inside... ASSET WATCH

CURRENT OPPORTUNITIES REGIONAL PROFILE:

CLARE PRICE vS vALUE

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2009

EXPERIENCE • KNOWLEDGE • RELATIONSHIPS

VALUER&BROKEREdition 2 © June 2009

Boomor

Bust?

VALUER&BROKER

2 Edition 2

ASSET WATCH

Budget avoids wine tax riseThe wine industry has welcomed the Government’s decision not to increase taxes on wine in the Federal Budget. Winemakers’ Federation of Australia chief executive Stephen Strachan says the Government has shown “commonsense”, as any change would have undermined its own tax inquiry. “Having said it wants all tax matters to be dealt with as part of the Henry Review, it would have made no sense to make changes before the review is completed.” The industry will be closely monitoring the Henry Review, with the hope it resists pressure to make inappropriate changes to wine taxation.

1.6m TONNES HARvESTEd The estimated 1.6 million tonne Australian 2009 harvest has produced some high quality wines, despite battles with early frosts, drought, irrigation restrictions, extreme heat and bushfires. Early indications reveal a 13 per cent fall on 2008. Crops fared better than expected in many regions after fears yields could be slashed by as much as 70% following extreme heat in January and February.

NEW ZEALANd EqUALS RECORdAcross the Tasman, the New Zealand crop has come in above pre-harvest expectations to total 285,000 tonnes – equalling the 2008 record. The national sauvignon blanc harvest was up 5% on 2008, driven by a 10% increase in plantings. The total producing area is estimated at 31,000 hectares – up 2,000ha on 2008. Export growth has reached 28% for the year to date, which means New Zealand will reach $1 billion of wine exports this year – one year earlier than forecast. New Zealand Winegrowers’ Chief Executive Officer Philip Gregan says despite the strong growth in exports, there has been downward pressure on prices in the short-term given the global recession and market conditions.

MIS SCHEMES UNWINd Two of Australia’s largest ASX listed agri-business investment schemes have recently been placed in receivership. Timbercorp (TIM) was placed in the hands of receivers KordaMentha on April 23, 2009, followed shortly after by Great Southern, with receivers McGrathNicol on May, 18. Timbercorp and Great Southern were most active in forestry. However, both investment managers have substantial investments in horticulture, with Great Southern managing more than 1,000ha of vineyard in regions including the Coonawarra, Barossa Valley, Adelaide Hills and Langhorne Creek in South Australia, and several vineyards in Western Australia and Victoria. While MIS schemes have received substantial criticism on a range of issues, it should be noted that in the main, Great Southern acquired existing vineyards and did not develop green-field sites.

Economists are tipping interest rates will remain around the 49-year low point for a little while longer. In June, the Reserve Bank kept interest rates on hold at three per cent for the second month in a row.

49 INTEREST RATES AT

yEAR LOW

dOLLAR HITS 8-MONTH HIGH

The Australian dollar hit an eight month high of US82c in June. After the highs of US98c last July, the currency took a downward slide to reach a low of US61.2c in late October 2008. In the first half of this year the AUD spent much of its time in the low to mid US60c range, but during May it steadily rose into US70c and past US80c. Analysts have been struggling to keep up with the sharp rise, with forecasts being lifted faster than any other major currency – in defiance of the recession.

Much of the commentary Toby Langley heard at a recent United States conference has implications for Australian producers. Toby attended the annual US Wine Industry Symposium - Vineyard Economics conference in the Napa Valley in June 2009. The conference covered a range of key topics affecting US vignerons and winemakers including grape supply and demand balance, consumer trends, market forecasts and key environmental issues.

Interesting comments include:• “Wehaveseenadramaticdropoffinthehigh-end

wines and a taking off of the lower-priced bottles as well as box wines.”

• “Premiumizationisgone,andnowwearebacktothe basics.”

• “Theeconomyandcropsizehasvirtuallyhaltedthe grape market.”

