Listed grape grower expects a loss for 2010 financial year and says it might breach its banking covenants
Warnings of losses and broken bank covenants by Oyster Bay Marlborough Vineyards reflect the challenges facing the wine industry, say observers.
The listed grape grower said probable harvest volumes and present market prices meant a loss was anticipated for the 2010 financial year.
A loss might cause Oyster Bay to breach its banking covenants and directors were in the process of seeking a waiver, the company said.
The industry's 2008 vintage jumped 39 per cent to 285,000 tonnes, resulting in an approximate 27-million litre oversupply after years of shortage.
The supply imbalance from 2008 led to erosion in wine prices and a fall in the value of grapes and land.
Oyster Bay chairman Sandy Maier said the main harvest would soon be under way and negotiations on price had not finished with winemaker Delegat's Wine Estate.
Oyster Bay has a long-term contract with its 50.1 per cent shareholder Delegat's to buy all its grape production, Maier said.
"Who's going to buy it and how much they're going to buy is not an issue," Maier said. "It certainly is for many of the other growers and it's a very painful issue this year for those that don't have a long-term buying contract."
Oyster Bay was a long-term business, he added. "It's an agricultural business, it was always known to have its ups and downs, the supply contract [with Delegat's] is decades long," Maier said. "I think the banks know what the implications of that are."
Discussions would take place within a commercial framework and there was no cause for deep concern, he said.
Oyster Bay was not ruling out expansion. "Most certainly not," Maier said. "On a long-term basis you look at all of these things all the time."
Oyster Bay shares closed steady yesterday at $2, while shares in Delegat's Group dropped 2c to $1.83.
New Zealand Winegrowers chief executive Philip Gregan said Oyster Bay's announcement was a sign of the pressure the industry was under.
"We remain very optimistic about the medium [to] long-term future but without doubt there are some very real challenges short-term," Gregan said.
The number of wineries had grown from 643 in the industry body's 2009 annual report to 675.
Some new wineries would probably be growers who had had trouble selling grapes and decided to make wine, he said.
"We see the toughest trading conditions in the last 20 years and that's applying pretty much across the industry," Gregan said.
Wine exports have increased in value from $125.3 million in 1999 to $991.7 million for the year ending June 2009.
Deloitte corporate finance partner Paul Munro said there was an expectation that grape prices would recover and strengthen.
"I think the majority of parties involved in the industry whether they're shareholders, bankers or advisers or whatever, have a realistic view that the short-term pricing is not at a level where it's going to be going forward and that prices will bounce back," Munro said.
"And they have too because while there's been a correction to an extent in terms of land values and vineyard values the pricing still needs to strengthen to get back to a sensible level so that there is an economic model there that makes sense."
Some smaller players would struggle to get through, he said.
"If they can find ways to rationalise and cut costs and achieve greater economies of scale and tap into other distribution channels that other larger players have already accessed ... then consolidation makes sense in that regard."
There was no doubt that some operators were thinking about whether to buy up smaller players, Munro said.
"I think the way those operators make some decisions over the next six to 12 months is going to influence how they actually can capitalise on the recovery."
"I'd like to think in two to three years' time that the industry will be in better shape but I don't really see it being a lot sooner than that unfortunately."
GRAPE HARVEST
* Total industry harvest soared 39 per cent to 285,000 tonnes in 2008. The harvest was matched in 2009.
* A roughly 27-million litre oversupply caused by the 2008 harvest eroded some wine, grape and land prices.
* Grape prices have been as high as $2200-$2400 a tonne but are now about $1200-$1300 a tonne.
* Wine-growing land around Marlborough has dropped in value from about $250,000 per planted hectare to $150,000.
* The 2010 harvest is expected to be toward the lower end of a 265,000-285,000 tonnes forecast.
