McGuigan Simeon suspends around 70,000 tonnes worth of grape contracts

McGuigan Simeon Wines has invoked a controversial clause to escape arrangements with grape growers that will leave an estimated 70,000 tonnes of fruit hanging on the vine this coming vintage, a crop roughly equal to the entire production of the Barossa Valley. In reality, this could just be one of several developments that is likely to see a record level of fruit left hanging on Australian vines this coming vintage.

McGuigan Simeon, Australia’s third-largest wine company, has advised about 200 Murray Valley Victoria and Riverland South Australia growers by registered mail that it has suspended their supply contracts. This news came to the growers around 8-10 days after the company’s AGM, at which it announced its net profit of $35.9 million for 2004/2005 and at which its managing director, Brian McGuigan, is reported to have told shareholders that the company’s wine stocks were in balance, and that stocks had been cleared to create space for the 2006 vintage. Despite the fact that McGuigan used the meeting as a platform to warn that the company would be ‘suspending some grower contracts as a result of a significant industry oversupply of Australian wine’, it’s little wonder that growers are bewildered and confused.

McGuigan Simeon’s share price continued to slide after the profit warning delivered at the AGM, that the first half of the fiscal year is likely to produce a profit of only $6-8 million against $12.4 million for the corresponding period last year. It is presently hovering around and below the $3.00 mark, which is about the company’s asset value and less than half the price achieved early in 2005.

The mechanism being used by McGuigan Simeon to suspend contracts relates to a particular Clause 13, headed Market Disruption. ‘All growers whose contracts contain this clause are likely to have been cut adrift by McGuigan Simeon Wines’, says Mike Stone, CEO of the Murray Valley Winegrowers. ‘The company claims this clause gives it the right to suspend or terminate contracts on the grounds of decreasing demand for wine and/or oversupply.’

Mike Stone’s view, which is supported by recent statements from the Australian Wine and Brandy Corporation, is that the oversupply situation facing the wine industry at present is part of the cyclical nature of the Australian wine business. As such, it could hardly be grounds to invoke a clause relating to market disruption.

‘Four years ago we queried the market disruption clause, which I had never seen in any other wine contract in this country. We sought its removal and now it’s come back to haunt us’, he said.

Making matters worse for the affected growers is the timing of the announcement. ‘This is disgusting behavior, leaving growers so close to harvest with the predicament of trying to find other buyers’, says Stone. ‘Furthermore, there is no mention in the letter advising the suspension of contracts detailing how long the suspensions are likely to remain in place and to what degree the growers are able to negotiate with other wine producers’, he says. ‘They’re out in the twighlight zone.’

According to Stone, McGuigan Simeon has ‘gone to ground’ and on behalf of his members, the Murray Valley Winegrowers are now pursuing legal options.

How should wine growers and makers work together to agree on prices in times of over-supply? ‘It doesn’t matter to me whether it’s over-supply or under-supply’, says Stone. ‘There just has to be a responsible framework based on fairness. This is supposed to be a sophisticated and successful industry, but it’s constantly disrupted by bad relations between makers and growers. Surely the industry is mature enough to operate in a fair-minded way.’

‘It’s a legal issue as far as the Winemakers Federation of Australia is concerned, so I can’t really comment on it’, says Stephen Strachan, its chief executive. ‘Everyone wishes that grape growers can find a home for their grapes, and that McGuigan Simeon is then able to find a market for that wine. However at this point in time there is a big gap between the aspirations of growers and the reality of what winemakers can achieve.’

There is no quick fix to this problem, since it runs very deep across a number of fronts. Last year 2005 saw a lot of wineries taking on more fruit than they really needed, and in the present market conditions many of them will adopt an entirely different strategy. This might involve the purchase of considerably less uncontracted fruit, and the later purchase of bulk wines once it is clear they have a market for such wine. Or, as we are seeing in the McGuigan Simeon case, the suspension of contracts. Either way, 2006 is likely to be very difficult indeed for growers.

However, it’s not just the growers that will be hurting. Many wineries have made significant write-downs in the value of their stocks, and are bleeding in the difficult domestic market. One only has to walk down the corridors of the recently established wine clearance centres for plenty of evidence of that. I would not be surprised to see a large number of bankruptcies in the wine making community during 2006, as wineries that have just been hanging on for survival are no longer able to continue.

Whatever the merits of the technique it has chosen to reduce its fruit intake for 2006, McGuigan Simeon is not doing just for fun or out of spite. Beneath this news is the genuine possibility that if it purchased the estimated 70,000 tonnes of fruit in question, it might not survive. In itself, that would adversely affect a significantly higher number of growers than the approximate number of 200 who have received suspension notices.

Mike Stone believes the suspended contracts will add weight to the recent Senate enquiry on the wine industry, whose list of recommendations included a mandatory code of conduct dealing with issues such as this. While such a code would bring some merit and clarity, there remains considerable doubt over its ability to provide genuine assistance in such cases. Whatever your feelings towards McGuigan Simeon Wines, it is unlikely that Australian wine would immediately become a healthier place if it went under. Please login to post comment