Some of the positive comments include the overall balance of demand and supply for key varietals cabernet sauvignon and chardonnay and the fact that given the absence of any significant vineyard planting and a growing market, California is moving towards undersupply. This undersupply represents a key opportunity for Australia, particularly below US$10 retail. For further information, visit: http://www.winesymposium.com/

US Symposium reveals undersupply opportunity

[dOWN UNdER]Californian producer, Bronco Wine Co. is to launch a US$3.00 Australian chardonnay [Down Under]. Bronco Wine Co - the producer of the Charles Shaw brand affectionately named “Two Buck Chuck”, led a revitalised Californian wine industry out of oversupply in 2002. Whilst this product is at odds with Brand Australia’s focus on premium regional wines, the 750ml light weight glass package will certainly move some volume if reports regarding the quality of the wine are accurate.

EXPERIENCE • KNOWLEDGE • RELATIONSHIPS

Edition 2 3

FOR SALE

CURRENT OPPORTUNITIES

■ Australia’s fourth largest winery by crush capacity;■ Ideal location in SA Riverland;■ Daily intake of up to 2,300 tonnes;■ Stainless steel storage of 89 million litres;■ Includes the established business “Austflavour”

– a market leader in the production of grape juice concentrate;

■ State of the art “Flash Détente” unit to aid colour and flavour extraction and improve production throughput;

■ Ongoing processing and storage agreements with Australian Vintage Limited.

■30hectarevineyardplantedtoshiraz,chardonnayand pinot gris;

■ Strategically located in the heart of the Adelaide Hills, just 20 minutes from Adelaide;

■ Fruit currently sold to local winemaker, with wines sold nationally and internationally.

Loxton Cellars RIvERLANd, SA

Prominent Hill VineyardHAHNdORF, SA

■ Established brand for more than 20 years;■ 14 hectares of vineyard;■ Sales exceed 10,000 cases;■ Fully integrated winery, with modern and

efficient winemaking facilities; ■ 1,000 tonne processing capacity;■ 414 tonnes of red fermentation;■ Stainless steel storage of 780,000 litres;■ Strategic land holding with development

opportunity.

Shottesbrooke Winery, Vineyard and Brand MCLAREN vALE, SA

■ 20 million litre storage capacity;■ Riverland location at Monash;■ Modern, low cost plant with scope for expansion.

Australian Commercial WinesRIvERLANd, SA

vINEyARdS SOUTH AUSTRALIA Clare Valley Coonawarra McLaren Vale Padthaway Wrattonbully

NEW SOUTH WALES Cowra

WINERIES SOUTH AUSTRALIA Clare Valley Padthaway Riverland

BRANdEd WINE BUSINESSESClare Valley McLaren Vale New Zealand

WANTEd TO BUyRiverland vineyardsMargaret River wineryPackaging equipment including cask and sparkling lines

Gaetjens Pickett Valuers is currently undertaking a review of asset values for a major Australian wine company.Check www.wineryforsale.com.au for more details

VALUER&BROKER

4 Edition 2

“IN THE LONG RUN THOSE WHO HANG-IN THERE WILL BE

REWARdEd. WE ARE vERy POSITIvE ABOUT

CANAdA ANd THE US IN THE SHORT TERM

ANd CHINA IN THE LONGER TERM.”

–Darren De Bortoli De Bortoli WineS

“I THINk THE INdUSTRy RECOGNISES THAT IT NOW NEEdS TO GET BACk TO BASICS IF IT IS TO RESTORE ITS SOLId FINANCIAL PLATFORM.”–WinemakerS’ FeDeration oF auStralia chieF executive Stephen Strachan

“THE MINUTE THE dOLLAR WENT UP ANd SALES STARTEd TO SLOW, INvESTORS REALISEd THE ONE BIG PROBLEM THE WINE INdUSTRy HAS ALWAyS HAd – CASHFLOW.” –DaviD cooke, rBS analySt

“THE dIFFERENCE BETWEEN THIS ANd THE LAST BUST IN THE

1980S, IS THE ALL ENCOMPASSING NATURE OF THE dOWNTURN...

NOW ALMOST EvERy vARIETy ANd REGION IS STRUGGLING.”

–DaviD murDock, Great Southern Group national

manaGer viticulture

RIdING WINE’S BOOM ANd BUST CyCLE Anyone who has had more than a passing association with the wine sector will know that, like most other agricultural-based commodities, success is cyclical.

