ACCC Commissioner Mick Keogh delivers an address to the Australian Wine Industry Technical Conference (AWITC). Mr Keogh discusses the role of competition in fostering future wine industry growth, in particular the findings from the ACCC market study into the wine grape industry.
Check against delivery
Good morning, and thank you for the opportunity to address this conference.
For the first 200 years after European settlement, the Australian wine industry, like the broader agriculture sector, was able to grow because additional natural resources — principally water and land — were readily available for existing or new participants.
However, over the last 20 years these natural resources have become increasingly limited, with Australian and state governments imposing a cap on additional water extractions in the Murray–Darling Basin in 1995, and bans on the clearing of additional land for agriculture from 1995 onwards in most states.
Now you might be wondering why I would commence a talk about competition issues in the wine industry by talking about constraints governments have imposed on access to land and water in Australia.
The reason is very simple.
With access to land and water now limited, the ability of any sector of agriculture to grow in the future will depend very much on the rate of productivity growth businesses in the sector are able to achieve.
In the case of the wine industry, that means wine grape growers achieving increased yields while utilising water more efficiently.
To achieve that will require widespread capital investment by growers in planting improved grape varieties, and in irrigation and water monitoring technology.
That investment will only occur when wine grape growers have confidence:
- that the market operates fairly
- that they are receiving a fair share of industry revenue, and
- that any additional investment they make has a good chance of generating adequate returns in the future.
In the absence of this confidence, wine grape growers will find it increasingly attractive to sell their water, and to pull out their vines.
This means it is in the interests of all involved in the sector, including winemakers, to make sure the market for wine grapes is efficient and fair, and there is strong competition through every part of the wine industry supply chain.
As Australia’s competition regulator, the ACCC promotes competition and fair trade in markets to benefit consumers, businesses, and the community.
In response to a significant number of complaints received over the years from wine grape growers, in September 2018 the ACCC launched a market study into the Australian wine grape sector, with the broad objective of identifying market failures or trade practices that hinder the functioning of competitive markets.
The wine grape industry is largely characterised by imbalances in bargaining power between a small number of major buyers, and a much larger number of small-scale sellers. This is similar to many other agricultural industries, although the wine grape industry has some unique features which exacerbate these imbalances.
On occasions during the progress of our inquiry, we were disappointed with the responses, or lack of responses received from some of the major businesses and organisations involved in the industry.
This reticence to provide information or contribute seemed, on occasions, to be due to a fear of subsequent retribution from other industry participants.
This is not something that would be expected in an industry where competition is working well, and markets are open and transparent.
We acknowledge that there are significant factors in the wine grape industry that make it different from other industries, including:
- the considerable variance in the quality and price of grapes and the wine produced from those grapes
- the broad diversity of business models adopted by the approximately 2500 winemakers in Australia, and
- the long lead times associated with grape growing and winemaking.
These unique factors were all taken into account in the ACCC’s study which focused on the three largest grape producing regions in Australia, these being the Riverland, the Riverina (NSW); and the Murray Valley, which includes the Murray–Darling (NSW/Vic) and Swan Hill (NSW/Vic) regions).
While our study focussed on the three warm climate growing regions, many of the observations and findings will also be relevant in the cool climate regions.
I will now discuss some of the findings of our inquiry, and the measures that the ACCC has proposed to address the problems we have identified.
I stress that we are still consulting widely with stakeholders about our Interim Report, and that the Commission is open to changing its views before releasing its Final Report in September 2019.
There is one key challenge that the industry needs to address, which is the low level of competition between winemakers acquiring grapes from growers.
The ACCC has proposed a number of measures we believe will improve the level of competition for wine grapes and enhance the future growth prospects of the sector.
These involve three aspects of the current wine grape market, which are:
- contracting practices
- pricing, and
- quality assessment.
In our interim report we identified inequities in the contracts between winemakers and growers, particularly in warm climate grape growing regions.
The inequities stem from a number of factors including the generic nature of warm climate grapes, the perishable nature of grapes, the small size of the growers’ businesses compared to the major winemakers, the better access that winemakers have to market information, and a number of practises that have become ingrained from the period when there was an oversupply of grapes.
