During 1993-95 the Australian winegrape and wine industry underwent a rigorous investigation by an independent Commission which was directed to present their findings to the Australian Federal Government.

The sub-title of this talk could have been "The Days of Wine, Roses and Econometric Regression Analysis".

You all know that the first casualty of war is truth, and one of the first casualties of the Inquiry process, I suppose, was language. We learnt a whole new language in the process of the Inquiry, we learnt how to pronounce words like "cross elasticity" - with a straight face - "substitutability", "econometric models", "resource allocations and distortions in production and consumption".

However I won't dwell upon that too much. But throughout the process of the Inquiry I was reminded of a Russian riddle (or a proverb perhaps), told by the poet Mark O'Connor who was in Russia during the last days of the Gorbachev regime. At that time the Russians felt they could speak out more plainly.

And the riddle goes like this - "What happens when Communism is tried in the desert?" Any ideas? Well, the answer is: absolutely nothing happens; for a long, long time; and then, there is a shortage of sand.

I was reminded of this because, in the process of the Inquiry, (and its taken nine months, twelve months, and - for those of you at the beginning of the campaign in October 1993 - its taken even longer). As much as we felt we were putting the case for the industry, we wondered whether we were being heard, we wondered whether we were speaking another language. Perhaps, if we had spoken in Swahili, it may have been better understood.

So, the impact of the Inquiry. "The Inquiry we had to have".

The fundamental terms of reference, required, the Inquiry to examine the industry's development potential, and identify impediments. The development potential of the industry, particularly with regard to exports. So, the industry put itself under its own microscope, as well as the microscope of the Industry Commission in Canberra. We undertook a rigorous process of self assessment. We deeply delved into the dynamics of the industry, we conducted a SWOT analysis, we looked at the competitiveness of our industry, its taxation structure, its performance, its world market share in the context of the international environment.

The Inquiry galvanised debate, (and still continues to galvanise debate) between the cask and bottle sections of the industry, between premium and non-premium producers and winemakers, between traditional and "new" areas of production, between "efficient", (that wonderful 20th century word "efficient"), and "non-efficient" units of production and regions. We were equally concerned to talk about "effective" and "non-effective" methods of production, marketing and consumption, and comparative and competitive advantage and disadvantage.

And James Halliday reminds us and reminded the Industry Commission people that for the car industries, of the UK, of Germany, and of Italy, it's the Rolls Royces, the Mercedes and the Ferraris that are of just as much significance as the Fords, and the Volkswagens and the Fiats of those countries. In fact one of Australia's unique advantages against all our other new world competition is in fact that we have premium wine at the highest prices down to the best value for money bottled (and probably "cask" wine) in the world.

We concentrated on the debate between those who viewed the industry purely, (or predominantly) in terms of its immediate return on net investment, as against those who talked more about the community benefits of the wine industry, the contribution to the economic welfare and the social cohesion of rural communities.
What some people might call "lifestyle", but why shouldn't we have a viable, vibrant lifestyle in the regions of rural Australia, not just the cafes and bistros of the Eastern seaboard.

In the end, it came down perhaps to discussion about, or between, the tangible and the intangible assets of the industry. Of course before, the IC, the only thing that mattered were the "measurable" tangible assets.

So finally, one day in March '95, we received the Draft Report. Upon first glancing through it I was reminded of the words of the English 17th century Poet and Essayist Robert Southey, who asked in one of his essays "But what good came of it at last?" Quoth little Peterkin: "Why, that I cannot tell," said he, "But 'twas a famous victory."

Mr Halliday, who won the Maurice O'Shea Award last Friday week had a different view. In a stinging letter to the Inquiry he wrote - "This is an appalling Report; it utterly fails to recognise the present and potential worth of the Australian wine industry; it is riddled with internal inconsistencies, half and quarter truths; it does not accept clear evidence which does not suit its own agenda; and it happily treats hypothetical possibilities as fact when it suits it to do so. "It's an insult to intelligence and constitutes a gross waste of money".

So, let's return to the beginning, what the Australian wine industry is. We asserted that the wine industry is a success industry for Australia. Its uniquely, combined market-responsiveness, quality-focus, value-adding, sophistication, and social responsibility. We contended that wine makes a major economic contribution to Australia.

We identified ten major flaws in the Draft Inquiry Report.

1. We saw that it presented no real blueprint for the future development of the Australian industry.

2. We asserted that Government intervention using the tax structure to accelerate change could not be justified.

3. We couldn't identify where there was any evidence of net benefits to the total Australian economy of the proposed tax changes.

4. The net economic loss to the grape and wine sector was not acknowledged, and certainly not quantified.

5. That the evidence to support the Minority (Scales) assumption of a strong substitution between wine and other alcoholic beverage was non existent.

