Grape glut to hit hopes of rebound for wine industry

THE Australian wine industry has produced another bumper vintage, dashing hopes that poor ripening conditions over summer would reduce the oversupply that has dogged the industry for the past five years.

Analysts say the ongoing surplus will slow the turnaround of Treasury Wine Estates, the former Foster's wine division which was spun off into a separate listed company last month.

The Winemakers' Federation of Australia has estimated the 2011 harvest at 1.62 million tonnes, a 1 per cent increase from last year and well ahead of market expectations, which had been as low as 1.1 million tonnes.

"The vintage is too big . . . a harvest of 1.6 million tonnes is out of step with the realities of sustainable production and the market opportunity for premium Australian wine," WFA chief executive Stephen Strachan said.

When crushed and made into wine, 1.6 million tonnes of grapes is equivalent to about 1.2 billion litres.

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Adding this year's production to the 1.7 billion litres the Australian Bureau of Statistics estimates the industry already has in stock, winemakers now have more than twice as much wine as they need to supply annual demand, currently running at about 1.28 billion litres, including 755 million litres in export sales.

Deutsche Bank analyst Paul van Meurs said the continuing oversupply, which drove heavy discounting across the industry, would delay a pick-up in earnings for Treasury Wine Estates.

"The Australian market moving back into supply-demand balance is one of the medium-term factors that we expect to drive a recovery in the prospects for the industry and TWE," Mr van Meurs said.

The high level of production came despite wet summer conditions causing disease, which, according to the WFA, led growers in some areas to lose up to 80 per cent of their grapes.

"Rain caused problems everywhere except in the west, but the impact varied greatly between regions and even within regions," Mr Strachan said.

JPMorgan analyst Stuart Jackson said the impact on quality would significantly reduce supply where Foster's most wanted it -- in its super-premium red wines such as Penfolds Grange and Bin 707 cabernet sauvignon.

"This will negatively impact 2013-14 earnings in a similar way that Southcorp's 2002-03 earnings were reduced by the poor-quality 2000 vintage," Mr Jackson said.

Southcorp, owner of wine brands including Penfolds and Lindemans, was acquired by Foster's in 2005 for $3.2 billion -- the biggest acquisition the company made during its unsuccessful 15-year attempt to mix grape and grain.

In a presentation to investors in February, TWE chief David Dearie said the Australian wine industry was moving to correct the oversupply problem, while the company was moving to target consumers in the fast-growing Asian market.

But Mr Jackson said he was also concerned that the larger than expected harvest might have been due to winemakers using disease-affected or unripe fruit rather than discarding it, putting Australia's wine export sales at risk.

"The variation in quality of the available inventory from the 2011 vintage could be much wider than normal, with poor-quality stock holding down prices for better-quality stock," he said.

"The worst-case scenario is that the poor-quality inventory is shipped into export markets, impacting the consumers' perception of Australian wine."