As with wheat, beef, wool and horticulture crops, seasonal variability is always a major influence on supply and demand.

However, according to three industry commentators, the most recent wine boom - and bust - has been influenced by a much more complex range of domestic and global economic factors. It is these complicated economic and structural influences that may see a very different wine industry evolve over the next decade.

Darren De Bortoli who heads up one of Australia’s most successful family wine businesses is struggling to see the positives in the next few years.

“We’re a family business and we’re in it for the long term,” Darren said. “We choose to remain part of the wine industry because it is a lifestyle and a commitment to our heritage.

“But that doesn’t mean that we are not in very difficult times. The oversupply situation is a man-made disaster, which is a result of gross industry mismanagement. The signals to stop planting weren’t given early enough and the market projections were short sighted.”

Darren says there is a simple problem - we have too many wineries and too much vineyard.

“Back in 1982 we had 400 wineries in Australia, of which 250 probably weren’t making a decent living,” he said. “If you’d asked back then how many wineries could Australia support by 2009, a Year 12 Economics

student probably would have said double - say 800 wineries.

“Unfortunately we now have six times the number of wineries we had in 1982 and more than 70% of those are still not making a living. At the same time the Federal Government, at the industry’s request, has increased the protection for these wineries through tax rebates.

“It is an unsustainable system and unfortunately the real losers will be Australia’s small wine-grape growers, who are victims of the industry’s 25 - 30% overproduction.”

Darren believes structural change is needed. Many grape-growers may need to get out of the industry and maybe rely on the lease or sale of their water licenses for income. Small wineries may need to explore other forms of income such as wine tourism as industry competitionsqueezesthemout.

“In the long run those who hang-in there will be rewarded,” he said. “We are very positive about Canada and the US in the short term and China in the longer term.

“In Australia, we’re doing quite well with pinot grigio and semillon-sauvignon blanc blends, which are likely to remain consumer favourites for some time.

“So I see some opportunities. But overall we are set for some challenging times.”

There’s no argument from David Murdock, National Manager Viticulture for the Great Southern Group of Companies who says that if the banks pull the pin on growers in the next 12 to 24 months there could be an historic “meltdown”.

After 30 years in the industry, including a stint as the National Vineyard Manager for Southcorp’s 20,000ha portfolio, David thought he had seen it all.

“But the difference between this and the last bust in the 1980’s, is the all encompassing nature of the downturn. During the last vine pull even though reds were out of favour, whites were still good - in fact we were planting white varieties to keep up with demand and using carbon filters to make sparkling white wine outofshiraz.

“Now almost every variety and region is struggling.”

David says that while the catastrophe has been building for several years, no-one expected the intensity of the crash.

“Certainly the over-planting boom which didn’t ease until 2004-2005 provided the foundation for oversupply, but in the short term it was the early buying of fruit in 2007-2008 which has exacerbated the current problem.

“The expectation of drought and a short year sent buyers in as early as July 2007 trying to secure 2008 fruit at unrealistic prices. Then the season turned out better than expected so there was just too much in reserve this year.”

Climate driven volume fluctuations aside, it is the gradual leakage of prices over a six year period which will have the biggest impact on grower - and industry - survival.

“We sat down recently and tracked our prices for premiumandsuper-premiumshirazsince2003,”David said. “In just over five years we have gone from an average of $2,000/tonne to around $1,000/tonne - a 50% drop.

EXPERIENCE • KNOWLEDGE • RELATIONSHIPS

Edition 2 5

The chief executive of the Winemakers’ Federation of Australia, Stephen Strachan suggests – with a nod to Paul Keating – the coming period may be “the adjustment we had to have”. “I think the industry recognises that it now needs to get back to basics if it is to restore its solid financial platform,” he said. “There is no doubt that some bad decisions have been made based on lifestyle aspirations and naïve expectations that sales and prices would stay buoyant forever, while exchange rates stay low.

“Perhaps more significant, however, has been an investment mentality which rates tax breaks ahead of profit or expects short-term returns in an industry which traditionally requires patient capital. The recent collapse of two high-profile managed investment schemes is just one example of what can happen when tax offsets are a motivating force and the choice of industry irrelevant.”

