Levy Reform In The Australian Wine Community

Author: Brian Croser
Source: WBM
Review Date: Jul 2022

Since 1929, a levy derived support system for the Australian wine community’s research and promotional programs has generated very large benefits.

The core rationale for these levies is that they are used to address market failure, those activities that have identifiable benefits for the whole grape and wine community and the nation, that otherwise would not be funded by enterprise. As well as research, extension and export (and domestic) promotion, the levies fund the regulation of the industry and the biosecurity effort.

The collection, administration and application of the levy revenues is subject to statutory control and Government overview through Wine Australia although the programs themselves are derived from the perceived needs of industry.

The compulsory statutory levies on grapegrowers and winemakers are based on tonnes delivered to the wineries and on the value of exports.

There are three levies, one divided between research and promotion and complex rates of levy depending on producer size. Suffice it to say the system is overly complex and arcane and for the simplicity of the arguments to follow I will only refer to levy funds for research and for promotion.

The levies are not without contention within the Australian wine community.

The very long running and seemingly irreconcilable arguments, assemble along the line between the few, large volume, low-cost branded commodity producers of the hot inland regions and on the other side, the many of the fine wine community of the cooler coastal regions. The research levy is based on tonnes produced so the 75 percent of the volume of the national winegrape crop produced in the inland regions generates 71 percent of the levy revenue. However, the 75 percent of volume produced in the inland areas is worth only 48 percent of the winegrape crop value.

Conversely the cooler coastal regions only produce 25 percent of the volume but 52 percent of the value of the Australian wine-grape crop and generate just 29 percent of the levy revenue.

Not without merit the inland producers claim since they supply most of the research levy, more research expenditure should be directed to their problems and innovation needs. Even the Wine Export Charge, which is based on value of wine exported, is mostly paid by the inland branded commodity producers because they are the biggest exporters. They demand the Wine Australia promotional levy revenue be spent on more direct, “in market” support for the large volume export brands rather than on the Australian wine quality image enhancing exercise that has been Wine Australia’s strategy for the past seven years.

For those of you who have stuck with the article so far, I will spare you the other side of these “bur under the saddle”, “stone in the shoe” issues for the inland producers. Just let me assure you there is another side to the levy allocation arguments forwarded by the inland producers, and it lands about where Wine Australia’s current expenditure priorities are today.

However, the levy revenue allocation argument represents a waste of emotion and squandered opportunity for the whole Australian wine community.

The real and urgent issue is that the levies should be based on the value of grapes produced not on the volume.

A system based on the value of winegrapes by region would reverse the proportion of levy raised from the inland and cooler regions; the cooler regions would pay more and the inland regions less. Achieving this would seem to be a natural mission for the inland producers but paradoxically they enjoy the influence of being the big levy payers and at the same time like to complain about the inequity. Their mission is to achieve influence over the allocation of the existing volume-based levy revenue.

Theirs is a flawed mission.

The value of Australian wine and the winegrape crop has been growing faster than the volume growth for as long as I have been part of the industry, since 1970. The value growth of the Australian wine community will continue to be driven by the increase in volume and value of Australian fine wine from the cooler coastal regions as well as a hand in hand but lower increase in the value of inland grapes. The volume of the Australian wine-grape crop has remained the same for the past 10 years at about 1.7 million tonnes whereas value has doubled from about $762 million in 2012 to $1,563 million in 2021, driven by a nearly trebling of the value of cooler coastal grapes and a 50 percent increase in the value of inland grapes.

As substantial as it is, the proportion of volume and value from the inland regions will diminish as it has done for the past 50 years.

The drivers of the economy of the future, climate change, cost and availability of water, cost of transport and most importantly, growing consumer demand for fine wine, point to a diminishing share of the volume and value of the national winegrape crop from the inland producers. They will remain competitive, innovative and important, making better wines year by year, just a smaller proportion of the industry. We must derive the growth of levy income from where the value growth is, the cooler coastal wine regions.

Now, as never before the Australian wine community will rely on home grown innovation to grow its share of global markets. I will not attempt to describe all the Australian grape and wine innovations over the 50 years I have been part of the industry, but they are legion and have given Australian producers a distinct competitive advantage, each in their time.  From understanding the importance of lowered pH and free SO2 and the role of anthocyanin in wine quality, the availability of low sulphide yeasts, the role of terpenes in wine flavour and aroma, the control of Brettanomyces in the cellar these have been Australian some of the wine research contributions. In viticulture, the early adoption of vineyard mechanisation, the importance of canopy management to quality and the game changing limited deficit irrigation (LDI) technique on quality from inland vineyards are but a few of the large returns on levy investment in research for Australian grapegrowers and winemakers.

