What’s behind warm inland winegrape prices? 2018 Murray Valley Information Forum Murray Valley Information Forum 10 May 2018 Page 1
The Agenda The BAD NEWS for warm inland winegrape prices is that, warm inland winegrape growers are price-takers, • winegrape prices are derived from wine prices, and • warm inland fruit becomes a second option in times of • oversupply. Nevertheless, there is GOOD NEWS. Supply and demand still operates and … warm inland fruit is in high demand in times of under-supply. This means for the well-informed grower, supply and demand conditions can be leveraged to wrest back some negotiating power – and it is potentially worth it. This presentation sets out to demonstrate this. Murray Valley Information Forum 10 May 2018 Page 2
The bad news (1) – price-takers Warm inland winegrape growers are PRICE-TAKERS . “A market -player whose size is small in relation to the market and doesn’t influence the market price” Australia’s major wine companies are relatively better positioned in terms of negotiating power relative to their buyers – they are fewer than warm inland winegrape growers, and they are larger. Wine companies will exert their relative power advantage to claim as much margin as possible from winegrape growers. Murray Valley Information Forum 10 May 2018 Page 3
Prima facie, WC growers are price-takers Murray Valley Information Forum 10 May 2018 Page 4
Bad news (2) – wine-derived pricing Winegrape price is derived from the price wine is sold for. When wine prices suffer so do winegrape prices. In fact they suffer more, due to winegrape growers being price- takers (previous point and next point). Murray Valley Information Forum 10 May 2018 Page 5
Bad news (3) – some warm inland fruit is a second option in times of over-supply 1 000 70% Average Australian winegrape price ($/t) [line] 900 60% Warm Inland price as a share of Cool- 800 50% 700 temperate [bars] 600 40% 500 30% 400 300 20% 200 10% 100 0% 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Murray Valley Information Forum 10 May 2018 Page 6
So, with this bad news, where have we got to … If the news is all that bad about the grower’s ability to influence prices – do growers have any options? Some sage advice – “The best thing growers can do is become INFORMED. Read the stuff that MVW provides. Once informed, speak up. Respond to price offers. Object. Lodge notice of dispute. Don’t stay mute.” M Stone, MVW Executive Officer, January 2018 Handled properly, this is called NEGOTIATION. Murray Valley Information Forum 10 May 2018 Page 7
Here’s the good news … The rules of supply and demand still apply and for the actively informed grower - Supply and demand can be used to gain advantage and benefits through negotiation. So, on with the demonstration of this … Murray Valley Information Forum 10 May 2018 Page 8
Note the following … While prices and the relativities between warm inland and cooler temperate fruit prices follow general trends over time – as explained in an earlier slide – there are also differences each year. With yearly differences, there are worthwhile negotiations to be had each year. 1 000 70% 900 Warm Inland price as a share of Average Australian winegrape 60% 800 Cool-temperate [bars] 50% 700 price ($/t) [line] 600 40% 500 30% 400 300 20% 200 10% 100 0% 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Murray Valley Information Forum 10 May 2018 Page 9
BUT … What price to ask for? … and how to sound convincing? Murray Valley Information Forum 10 May 2018 Page 10
The negotiating position At the end of the day you want to achieve a margin (profit) over your costs – and the buyer does also. What you will be doing is asking the buyer to share the profits available to be shared between you – so you need to know • their likely margin, • your desired margin, • the drivers of both and • what you consider reasonable in terms in a sharing arrangement. To do this, we need to understand the whole value chain from dirt to slurp . Let’s do some modelling … Murray Valley Information Forum 10 May 2018 Page 11