6. We didn't believe, as someone said, that "three wrongs shouldn't make a right", that over taxed beer and spirits were not an appropriate benchmark for wine taxation.

7. The "external third party" costs of alcohol abuse were used as a questionable justification for changing the structure of wine taxation, and, if accepted, would introduce a whole new premise into the Australian taxation system.

   And you can imagine what the impact would be on the hamburger industry, or the sugar industry, or coffee producers, or the pharmaceutical and confectionary manufacturers, if a similar concept of "external cost" was imposed upon them.

8. We thought that there was an over statement of wine's share of alcohol's external costs.

9. We thought the IC failed to accept that a domestic market tax disadvantage compared to our overseas competitors would detract from international competitiveness.

10. And finally, the Inquiry didn't seem to understand that displaced wine investment, technology and skills would be lost to Australia, as the wine industry is a highly mobile industry today, (and of course there is sunshine elsewhere in the world!).

Average grape yields were clearly well down, for all the reasons that most of you know. Quite substantially down on where they had been in even that last four or five years.

However, looking ahead to the future, we believe that the '96 and '97 vintages will come back more on stream. Looking specifically at the '96 vintage. If we follow the trend line of average vintages, and take into account the new plantings, and normal uptake of sultana, we think the '96 vintage will be around the 750,000 tonnes. That's if we get the new plantings coming on stream, if there is sufficient quality bud wood on vines being pruned right now, if there is a better growing season than Spring '94, and if there is an "average" intake of sultana into the total industry.

If there is a higher intake of sultana, of course, the total intake could reach 800,000 tonnes plus figure.

However, whatever happens, we would see that the proportion of premium grapes will continue to rise as a proportion of the total intake (probably up to almost two thirds of the total crush).

The '95 vintage shortfall has presented unique margin, price and inventory management issues for the industry, both domestically and in export markets. Wine prices are continuing to rise faster than CPI and other alcohol prices, the economic calculations by Treasury would clearly show that the rate of revenue from the wine industry is growing substantially, even at the current rate (as of July 1) 26% WST.

However there have been some significant changes in the composition of the market. Cask wine over the last four years has been declining. Sparkling wine, particularly at the lower end, has been declining, and even total white wine consumption has declined by 2.4%.

However, the significant trends are, that, bottled table wine continues to grow, (especially bottled red wine). So, the industry's message about drinking less, but drinking better is certainly having an effect.

Of course, in the context of the shortfall of grapes and wine, imports are continuing to rise. Something like a 70% increase in volume over the past twelve months, but only about a 24% increase in value, (because the imports cover everything from Retsina and Lambrusco etc through to premium Champagne, Bordeaux and Burgundy). So we expect that imports will continue to rise, but in a total market of 320 million odd litres, even if we sold 20 million litres of imported wine, it is hardly going to have a significant displacement effect on the domestic market.

The industry will clearly have to manage this shortage. With vintage '96 we can return to higher export growth rates.

However, significantly, even within exports, what we've long forecasted is now happening i.e. the volume of bottled wine exports continues to grow, (particularly bottled white and bottled red), and bulk exports are declining, particularly the bulk markets of New Zealand, Sweden and Canada. The trend is clearly towards bottled production.

The 2010 Vision

So, in the absence of a blueprint delivered by the Inquiry itself, we have crafted what we call the "2010 Vision", the year 2010. The process of the Inquiry has lead us to these propositions:

• Australia will position itself, not as the cheapest, not as the biggest, but as the world leader in innovation in wine production, product style and distribution.
• Our core competence is our superior responsiveness and flexibility in adapting to wine consumer preferences. We shall continue to exploit all the competitive advantages of our technological and skills leadership, our product formula - "more flavour for the dollar", the flexibility we have with regions and blending, (and no strict appellation regime), and of course the personalised promotion of the wonderfully sophisticated, suave, self-effacing, modest winemakers of our industry!
• The market responsiveness of the industry's institutional arrangements, via the AWBC and the GWRDC.
• Quality/price equation superiority.
• The physical resources we have and are still to develop.

Achieving this export goal would deliver $1.3 billion of revenue to Australia, yet there is still significant consumption growth in the domestic market attributable to population growth, and to the market shift to higher value products. Therefore, we see that this industry can move from a present $1.3 billion industry to a $3 billion industry in the next fifteen years.

We presented this 2010 vision in May '95 to the Inquiry.

Such growth requires the following:

Wine production has to increase by something like 420 million litres; we need an extra 560,000 tonnes of grapes; and vineyard area will have to almost double. We believe these figures are achievable, based on the historical growth rates.

However, to achieve this, we need the critical success factors Government can facilitate.

