the change and claims of WET similarly increased within this state. The Board is aware of 44 regional businesses that grow grapes and have these processed by third parties. In the Riverina there are 20 winery facilities that make wine. It was brought to the Board’s attention that a number of business models within the region operating in the WET Rebate claim were actually not from within the industry, did not have vineyards nor were they linked financially to a winery processor. The fact that these businesses had received licences was brought to the attention of the NSW Government and the NSW Small Business Commissioner (NSWSBC). The NSWSBC arranged for a majority of licence holders in the Riverina to be inspected by authorised officers of the NSW Office of Liquor Gaming and Racing (NSWOLGR). They determined that the vast majority of wineries within the region were actually operating counter to the provisions within the Act and the licence to which they were granted. For example, a number of wineries do not own vineyard operations and act only as a processor – which is not catered for in the licence conditions. This issue arose time and time again with many of the leading wineries in the region whereas growers that had applied and received the same licence were legitimate operations as they owned and operated a vineyard. They had “skin in the game” so to speak but they were not a winery. A number of accountants, solicitors and members of the general public that were interviewed by the NSWOLGR were also deemed to be operating counter to the regulations. 11 Australian grape and wine industry Submission 33 After some major deliberation, the matter was closed following NSW Government intervention with due regard that prosecuting wineries that were undertaking business operations that they had done for numerous years would not be in the best interests of Government nor the NSW industry. This approach has opened the way for more nonindustry participants capitalise of the rebate. The WET Rebate is a subsidy that is easily obtained by participants within the industry. The Board’s position is in moral agreement with Wine Grape Growers Australia that it needs to be reviewed urgently and parts of it need to be removed. The Board would like to see immediate change and that further claims of the rebate can only be applied to cellar door sales up to a maximum per annum of $50,000. This will ensure that it assists the industry in providing assistance for labour costs within cellar doors which will have a regional tourism and development function. To allow any amendment of the legislation that would allow it to be only available to wineries will see clever schemes emerge within industry that will have WET Rebate recipients leasing storage and or processing space to obtain access to the rebate. The industry was very astute in obtaining such a generous financial subsidy from government but this is now impacting on the industry profitability through the entire supply chain. Why should the processing sector be provided with such generous incentives when similar incentives are not provided to the winegrape grower base within Australia? The decline in farm gate profitability within this country is potentially being fed back into those claiming the rebate. The unintended consequence of the WET Rebate regulation is that many of the winegrape producers are now earning less than what it costs to produce the winegrapes. The others that are claiming a rebate are in part funding the processing and bottling costs of regional wineries. The system is enabling wineries to be direct recipients of the rebate while being indirect recipients via their profitable processing charges. 12 Australian grape and wine industry Submission 33 e) the extent to which grape and wine industry representation at regional, state and national level effectively represents growers and winemakers with respect to equity in the collection and distribution of levies. The winegrape production industry has for many years struggled to receive adequate funding for its representative peak industry body. This used to be the Wine Grape Council of Australia which was primarily made up of representatives and funding from the Riverina Wine Grapes Marketing Board, Murray Valley Winegrowers Inc and the South Australian Farmers Federation (SAFF) Winegrape section. It also had representatives from the South Australian Riverland on its board of directors although funding from the South Australian Riverland was paid for via SAFF. Funding then become available following the setup of the Riverland Winegrape Growers Association using the SA Industry Fund legislation. In the Riverina, the Board acts as the grower representative body for all matters relating to the services that are prescribed in its regulations. The Board is a member of the NSW Wine Industry Association (NSWWIA) and according to its current constitution the NSWWIA must hold an executive position on its board for the Chair of the Board. The Board also is an affiliate member of the peak growers representative body, Wine Grape Growers Australia (WGGA). As a statutory authority the Board is not inclined to provide a set amount per tonne to WGGA on behalf of its growers as it understands that some of these funds may be used for agro-political activities. The Board however provides funding to WGGA for industry projects that are aligned to the Board’s agricultural industry services functions as listed in the introduction of this submission. Growers in the Riverina are well represented at national, state and regional levels with Board staff and its members sitting on a number of regional committees. Across the three inland regions, Riverina, Riverland and Murray Valley growers are required to pay a regional industry service charge per tonne that varies from region to region. There is no sense of equity to these payments as they are each set and 13 Australian grape and wine industry Submission 33 collected in a different manner to be applied to the various activities and functions of each of the organisations. With regard to the Riverina, in past years the Board has returned to growers excess funds obtained from its statutory fees. If a surplus to budget requirement occurs the Board can issue return payments to its grower’s base on an amount per tonne. In 2015 the Board is going to return $2 per tonne to growers by in part drawing on its reserves and excess to budget requirement due to the unexpected large intake this season. The industry