These factors result in an imbalance in bargaining power, and in growers accepting contracts with sub-optimal terms, with limited ability to negotiate or to resolve disputes.
One of the manifestations of the imbalance in bargaining power between growers and winemakers is the lengthy payment periods prevalent in grape supply contracts, sometimes up to nine months after delivery of the grapes.
Such long-term payments are not consistent with any other industries, and put growers at a significant financial disadvantage.
There is a view among winemakers that these arrangements are justified because the wine industry is special case, as it takes such a long time for the wine to reach the market.
The ACCC is not convinced of this.
There are many other industries, including in the agricultural sector, where the product takes a long time to reach the final consumer.
In the wool industry, for example, it takes an average of two years for raw wool to be converted into finished consumer products. Despite this, growers in that industry are paid within seven days of the sale of their wool.
For those in the audience who still think that extended payment terms are justified, I have a proposal to put to you.
As a wine consumer, I think I should be able to select a bottle of wine off the shelf, and decide what it’s worth. I pay one-third of that when I leave the store. I’ll pay a second one-third payment in six months, and I’ll pay the balance when I get around to drinking it, which could be years in the future.
If you think this is a ridiculous proposal, then perhaps you need to reflect that this is essentially how the current contract and payment terms operate for wine grape growers.
The ACCC has recommended that lengthy payment terms should be phased out of most supply agreements between growers and large winemakers.
A best practice standard of payment within 30 days of grape delivery should be adopted by all winemakers with processing capacity over 10 000 tonnes.
Our interim report identifies other contract clauses that we think may be unfair. These include winemakers reserving unilateral rights to modify contract terms, to change quality standards, to vary prices, and to restrict growers supplying other winemakers.
We note the business-to-business unfair contract laws that were legislated by the Australian Government in November 2016, which we believe are applicable to many terms in standard contracts between winemakers and wine grape growers.
We will certainly consider taking enforcement action in the future against winemakers who have unfair contract terms, in the same way we have taken such action in the horticulture, dairy and many other industries.
A second issue we identified in our report is the pricing practices employed in the industry.
The pricing mechanisms used in wine grape supply agreements are varied, with some being essentially fixed and some being variable.
Many agreements do not specify a fixed price, and instead refer to a ‘fair market price’ which is determined unilaterally by the winemaker close to harvest.
Variable price supply agreements are often not benchmarked against any visible, objective or verifiable measures of grape prices, meaning growers do not have a sense of what is a fair market price.
In the wine grape market study we found that winemakers do not publicise the prices they pay to growers, and often have confidentiality terms in supply contracts intended to prevent growers from disclosing prices to other growers.
Consequently, information about price offers being made by individual winemakers’ can be difficult for growers to access.
This makes it hard for growers to assess the competitiveness of available price offers for their grapes from competing winemakers.
Pricing transparency is important because it helps markets to operate efficiently by encouraging buyers to make better offers, and provides clear signals for suppliers to assist them in their operating and longer-term investment decisions.
To improve pricing transparency, the ACCC has suggested that winemakers in warm climate regions be required to confidentially provide indicative wine grape prices for the coming harvest to an independent third-party body by the 8th of December each year.
These prices could then be released simultaneously by the independent body by December 15th each year so they are available to all growers, while reducing the risk of the largest winemakers working together to use this process to price signal and therefore to inhibit competition.
The ACCC continues to consult with stakeholders on the detail and potential implementation of these recommendations, but it is clear that greater price transparency is needed in wine grape markets.
Increased transparency of prices on offer will provide increased price certainty to the market, and not only improve growers’ bargaining power but also improve competition between winemakers.
Quality assessment of wine grapes
A third matter of considerable contention in the industry is the assessment of quality of wine grapes delivered to a winemaker.
Concerns about quality assessment arise because assessed quality has a big impact on the price growers receive for their grapes.
We received intelligence through our survey and broader stakeholder engagement that there are significant differences in the ways winemakers assess the quality of grapes.
The growers we heard from raised concerns about the transparency, consistency, timing and subjectivity of quality assessment methods.