1. We have to maintain our competitive advantage, especially through Research and Development, and our continuing quality focus. Obviously the pressure on the shortage of wine stock does lead to temptations to stretch quality, and quantity, and that is something we have to be very vigilant about.
2. Investment capital - this is the biggest challenge. Another $3.7 billion of new investment is needed.
3. We need a business climate in which investor confidence can be assured through certainty of tax treatment and competitive investment returns dependent on those predictable taxation levels.
4. We need Government facilitation to continue long term Research and Development, pro-market self-regulation, generic export promotion, and commitment to overcome trade barriers, (particularly those in Asia, where the trade tariff barriers and distribution networks are a major impedient).
5. Supply infrastructure - we need to increase the volume of quality water available to the industry, and the supply of skilled labour.

We do not see the wine industry as a problem industry, we see it is an opportunity.

We particularly wanted to dispel the Furphy that somehow the domestic market in a vacuum from whatever the industry could do in the export area. (We were even told "the sugar industry now exports 70-80% of its production, why can't you do the same thing if you find it difficult to sell it in Australia?") We wanted to impress upon the Inquiry firstly that the cost competitiveness, profitability and cashflow of the Australian wine industry are predominantly determined by the domestic market, and secondly that the dominance of Australian wine over the full range of price points provides a greater proportion of high margin products in the domestic sales mix than in the export market. Domestic volume establishes the scale and the scope of the economy we need. Lower levels of inventory are required for the domestic market. Lower domestic transport and distribution costs, a faster domestic cash flow, and no exchange rate uncertainty are key characteristics of the domestic market.

However tax measures which reduce volume and depress profitability in the domestic market will inhibit the industry's capability to invest in export market expansion and development. Australia's tax levels are already high by international standards, (only New Zealand taxes its wine industry higher than Australia), and you can see we are well above the major competing industries that we have to deal with. This didn't seem to make an impression upon the Inquiry. They seem to be more concerned about the balance of taxation impost within the alcoholic beverage sector in Australia, rather than the real competition that we felt we faced internationally.

However, to winemakers' chagrin, we know that wine tax revenues in fact expanded at 2.5 times the rate of all alcohol tax revenue in the last six years, and 3.5 times the rate of general tax revenue. So the industry is paying substantially more (and at 26% WST will continue to pay a significant amount of tax).

Finally, the Inquiry outcomes. We will judge it by, to what extent the 2010 Plan Critical Success Factors are delivered:

• To create business confidence for wine industry investment.
• To facilitate the further development of the wine industry sustainable competitive advantages.
• To facilitate the provision of water and labour training infrastructure
• To enable expansion of the wine industry supply base.
• To create a stable and predictable taxation regime for wine with a tax level not exceeding the status quo level of 26% WST.

In closing, I should like to address the statutory institutional arrangements of the industry, because I think these have particular relevance to the ASWE. At present there are two statutory corporations, a Research and Development Corporation, - the GWRDC, and a Statutory Marketing Authority - the Australian Wine and Brandy Corporation. The Winegrape Growers Council of Australia and the Winemakers' Federation of Australia believe the interests of the industry will be best served by the merging of the Board functions of these two separate Corporations, while maintaining the full range of activities and services that the present Corporations carry out.

Present AWBC

The present Australian Wine and Brandy Corporation - Chairman, Government Member, six other members. The present composition of the Board comprises 50/50 industry and independents. The key functions the AWBC undertakes are promotion through AWEC and its offices overseas, and regulation functions - via The Label Integrity Program, The Geographical Indications Committee, The International Trade and Technical Advisory Committee (which undertakes the negotiations with the EU on market access and wine practices), and of course The Wine Practices Committee itself. So they are the key functions regulating voluntary pro-market regulatory activities to protect the intellectual property of the industry, and above all to protect consumers who are buying Australian wine whether here or overseas.

GWRDC

Alongside that there is the Grape and Wine Research and Development Corporation. There are now six directors, Government Member and Chairman. The Chairmen, of both corporations are appointed by the responsible Minister for Primary Industries and Energy. The GWRDC undertakes research funding and programs in wine and viticulture.

So , combining the AWBC and GWRDC would integrate the signals which run from the vineyard back to the marketplace, and from the marketplace back to the vineyard. There would be a constant structured stream of information flow between the two.

Overlay

We can maintain all those functions with discreet accounts, with the appropriate quarantining of levies and industry funds etc. with three key councils - The Export Promotional Council, The Regulation Council and The Research Council - and a composition at Board level of winemakers, grape growers and independents.

At the moment grapegrowers have little representation on either of the Boards, though of course there is some highly skilled viticulture research expertise on the GWRDC. So, putting them together, we believe, is the logical way for the industry to progress.

The Future

Finally, we believe the industry can meet the challenges through the 2010 process going out to 2025 to further develop market targets. We forecast that there will be a steady value growth trend towards better quality wines and bottled wine of 5% per annum, export growth of around 15% per annum.

The Government decisions arising from the Wine Inquiry will critically affect the investment climate, and hence our ability to achieve that export potential.