Future of the wine industry

Press, 1 February 1986, Page 18

Future of the wine industry

The Minister of Trade and Industry, Mr Cayglll, is confident that a raft of measures affecting the wine industry, Including the subsidised extraction of vines, will create a more rational environment for development Commenting on a recent editorial in “The Press” on the vine

extraction scheme, Mr Caygill sought to detail the reasons for the Government’s actions. He said that late in 1983 the then Prime Minister, Sir Robert Muldoon, instructed his department to work with selected officers in other relevant departments to produce a report and recommendations on how to deal with the grape surplus, a problem aggravated by a bumper harvest of 68,000 tonnes the previous autumn. "In December, 1983, the report, from the group which became known as the Hartevelt Committee, recommended that any form of Government intervention would be inappropriate and that the industry should be allowed to resolve the problem in its own way. Fortuitously, poor climatic conditions and increased damage caused by the phylloxera grub cut the 1984 harvest to 49,000 tonnes, and the problem of the grape surplus went away again by itself,” Mr Caygill said. “But the factors which had caused the surplus remained: the industry had planted 6000 hectares of grapes but needed only about 4500 hectares to sustain normal sales. In 1985 those 6000 hectares yielded a record 78,000 tonnes — and the grape surplus ■! problem re-emerged dramatic- T 1 ally.

"By the middle of 1985, wine* stocks were equivalent to more than twice the industry’s annual sales. Storage space was at a premium and dairy companies well away from the main grape growing districts filled their stainless steel tanks with wine instead of milk.

“This time the problem had grown too big to be remedied by seasonal fluctuations in grape production: even if no grapes at all were harvested in 1986, the balance would not have been restored until some time during 1987,” Mr Caygiil said. “In fact, however, the major wine companies were bound by long-term contracts to purchase almost all of the 1986 harvest whatever tonnage it yielded; and grape prices- were set in a manner tending to reflect grape growing costs rather than wine selling prices. The major companies, their working capital requirements growing as the cost of stock holding increased, looked towards the next harvest with apprehension. “High stocks created pressure to sell quickly. Contracted commitments to purchase whatever grape quantities might be produced created pressure to expand market shares. The result was inevitable: the major wine companies engaged in a price war which saw cask wine prices slump well below production costs,” he said. “The major wine companies, with comparatively substantial financial backing, proved themselves capable of sustaining the battle for a considerable period; but the medium-sized producers, particularly those who had

entered the cask wine market, were quickly forced to match the tumbling prices of their major competitors and shortly found their financial resources stretched to breaking point. . “Three companies went into voluntary receivership and several others slid dangerously close to a similar crisis. Even the smaller comapnies found it necessary to cut the price of their popular bottled wines which customers were beginning to compare unfavourably with the bargains available in the casks and other large sizes. “The Government recognised that a significant number of medium-sized and small wine producers would eventually become casualties of the wine price war, and anticipated that many of the small grape growers could be bankrupted if continuing strains obliged wine-makers to default on their contracts. "Two factors were of particular concern to the Government First the consequences of surplus production were likely to fall most ruinously on the smaller wine companies which did not themselves hold excessive stocks and which were not tied to long-term contracts to purchase more grapes than they needed. Second, the Government accepted that however mistakenly, the wine industry in general had been encouraged by the policies of the previous administration to develop its productive capacity more rapidly than the market was capable of expanding.. ; ■ ■ : “The Government’s response was/he introduction of the wine industry assistance programme

in December, 1985. Features of the programme are the Government contribution towards the costs of vine extraction, an undertaking to review the system of standard values for taxation purposes, and the introduction of a more liberal tariff regime,” Mr Caygill said. "The Government is very pleased with the Industry’s response to the assistance package. Fractionally over the optimum target of 1600 hectares of vines have been offered for extraction.. This will reduce the 1986 harvest to manageable proportions and, more importantly, allow the Industry the stability and security of a production base which is realistically geared to market requirements in the short to medium term. “The reform of the standard value system will remove the previous incentive to accumulate stocks of popular wines and help to guard against any repetition of recent problems,” Mr Caygill said..

“The introduction of a tariffphasing programme on July 1, 1986, will open the New Zealand market to gradually increasing quantities of more varied wines from overseas, These changes are slow enough to stimulate competition and efficiency at all levels of the domestic industry without creating disruptive pressures.

“Finally, the Government expects to be able to make some very constructive changes in the distribution sector of the industry once it receives the report of the special working party set up to review liqiißr legislation,” he said.