Wine industry losing ground

SPARE a thought for the Australian wine industry and what it must be going through at the moment.

But once you have done so, don't make the mistake of wanting to help it out.

There is a glut of grapes on the market on the back of a bumper season. That's pushing the price of wine considerably down because of the larger than usual competition at the domestic level.

Then there is the impact of the soaring Australian dollar, which is making our wines more expensive for overseas buyers. The dollar has been especially strong against the greenback and the pound, and the US and Britain are our wine industry's two biggest export markets.

On top of the challenges that a rising dollar poses for exports, it makes imported wines cheaper, which means that domestic wine producers must also deal with consumers now attracted to French, Spanish and Italian wines that they otherwise might have been priced out of buying.

Finally, wine producers up and down the Murray-Darling River - one of the key regions for Australia's wine industry - are now facing the prospect of massive cuts to their water entitlements under the Murray-Darling Basin Authority's draft plan for fixing the problems with the river.

In the long run, of course, water cuts will result in water allocation buybacks, which will reduce the number of wine producers in the basin and thereby fix the supply side of the wine industry's problems, at least domestically. It could also be a way out for unprofitable producers.

Less wine production means higher prices. That's not good for consumers and it's certainly not good for wine exporters, but domestically - despite the challenge of competing with cheaper overseas wines while our dollar is strong - it's a good outcome for winemakers that survive the purge. But in the short term, try explaining that to a wine industry on the brink.

As tempting as it must be for our most interventionist of federal governments to prop up the wine industry (if it can find any votes in doing so), along with many other industries suffering in similar ways, there is nothing it can or more accurately should be doing about the situation.

Government can't save every problem free markets and environmental and economic circumstances throw up. Intervention is not always the answer. Sometimes you just have to let the market rip.

Australia's dollar is rising mostly because of global factors. The US economy is weak, its government is doing a certain amount of quantitative easing (printing money). The international community is getting increasingly angry about China's undervalued currency. Unlike most other nations, China hasn't floated its exchange rate and its government has decided it is in China's best interests to slow down the yuan's assent. Protectionist talk is therefore creeping back into the minds of some.

In a weak global economic environment where the old world is slowly being replaced by a new order, which includes China, India and Brazil, Australia is torn between the two sides.

Culturally (although less so than was once the case) we are part of the old world - that is, the Western developed collection of nations. However, geographically, we are part of the new order - the rise of Asia and underdeveloped nations in our region.

You could even say that elements of our two-speed economy are explained by this dynamic. Our mining interests are servicing the new order while our ailing manufacturing sectors are part of the old order - hence the divide in fortunes.

Australia's problem is a better one to have than those most of the developed nations face, but that doesn't mean we can sit back and let the new order sweep us up and thereby maintain living standards.

We need to embrace reforms to do two things: make sure our most profitable industries for the future are supported and given every chance. Second, we must avoid the pitfalls of pandering to the electorate by saving "losers".

In other words, no intervention, just facilitation.

Like it or not, the wine industry as it is currently constituted appears to be one of the losers. Our climate in some parts of the country where grape harvesting occurs isn't suited to it, and if climate change is to be believed the Australian climate is only going to become less suited to it. We don't have the domestic population to sustain our rather large wine industry without exports accounting for much of what is produced, yet with our rising dollar the wine industry's export competitiveness is now questionable.

Both major parties during the week have rejected the idea of government getting involved in curtailing the dollar's rise. That's a good thing, but for exporters it means that one way of trying to do something about the economic pressures they face is removed.

Brazil's Finance Minister, Guido Mantega, was right when he declared last month that a currency war had broken out internationally. However, it isn't something Australia should get involved with. We are too small and our interests are torn between the two sides of the debate.

Sometimes market forces have to be left to help shape the new reality. But for that to happen, the public must become accepting of economic liberalism.

The reason? Because the political world we live in is voter-driven. The days of courageous political decision-making are behind us - replaced by the poll- and focus group-obsessed MP.

Voters need to be courageous enough to let our leaders suggest unpopular but necessary reforms without committing to vote the other way because of it.

And the politicians must be constructive enough to debate the merits and pitfalls behind disagreements on action rather than carp about the action itself.

If none of that happens, we won't be the nation we could be in 20 years' time. We would be weighed down by unproductive industries, even if one of the consequences was a wide selection of Australian wines.