Random thoughts - A$ exchange rates

[Daryl Douglas]

Some thoughts about the news of the fall in wine exports last November.

It's a disaster for producers but does that mean a bonanza for domestic consumers? Perhaps in the short term as wines made specifically for the US market but now not a saleable proposition there start to hit the shelves here, heavily discounted in an attempt to generate sales in an market increasingly given to the consumption of alcoholic softdrinks (sodas?). Not an encouraging scenario when domestic wine consumption has apparently plateauxed and may even be starting to decline. The doomsayers of a few years ago are starting to seem as though they were soothsayers with crystal balls. Wine lake? What wine lake?

Hmmm, wines made for the US market sold cheap on the Australian market? Parkerisation by stealth?

The A$ has risen considerably against the US$ since last November and is starting to buy more of the other major currencies as well. I don't think the Australian wine industry enjoys the luxury of forward contracts and doubt that hedging would be of much benefit in the current situation. It may be that the major producers' share prices will plummet to a level low enough to offset the high A$ and make them attractive takeover propositions. I hope the ACC and/ or the FIRB would would prevent the Australian wine industry (let's face it, the independent, small/medium producers are mostly specialist and have only a minor share of the market) becoming a Constellation subsidiary. Goodbye Southmount!

On a year-to-year basis, exports of wine dropped 11+% last November. Any prognostications on that drop reaching at least 25%, if it hasn't already? With the BSE scare in the US, how many vines planted over the last couple of years or so will be pulled to have fodder crops planted instead so the beef industry can service the Japanese and other markets? That's an extreme given that fodder crops need more water, an increasingly finite and expensive resource, but markets is markets.

It's likely that particularly smaller and medium-sized wineries heavily dependent on exports are already really feeling the
pinch unless they have loyal niche markets. If the value of the A$ hits the US80c mark and stays in the 76-80 band for a couple of years, the Australian wine industry will be, to say the least, turbulent.

daz

[Guest]

Daryl I think the Aus wine industry is in for some VERY tough times. The consolidation of our icon wineries into the Multinational's made a lot of sense from a distribution point of view and certainly paid dividends whilst the AUD was falling. Unfortunately the second rate management behind these acquistions failed dismally to anticipate a reversal of fortune for the AUD. They drove domestic prices skywards on the basis that if we were not prepared to pay up then they would sell them to the yanks and poms, who could afford to buy our wines because of the exchange rate. Very short term thinking in my view. Now our wine is expensive over there.
Having lived in Paris for 6 months recently I feel that we are really struggling to compete. For the wine consumer who is willing to look beyond the big names in France (and lets face it, anyone considering a "new world" wine is already prepared to do so) there is real value to be found in the French producers.
The Howard Govt have not done the industry any favours with their punitive WET/GST impost either.
The last time our Dollar was this strong we had far fewer grapes and even fewer producers. The boom that ensued after the dollars decline no longer has that going for it.
I think we will see more of the "Combination Offers" where the Southcorps/BRL's/Fosters will offer free rare wines with every dozen of the volume labels they sell.

[TORB]

Daz,

I agree with much of what you have said, but not all.

Firstly, the A$ was artificially low had been so for years. Any company that built their business on that point deserves to be in trouble. It was odds on that the A$ was going to climb back a sane level which is somewhere around 75 cents.

Sure its a bit high at the moment but thats temporary and it will fall eventually.

There are a lot of new players that came in based on the low $ and they will be the hardest hit because in many cases they don't have firmly established markets. Think the new producers who were not there 3 years ago and want $40 a bottle (locally) for the wine.

The points you make about the export market not absorbing own wines from the majors like BRLH who jacked by their icons by almost 100% over a few years mean these guys will get exactly what they deserve. They showed their regular customers no loyalty and talked about the global market. Well now they will reap what they have sown. They will survive but their results may not look great.

Interesting topic.

[Paul]

In the past 12 months, the AUD has risen about 16% against the British Pound, 11% against the Euro and 38% against the $US.
Therefore, OZ wineries will be struggling mostly in US, being where (I've read) that local wines such as Opus 1 have (in some cases) halved in price.
I cannot see OZ wineries increasing their prices (otherwise they will be less competitive) so their margins will sink and in some cases there will be losses... will be interesting to see who does not survive the next 24 months.
Now I understand why wineries such as Rockfords remain loyal to their mailing list clients and have not substantially increased prices as they will have lesser returns from overseas markets during the current period.

[Vickie]

...these guys will get exactly what they deserve. They showed their regular customers no loyalty and talked about the global market. Well now they will reap what they have sown.

I must admit to feeling this way too except I fear for the local growers. The big players will survive but its the "little guys" who will bear the brunt of poor management.

Definitely interesting times ahead...

[Brett Stevens]

Not sure if should buy into this one or not? Some interesting points raised. I particularly agree with TORB in regards to the AU$ being artificially held low for many years.

It is reasonably common knowledge that with a rise in official interest rates the dollar strengthens, therefore if we get another rise in a few weeks then we can expect the AU$ to hit .80 cents.

