Debate continues on how to deal with Ontario grape surpluses

Big players warn government levy on blended products sold at their stores will result in them buying fewer grapes

For a second consecutive year, Ontario has ended up with a large grape surplus. Key winery representatives say it’s time to change the way grapes are priced.

“Some people want collective bargaining forever,” said Hillary Dawson, executive director of the Wine Council of Ontario (WCO), told winebusiness.com. “It’s a challenging predicament because every other wine region in the world sells and buys grapes in a more open market than we do, and it’s becoming an issue of competitiveness.”

Grapegrowers are resisting the mounting pressure to forego their right to collectively negotiate base rates. “The only reason I can see for adopting a different pricing model is to lower than the minimum prices we already set,” Debbie Zimmer, CEO of the Grape Growers of Ontario (GGO), said. “I’m worried grapegrowers might be pushed back to the days when they had to accept whatever price was given or go without a contract.”

A total of 6,062 tons (5,500 tonnes) of grapes went unsold last year, according to the GGO. The surplus had been anticipated at 9,810 tons (8,900 tonnes) in mid-September, but a cool summer resulted in fewer red grapes. The excess is expected to be larger next year, with about a five-percent increase in vinifera production based on vines planted three to five years ago, according to the GGO.

Dawson blames the glut primarily on speculative planting in recent years. “We’re looking at a huge surplus next year if the weather is good and nothing else changes,” she warned. Zimmerman insists no growers in their right mind would plant a vineyard these days without first having a contract.

Debbie Zimmer, CEO of the Grape Growers of Ontario

She maintained the surplus is the result of processors cutting back on their contracts because of slower wine sales. “This past year was a prime example with processors saying they would buy 50,000 tonnes (55,115 tons) of grapes and purchasing only about 43,000 tonnes (47,399 tons),” she said.

“When growers lose contracts, they’re wrongly shifted into the category of being speculative growers, even though some osorbed if grape prices were established differently. “We’re very interested in having what every other place in the world except Ontario has, which is direct arrangements between growers and wineries,” she said.

“We’re suggesting that we try to do this on an experimental basis to see how it works, without forcing anyone to do anything they don’t want.”

All Ontario growers currently bargain collectively through the GGO to negotiate a minimum price for each of 37 varietals grown in the province annually. These negotiations have traditionally taken place with the WCO, but will now also include the Winery and Grower Alliance of Ontario (WGA).

A negotiating agent from Ontario’ Farm Products Marketing Commission facilitates the process under provincial regulations. Ontario appointed the Commission last fall to hold public hearings and recommend changes. Its report was expected by the end of February but remains with the minister in charge of the matter.

The GGO had urged the provincial government to impose a higher Ontario content within blended wine. The minimum Ontario content has gone from a high of 85 percent in 1973 to the current 30 percent within every Cellared in Canada (CIC) bottle. As of the 2010 harvest and for the next four years at least, the province is obliging wineries to ensure that at least 40 percent of a company’s overall content purchases are Ontario grapes.

“So a bottle can now have only 25 percent Ontario content as long as the company’s overall Ontario content is at least 40 percent,” Zimmerman explained. “That five percent varietal is usually vinifera grapes, which the wineries can now use elsewhere. It doesn’t mean wineries are going to buy more Ontario grapes.” The change was made to ensure adequate quantities of Ontario vinifera remain available for VQA wine.

The GGO estimates the five-percent reduction of mandatory Ontario content per CIC bottle enables producers to save up to $2 million on grape purchases. Insisting the GGO is open to new ideas, Zimmerman said it suggested establishing a two-tiered system: one with a higher base price for grapes used to make premium Vintners Quality Alliance (VQA) wine from 100-percent Ontario grapes; the other with a lower base price for wine blended with imported supplies to make CIC products.

However, the WCO couldn’t support a change that would benefit only a few of its members. Only wineries with licenses that predate the 1993 North American Free Trade Agreement can make CIC products. These few large wineries left the WCO after its more numerous small to midsized wineries rejected a two-tiered approach.

Andrew Peller, Vincor Canada, Magnotta, Kittling Ridge and Colio Estates now belong to their newly formed Winery and Grower Alliance of Ontario (WGA). (Pelee Island has also joined but kept its WCO membership.)

These few WGA members represent the province’s largest operations and buy upwards of 80 percent of all contract grapes. Despite this leverage, the WGA started out promising not to take a heavy-handed approach to bringing about change. “Our No. 1 priority is to create a new style of relationship with our grower community,” Bristow recently emphasized.

“We’ve looked at the New Zealand model where growers and wineries collaborate in creating a vision for the future. “We need to build trust so the commentary of one side versus the other can be put aside in favour of a collective that can compete against the import world and make our products more sustainable for both the growers and wineries,” he added.

The WGA opened the door by inviting growers to sit on the board of the newly formed non-profit association. It has also intended to create a better understanding regarding financial aspects of the business through an ongoing dialogue. “We’ve already shared information that growers have never previously had regarding some of the economics involved and supply chain elements,” Bristow said.

“We’re opening up to a new level of vulnerability in order to build trust.” While promising to respect the GGO’s collective bargaining rights, the WGA – like the WCO – is anxious for a more open market system. “There was a collective bargaining situation in British Columbia, and it was the growers and wineries that went to government and said they wanted it disbanded,” Bristow said.

The GGO is resisting. “One of the reasons grapegrowers in Ontario have been fairly successful is because we’ve been able to maintain a collective approach and, quite frankly, I don’t see that changing in the short term,” she said. “We believe growers have been made vulnerable to wineries taking advantage of their position by cutting contracts mid-season and want to make sure that the growers’ position and their organization are not weakened any further.”

Patience on the part of the WGA seems to be already wearing thin after only a few discussions. Last week, Andrew Peller Ltd., Colio Estate Wines, Magnotta Winery and Vincor Canada issued letters to growers stating that contracts would be renegotiated and purchases likely reduced as a result of a levy that comes into effect this July. The 10-percent levy is another reason the WGA members broke ranks with the WCO. It will be placed on every bottle of CIC wine sold in winery-owned retail stores. (Only the wineries with the licenses that predate free trade have the right to run these retail stores.) The levy is expected to collect $11.67 million (CAN$12 million) annually that will be poured into VQA-supportive initiatives.

WGA members say they can ill-afford the levy at a time when sales have slowed and global competition is fiercer than ever. “We’re up against bottles of wine that cost $7.45 because other governments around the world are supporting wine products directly or indirectly,” Bristow said. However, the GGO has been quick to point out that the levy results in only a 10 percent reduction in “the tax advantage” on blended wine sold in winery retail stores, which already benefit from much lower government taxes than wine sold through the Liquor Control Board of Ontario (LCBO).

Currently an $8.00 bottle of wine sold through the LCBO incurs $5.10 in taxes and levies, compared to the $2.07 on the same bottle sold in a winery retail store. The new 10-percent surtax will increase the overall levy to $2.72.

“I’m worried the focus is being placed on taking the price out of growers instead of working together to build VQA sales and own 51 percent of our market instead of the current 43 to 44 per cent,” Zimmerman said. “I know it won’t be easy, but that should be the government and industry’s target, and why Ontario is introducing the levy on CIC products sold at retail winery stores.”

“We should be bottling our grapes instead of dropping them on the ground,” she added. “We can’t tout ourselves as a world-class wine region until we own our market.”