also pays a $2 dollar per tonne research and development levy that is deducted from grower payments by wineries and remitted to the Department of Agriculture Fisheries and Forestry Levies Management Unit. Some within industry have suggested that any variation or change to this should be accompanied by a review of the system of payments and whether this should be based more on the value of the production rather than a per tonne basis. This relates to growers receiving high returns per tonne paying the same $2 per tonne rate as a grower that is receiving as low as $100 per tonne (a notable lack of equity). f) the work being undertaken by the Australian Grape and Wine Authority pertaining to levy collection information; The Board cannot comment on this without a point of reference. The Board is not aware of any work being conducted by the Australian Grape and Wine Authority in relation to levy collection information. g) the power and influence of retailers of Australian wine in domestic and export markets; The major retailers account for the majority of off-trade sales of wine in Australia. They have become a very influential and important vehicle for wine businesses to access consumers and as a result they have a dominating and significant effect on the market. They are also now involved with the production and processing of their own wines for sale, i.e. Woolworths ownership of Dorrien Estate and the bottling facilities of 14 Australian grape and wine industry Submission 33 Cellarmasters. The integration of Woolworths into production and processing has meant that they now have a complete understanding of the costs of operating a wine processing facility which can enable them to negotiate the price of wholesale wines with more intimate knowledge of the costs of business. It has been stated from a well-informed industry source that these retailers have a margin on wine sales of approximately 40-45% of the value. If this is even partially accurate and government are by tax law receiving the WET at 29% of the value it does not leave much for the wine producer and the grower. These retail businesses now are looking to sell more and more of their own branded wine which will impact on sales of known brands as the domestic market for wine is not growing. h) the adequacy and effectiveness of market intelligence and pricing signals in assisting industry and business planning As a grower representative organisation this response will deal predominately with supply side issues. As explained in previous responses there is a void in terms of credible information being available to industry for planning. We do not know with a high level of accuracy the volumes of plantings per variety currently producing winegrapes. Information that relates to regional plantings can assist the market deal with potential supply imbalances more promptly and accurately. Growers should be able to be informed of what varieties are being produced in the region and they can then match that to pricing signals from their wineries in terms of what varieties they may look to plant. The industry also lacks credible detail about the available stock position of wineries. Stocks of wines listed by variety, region, age and volume would form an invaluable role in informing the supply side of the industry what varietals in what regions are in demand and those that are not. It would also assist Australia’s marketing efforts as we could focus more on varieties and styles of wine that are currently stocked in abundance. 15 Australian grape and wine industry Submission 33 Price signals for winegrapes need to be regulated. Growers produce winegrapes without any knowledge of the final price that they will receive. Signatories under the industry Code of Conduct are prescribed a date upon which they must make their pricing information available for their growers. At the time of disclosure growers have spent approximately 70% of the production costs of winegrapes. The timing of price disclosure within the existing code is too late for growers to make fully informed business decisions. Having sunk a majority of costs into their crop they are limited in their ability to walk away from the crop without trying to realise some return. Transactions that are not covered by the code are common in the Riverina and growers in general are not aware of the price to be paid until they start harvesting their product. For some, wineries do not even release the price until the grapes are being delivered and some are informed of the final price a number of weeks following delivery. For grape business to structure their finances and undertake budgeting it is difficult when there is a distinct lack of information forthcoming from their buyers about the price that they will be paying. If growers were better informed they could make valid business decisions about their future within the industry. i) the extent to which the Australian grape and wine industry benefits regional communities both directly and indirectly through employment, tourism and other means; and As New South Wales largest winegrape producing region there is a massive flow on benefit through the community of having the production and processing based regionally. The wine industry employs hundreds of workers in regional wineries. The production side of the industry hosts 345 winegrape production businesses that are majorly family owned operations. These grape producing businesses regularly hire staff to assist in the running of the business and at times they engage contract workers to assist in the spraying, pruning and harvest of winegrapes. 16 Australian grape and wine industry Submission 33 All employees within the industry provide wealth to the community through their commercial and social activities in the region. Within the Riverina rural supply stores, winery equipment manufacturing facilities, employment offices all benefit directly and independently from having the winegrape industry in the region. Local hotels and restaurants similarly benefit from the regular influx of tourists that come through the region to sample wines from the many cellar door facilities available to them. If measures were made available, and implemented, to improve the viability of winegrape production it could assist succession planning thereby encouraging young family members to remain on the farm and make a lasting contribution to the local economy. j) any related matters No comment. 17
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