Because the volume of the Australian wine grape crop has remained static for nearly 20 years, the research levy generated has remained static in dollar terms, at about $12m.  The purchasing power of today’s levy of $12m is only 73 percent of the same amount levied in 2008, just $8.7 million 2008 dollars and each year that passes it is further eroded by inflation and the diminishing value of the dollar. A levy based on value would self-adjust and today’s levy would be $15.4 million, the equivalent of $12 million 2008 dollars.

The last increase in levies occurred in 2004 and the erosion of research spending power is becoming an existential issue for Wine Australia’s support of the Australian Wine Research Institute and for the Universities that produce the next generation of innovation capable viticulturists and winemakers.

Funding for research programs at the Universities has been recently significantly reduced by Wine Australia and to a lesser but viability challenging extent at the AWRI. Mainly this is a response to the reducing value of the research levy.

Meanwhile the wine insensitive Government is demanding more of the Australian wine community’s levy revenue be spent on federally sponsored collaborative research ventures, wine as a junior partner with the much larger commodity crops like grains.

Wine is not a commodity. It is an elaborately transformed good of the most sophisticated kind involving extension of very personalised brands into the global marketplace.  The Australian wine community has invested in its own very successful research institute, the AWRI for 66 years, creating a globally admired and envied industry asset. As well the viticulture and wine degree courses at the University of Adelaide and Charles Sturt University are internationally recognised for the high quality of education provided. They need the support research funding to attract the best teachers and to inspire the next generation of vignerons with exposure to cutting edge researchers and their work.

Levy funds put into Government designed collaborative programs will be at the expense of support for these vital industry assets. The result is unlikely to be favourable for the Australian wine community but will be Government compliant.

We are grateful that the Commonwealth continues to match agricultural levies dollar for dollar. However, I say to the Government, “hands off wine community levies! We can invest them more successfully than you.”

The Australian wine community federal levy needs to be simplified, modernised, equalised and stabilised. This to underwrite the competitive advantage delivered by our research and education institutions into a future that will demand ever greater innovation.

All Australia winemakers and grape-growers have reason to be disgruntled with the many and complex levies they dutifully pay to federal, state and regional organisations.  It’s expensive, very complicated and time consuming.

To get the arrows flying I am going to set up a target, on my back.

We need one federal levy to be divided between research-extension and promotion.

For reasons of equity and efficiency the levy needs to be based on the value of the Australian grape crop.

The value of the grape crop fluctuates more widely than the volume because two parameters are at play, the vintage volume and the average grape price.

It requires a five-year average to smooth out the dips and humps of the grape crop value. In 2011 a year of low crop and low price the value of the crop was just $677 million and in 2021, a big crop and high prices generated $1,563 million.

The five-year average of the value of the crop from 2008 to 2012 was $897 million, in today’s dollars $1,139 million

The five-year average from 2017 to 2021 was $1,290 million.

Given that the 2008 to 2012 period includes the price collapse of the GFC and the decimation of the US market and that 2017 to 2021 has consistently high and improving prices and two large vintages, the five-year averages are tolerably close for these two extreme periods.

We need to recapture for research, some of the lost value since the last levy increase in 2004 and we need to stabilise the marketing levy.

Based on the last five years average crop value of $1,290 million, I suggest a levy of 1.6 percent to be divided two thirds for research and extension and one third for marketing. The levy for 2021 would be $20.64 million, $13.8 million for research and $6.9 million for promotion.

Based on the five-year average of actual levies paid on the current volume basis, combined research levies were $12.1 million and promotion levies were $6.91 million, a total of $19.01 million After 18 years of no increases my proposal of an 8.6 percent lift in the levies would seem reasonable in the light of our future innovation and promotional needs.

The equity issue between hot inland and cooler coastal producers is resolved by this simple value-based levy method.

The five-year cooler area grape value is $703 million and at 1.6 percent raises $11.25 million, 54.5 percent 0f the total levy. Conversely the five-year crop value of the inland producers’ value is $587 million and they would pay $9.4 million or 45.5 percent of the total levy.

Currently based on the tonnes produced and including the value-based wine export charge, the inland producers pay approximately 71 percent of the levy or $13.7million and the cooler region producers pay 29 percent or just $5.68 million (five-year average, 2017-2021).

To implement the levy, the regions need to be identified as inland or coastal and the 5-year average grape price applied for each of the two categories.

The cooler region producers are likely to have some problems with an increase of their share of the levy from $5.68 million to $11.25 million, a 98 percent increase but we have been getting a cheap ride for decades. I for one will grit my teeth and endure the increase to ensure the long-term viability of our research, education and promotion structures.

This solution provides the simplicity, modernity, equity and stability overdue for our levy system.

Don't miss out on the next vintage of Tapanappa Chardonnays again!

Sign up for Tappening Newsletter and be the first to receive information on our newest releases, upcoming events and much more.

Sorry we have to ask

To enter this site you must be at least 18 years old.

By clicking enter, I certify that I am over the age of 18.