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Hopes withering on the vine

Hopes are withering on the vine across Marlborough. Grape prices are at a record low, wine makers are demanding lower yields, and property values in the region have slumped. And there's no easy way out for struggling growers -- with a surge of vineyards o

Matthew Backhouse of NZPA
Wed, 21 Apr 2010

Hopes are withering on the vine across Marlborough. Grape prices are at a record low, wine makers are demanding lower yields, and property values in the region have slumped. And there's no easy way out for struggling growers -- with a surge of vineyards on the market, finding a buyer can be difficult.

"We're facing probably the most severe test of Marlborough's short 30-year wine history at the moment," says Wine Marlborough marketing manager Marcus Pickens. "There are certainly people who are looking to exit the industry."

The region's woes stem from demand for its signature wine, sauvignon blanc. As Marlborough savs gained acclaim overseas, wine makers stepped up their production to get in on the booming export market. Supply couldn't keep up with demand, and vineyards increased their yields to make the most of record-high grape prices.

The golden run started to sour in 2008, when the supply of grapes outstripped demand. Some wine makers turned to producing bulk wine to rid themselves of the surplus, which saturated overseas markets with cheap, low-quality sauvignon blanc. Wine critics and analysts warned that oversupply could hurt New Zealand's brand and wine makers responded by putting pressure on growers to reduce their yields. Marlborough wine makers are hoping this year's harvest is below the 192,000 tonnes produced last year.

With demand for grapes down, prices have plummeted from up to $2400 a tonne in 2008 to an average of $1200 this year. Growers without contracts with wine makers have taken an even bigger hit, with prices on the spot market as low as $550 per tonne -- less than the $800 to $1000 per tonne production cost.

"Every grower knows if you don't have a contract in good times you can make a lot of money, but in bad times you have to suffer the loss," says wine critic Bob Campbell. "They could easily get left out in the cold or just be driven down in terms of price."

Even big growers are hurting. Last week, Delegats subsidiary Oyster Bay, which has an exclusive supply agreement with its parent company, announced it was expecting a loss this year due to low grape prices.

The financial pressure is proving too much for some growers, who are now looking to get out of the industry. Bayleys Marlborough real estate manager John Hoare says the number of vineyards on sale has increased substantially since 2008. Of the 568 vineyards in the region, he has about 50 on the market, compared with about a dozen two years ago. But vineyards are not selling as fast as they did during the boom.

"There's a lot of waiting going on, waiting and watching," Mr Hoare says.

The lack of demand has driven down property values, further hurting those who are looking to get out of the industry. Vineyards which sold for $200,000 to $250,000 per hectare in 2008 are now on the market for about $150,000 per hectare, Mr Hoare says.

Deloitte partner Paul Munro says potential vineyard buyers are waiting for grape prices to recover.

"Prices will come back, maybe not to the peaks they were at, but they'll certainly strengthen over the next one to two years," he says. "But until people start to see the evidence of that, there's always going to be a bit of conservatism in terms of whether people are actually prepared to take the plunge."

While banks have been lenient with struggling vineyard owners, they are cautious about lending to potential buyers with high debt levels. That could cause a shift in vineyard ownership, Mr Munro says.

"There will be increasingly some consolidation in the industry, and there will be a number of the mid-size or larger wineries and vineyard operators that will certainly look at the current market and consider whether there's an opportunity to buy up some of the smaller operators to consolidate and grow their position, and increase the economy of scale they can get out of their business."

While most in the industry expect grape prices and property values to recover, the uncertainty is in the timing, Mr Munro says.

"Some people would say that it's one to two years, others might say that it'll take a bit longer for prices to get back to more reasonable levels. Unfortunately none of us have got a crystal ball."

Mr Pickens says growers are confident that market conditions will begin to improve soon.

"A lot of these people are farmers. They understand that there are major upswings and down period cycles, and they're prepared to adapt and live with that."

Marlborough wine makers are well-poised to increase the overall quality of their exports to rebuild the brand, he says. "Bulk wine has grown significantly, but we are actually matching that with the growth of premium bottled wine, and that holds us with a lot of confidence."

Mr Campbell says he hopes the current woes are temporary, rather than a long-term trend.

"I have a lot of faith in the quality and uniqueness of Marlborough sauvignon, and it's a very big brand internationally," he says.

"Everything points to higher levels of quality through reduced yields, which I think is a great thing. And that's what you need to rebuild, re-strengthen that brand, Marlborough sauvignon."

Matthew Backhouse of NZPA
Wed, 21 Apr 2010
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Hopes withering on the vine