In support of this, there was evidence provided of different loads of the same grapes from the same vineyard being allocated very different quality grades by winemakers.
These shortcomings contribute to mistrust about winemaker’s quality assessment processes and outcomes, with some growers claiming that these assessments are conducted arbitrarily or for ulterior motives.
Generally, grape supply agreements and grower manuals issued by winemakers clearly set out quality assessment specifications and associated penalties and bonuses.
However, they do not always specify when testing will occur, or the precise methods to be used. There is also limited standardisation of calibration of testing equipment.
Some winemakers’ contracts also contain clauses reserving a broad unilateral right for the winemaker to change quality specifications during the season, which creates uncertainty for growers, and could be used to lower prices.
There are further grower issues relating to tests for sugar content and the scientific reliability of colour assessment.
It is obviously important for growers to have on-going certainty about the quality and hence value of their grapes, and trust in the process, if they are to make any production decisions during a season to better meet quality requirements, or are considering investment plans for the future.
While we recognise the arguments challenging the value of objective tests to describe wine grape quality characteristics, I note that this very same argument prevailed in the wool industry back in the 1970s.
Wool processors at that time argued it was impossible to adequately describe the quality of wool using objective measurement. Fortunately, the industry invested heavily in research to develop objective tests, which are now the mainstay of the wool trading system, and critically important for growers breeding and production decisions.
The dramatic improvement in Australian wool quality that has occurred over the past thirty years is a direct result of the development of objective testing methods, and it is highly arguable that similar benefits would arise in the Australian wine grape sector if objective quality testing was introduced.
We have recommended the National Measurement Institute and the Australian Wine Research Institute work with industry to develop uniform standards for testing and measuring grape sugar levels and colour.
A way forward: the Code
Our interim report made a number of recommendations aimed at improving competition in wine grape markets and ensuring the industry can optimise opportunities for future growth.
Where an industry is found to have widespread issues relating to both contracts and competition, an industry code of conduct can be an efficient mechanism to address these issues.
The wine industry recognised some of these industry problems in 2008, and responded by developing the Australian Wine Industry Code of Conduct.
Our inquiry has indicated that the adoption of this code by many in the industry has been beneficial, but a number of shortcomings remain.
We heard from growers that there are important benefits to having a structured process for growers and winemakers to resolve their disputes. Noting that, we have made several recommendations to strengthen the Code including improving the dispute resolution mechanism.
However, for a code to be effective there must be a high degree of take-up by industry participants and sufficient disincentives to deter non-compliance.
The fact that no major winemakers in the Riverina region have become signatories to the code highlights its limitations, and means that none of the growers in that region — one of the most significant wine grape production areas in Australia — can access the benefits the code provides.
The ACCC understands the preference of many that the wine grape industry continues to operate under a voluntary code, with the industry control and flexibility that such a code provides.
However, the ACCC has concluded that if there is not an improved take-up of the Code by the large and medium-sized winemakers, it may be necessary to introduce a mandatory code in order to bring about the required industry reforms.
The ACCC has undertaken to revisit this issue in one year, and if all major winemakers have not become signatories to the voluntary code by that time, there will be a need to seriously consider a mandatory code.
You might think the issues I have raised today are simply about competitive business practises between winemakers and growers – with each side working hard for their own best interests.
We believe these issues are much more significant, and at their core, represent a very real threat to the future of the wine grape industry, especially in an era of scarce resources.
The wine grape industry will need capital investment from its growers if it wants to improve productivity and grow in the future.
Only when the growers have greater confidence and certainty in the market will they be prepared to make those investments.
Our recommendations are aimed at better balancing the bargaining power of growers and winemakers, and providing more market transparency so that growers are better informed.
We are currently contacting growers and winemakers and speaking with stakeholders about their submissions. Our next step is to put together our report with our final recommendations. That final report is due in September. I encourage all of you to engage with this process.
In closing, I want to reinforce our key message.
The lack of competition in the market for wine grapes will be a major impediment to the future growth of the industry, and unless this is addressed, the industry faces a strong risk of long-term decline.
It is in the interests of all industry participants to engage with us in the process of addressing this challenge.