The other side of that is i cant believe the Fed Reserve in the US will allow there $ to continue to free fall, particularly against the Euro and pound. and remember interest rates in the US currently are approx 1.5%

My crystal ball which is all it is tells me the US will call in some loans from the world bank etc. and start a buyback of the US$ at an inflated rate so as again to regain strength.

I dont think the AU$ is particularly strong at the moment but that other currencies are weak. (does that make sense?)

The other side of this is it makes the purchase of imported producets such as machinery, tractors and other plant a little cheaper. this will partially offset the the sales lessening in the US. I think the wine industry and all exporters need to take a long term view at this and stop looking for a quick buck in the US.

Maybe with the strength of the dollar some Aussie companies can look at purchasing wineries from the US or old world as they will theoretically now be cheaper?

Sorry all this is a bit disjointed, but you get the gist of my ideas (i hope)

I am prepared to be flamed.

Brett

[Michael]

Paul,
the US market is incredibly buoyant for premium Australian wines at the moment. It's the distribution through the 2 tier system, not the exchange rate that will be causing most concern.

M

In the past 12 months, the AUD has risen about 16% against the British Pound, 11% against the Euro and 38% against the $US.
Therefore, OZ wineries will be struggling mostly in US, being where (I've read) that local wines such as Opus 1 have (in some cases) halved in price.
I cannot see OZ wineries increasing their prices (otherwise they will be less competitive) so their margins will sink and in some cases there will be losses... will be interesting to see who does not survive the next 24 months.
Now I understand why wineries such as Rockfords remain loyal to their mailing list clients and have not substantially increased prices as they will have lesser returns from overseas markets during the current period.

[Guest]

[quote="Michael"]Paul,
the US market is incredibly buoyant for premium Australian wines at the moment. It's the distribution through the 2 tier system, not the exchange rate that will be causing most concern.

M[quote="Michael"

Hello M

But for how long will the market for Australian premium wines remain buoyant as stocks imported to the US before/during the A$ rise are depleted and their prices start to approach/exceed those of premium US wines? Unless the Australian sellers start to reduce their margins, profits and share values even further, as a result.

Would you please explain the two-tier system?

Cheers

daz

[Daryl Douglas]

Sorry, thought I was logged in.

daz

[TORB]

Actually its a three tier distribution system not two. Its very complex but essentially in most places you are not allowed to buy wine from interstate. So that means you have a producer or importer (first tier) who sells to a distributor (second tier) who sells to the retailer (third tier.)

Many US wineries are not allowed to ship to consumers (unless its in a reciprocal state) and they don't have the ease of Internet wine sales like we do. Thats a very short to a very complex problem.

The root of it lies in prohibition and state taxes. Free trade? Not even between states!!

[simm]

Having lived in Paris for 6 months recently I feel that we are really struggling to compete. For the wine consumer who is willing to look beyond the big names in France (and lets face it, anyone considering a "new world" wine is already prepared to do so) there is real value to be found in the French producers.

Hi all, great to be back!!

Just looking into this Paris thingo as it is very fresh for me, having just come back myself! I find the above to be more than true. I didn't get the time to really go on a retail crawl but what I found was disappointing when I needed to get back in touch with the "new world". The only time I found something fairly priced it was a Sth American wine from a shop in Brussels. At around 10e it was pretty good, but being a Pinot wasn't going to hold up to the local produce selling at almost half the price. Imagine my dismay when I found some Australian wine selling at enormously inflated prices eg. Rosemount Reserve Cab 98 for over 40e. And I think it was a Yellowtail going for around 15e, a price I wouldn't pay if it were in dollars. Do the exchange and then fall into coma right there in the middle of the shop.

By comparison there were some fabulous Bordeaux of old and new vintages between the 20-30e. Still this is expensive if you are just looking to take something to dinner without having to subject yourself to swill. We did take the kids to an Amercanised steak joint and found a great bottle for only 16e - then comes the exchange again. You forget about the exchange and tend to think in terms of dollars until it is too late - a far cry from another real restaurant we went to where the cheapest was the same price but of low quality.
Now I don't know whether it's just me, but I found that in Burgundy I was only drinking wine with food because the quality wasn't often there to enjoy it on its own. A lot the Pinot at reasonalbe prices was very acidic or bitter and not nearly as complex as the wine maker would have you believe. Still they were Pinot's, unlike a lot of them made hereas if they are made from Shiraz. What a sin to think that you can drink wine for the flavour itself!!

An up side to the "new world" influx over there is that they are beginning to put the variety on the label.

Amittedly it's hard to buy the local wine over in France unless you really know what you are doing, but I was having a hard time finding a retailer who would offer a tasting. Once again a very helpful and honest salesman (in Belgium, not France) led me right to a very good Bordeaux without sending me to the high end first. And there is a lot of dross out there, which can make it very difficult to single out and buy well from cellar door. It would take years to get it right, many more than here in Oz. I suppose in some ways we should be thankful.

Must go, and regards to all,
simm

[Michael]

Daz,

It's actually the 3 tier system - typo.

I don't have time today to go into, maybe later in the week. Basically it means there are severe restriction on who can sell to who and from whom.

you cannot just 'sell' your wine in the US.