Some notes on the nature of modelling The following modelling will not generate numbers that are directly relevant to your business. Averages are being used – across winegrape colour and varieties, wine prices, costs and so on. As such, they are not necessarily your numbers or circumstances. The full relevance to your business can only be understood by using your business numbers and your best intelligence on your own buyer’s numbers. The model will however, tell the general story about margins available to all members in the value-chain, • what could be achievable in terms of margins/winegrape prices • and what needs to be negotiated to get there. • Murray Valley Information Forum 10 May 2018 Page 12
Value-chain analysis (1) For Bulk Wine prices in 2018, I have used $1 per litre for whites • and $1.25 for reds. In terms of Bottled Wine from the Murray Valley, or possibly other • warm inland regions, I have relied on a brief personal survey of prices in some major outlets (done in Feb 2018). The categories of wine I found were ... 1. Proprietary Brands (Australian Vintage, McGuigan, Lindemans) 2. Premium Buyer-Own-Brands (a basic identifiable label indicating both source region [premium] and variety [the classics]) 3. Non-premium Buyer-Own-Brands (Aldi brands, labelled as an ‘imaginary’ wine company, the variety indicated but not the source region) 4. Cleanskins (a very basic functional label ie no ‘branding’, variety identified). Murray Valley Information Forum 10 May 2018 Page 13
Value-chain analysis (2) This is how the prices came out – compared to a similar exercise conducted in 2014. * Labels with dedicated format and identified by premium region and by variety ** Identified by variety only Murray Valley Information Forum 10 May 2018 Page 14
The Model – using Proprietary Brands as an example Value chain Units Data input Outcomes Comment YIELD t/ha 19.0 Warm inland (sustainable) TONNAGE t 19 WINE CONVERSION RATE L/t 750 Mega/bulk processing facility VINEYARD COST OF PRODUCTION $/ha Warm $7,500 VINEYARD UNIT COST OF PRODUCTION $/t $395 GROWER NET MARGIN % -6% Significant margin sacrifice GRAPE SALE PRICE $373 GRAPE COST PER LITRE $/L $0.50 WINE CONVERSION COST per LITRE (excl wg cost) $/L $0.35 $0.35 Mega/bulk processing facility WINE PROCESSING COST per LITRE (incl wg cost) $/L $0.85 WINE - OAK AND MATURING $/L Non-prem $0.15 WINE BOTTLING, BOXING, WAREHOUSING, FREIGHT $/L Non-prem $1.10 WINE COMPANY TOTAL COST $/L $2.10 WINE COMPANY NET MARGIN % 30% Standard margin WINE SALE PRICE pre-WET $/L $3.00 WET % 29% Yes WINE SALE PRICE BY WINE COMPANY (litre) $/L $3.86 WINE SALE PRICE BY WINE COMPANY (750ml bottle) $/bottle $2.90 DISTRIBUTOR MARGIN % 30% Standard margin DISTRIBUTOR SALE PRICE $/bottle $4.14 DOMESTIC RETAILER MARGIN % 40% Super-normal margin RETAILER WINE PRICE $/bottle $6.90 GST % 10% SHELF PRICE $/bottle $7.59 Murray Valley Information Forum 10 May 2018 Page 15
Assumptions behind the model Vineyard Cost per hectare Cost slashing (unsustainable) $6,500/ha Average season $7,500/ha Yields Tonnes per hectare (unsustainable) 25 t/ha Tonnes per hectare (sustainable) 19 t/ha Winery Conversion rates Mega/bulk processing facility 750 L/t Medium/large processing facility 700 L/t Conversion costs Mega/bulk processing facility $0.35/L Medium/large processing facility $0.60/L Oak, maturing Non-premium wine $0.15/L Bottling, boxing, warehousing, Non-premium wine $1.10/L freight Margins All players Sub-normal <30% Normal 30% Super-normal >30% Hierarchical norms apply Players further down the value-chain have greater negotiating power and will exercise this to extract a higher margin Murray Valley Information Forum 10 May 2018 Page 16
My accounting system (Mary Retallack model) VINEYARD PRODUCTION COSTS (aka ‘cash costs’) Operating Costs (aka ‘proportional costs’) Includes … Hired labour • Fixed costs (aka ‘overheads’, ‘non - proportional costs’) Includes … The owner’s salary • Debt servicing (roughly 15% of production costs on average) • BUSINESS RETURN (aka ‘margin’ or ‘profit’) Covers … Replacements/depreciation • Principal repayments • Business improvements • Wealth generation (super top-up) • Murray Valley Information Forum 10 May 2018 Page 17
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