Stephen says there is no doubt that the rest of the world has learned from Australia’s positioning and marketing, and a low cost/high quality mantra no longer differentiates us from the likes of Chile, Argentina and South Africa. “We need to get back to basics here too by reading and influencing the market opportunity,” he said. “That means less ‘more of the same’ and more innovation around making wines that consumers want to buy and which are authentic.”

Glancing back over the last two decades, David believes a lot of what happened to the grand old Australian wine industry had to happen.

The public floats of fine family companies like Pipers Brook, Petaluma and Banksia Wines (Tatachilla and St Hallett) and the corporate mergers and takeovers - Blass and Beringer in 2000, Lion Nathan/Knappstein/Banksia/Petaluma in 2000, Constellation and Hardys, Southcorp and Rosemount - reflected the rosy outlook for Australian wine and the need for additional capital.

“We have to remember that growth in the wine industry during the late 1990’s was phenomenal,” David says. “Production was growing at 14% per annum and vineyard plantings at 8.6% per annum. Exports were growing year on year by more than 20%.

“Equity investors were attracted by this growth but they were also blindsided by the numbers and the circumstances. A lot of this export boom was driven by a very competitive dollar and ridiculously cheap prices for our good, well-made wines.

“The minute the dollar went up and sales started to slow, investors realised the one big problem the wine industry has always had - cashflow.

“Equity investors don’t like waiting two to three years for wine to mature so they can be paid.”

It was the same realisation that saw Philip Morris, ReckittandColman,andHeinzexittheindustrysoquickly in the 1980’s and it led to the same result - nervous investors and a skittish share market.

David recalls that in particular the correction made investors re-examine over-priced purchases that had taken place in the early 2000’s - such as Southcorp’s purchase of Rosemount for $1.4 billion ($880 million cash and 90 million $5 shares plus a debt repayment of $60 million) and the subsequent $3 billion takeover of the monolith by Foster’s.

“The industry was also much more exposed on the global scene than it had been in the 1990’s,” David says. “In 1996, 75% of sales were domestic but by 2007 that had swung to more than 65% export. While that had market diversification benefits, it opened Australia up to international currency risks and stronger competition.

“Another factor which changed the playing ground was the investment by countries such as Argentina, Chile and South Africa on generic promotion. Until about 2002 Australia stood apart because of our collaborative, industry based marketing. Then we lost that edge.”

David believes that while Wine Australia’s Regional Heroes marketing campaign should be strongly supported, it will take a long time to change market opinion.

“Even after all these years there are many wine drinkers in the UK who wouldn’t have heard of the Barossa - and I doubt if one in ten US wine drinkers know of McLaren Vale.

“It’s not the fault of Wine Australia - it is just a huge awareness challenge with a limited budget.”

David believes cashed up family-based wine companies will weather the storm more successfully than the few listed companies that remain - Foster’s, Australian Vintage, Lion Nathan and Constellation.

“There is a lot of talk about Foster’s selling off its various wine brand assets but I can’t see it happening,” he says.

“They will wait for the market to improve and probably de-merger beer and wine. Beer will be very saleable to an international brewer and then they may offer some of their listed wine assets for sale - such as Penfolds or Blass.

“But nothing will happen anytime soon. We need to clear the oversupply and go through some sort of structural re-adjustment, which means allowing growers and small wineries to depart the industry.”

“In less than ten years the industry has gone from a high of $3,000/tonne in the mid 1990’s to almost the 1980’s lows of $800/tonne - a complete cycle.”

While David, who also runs his own small family wine brand and cellar door, tries to remain optimistic, he says it is getting harder to see any short term relief.

“Australia’s export market is taking a real belting from Argentina, Chile and Italy,” he said. “The word is that the UK market has basically stopped due to discounting and competitive pressure. The US and Canada are our main hopes but wines over $20 are just not selling.

“Everyone is looking to Wine Australia (The Australian Wine and Brandy Corporation’s marketing arm) to get some traction with their Regional Heroes and Landmark programs to lift consumer interest in our better wines and increase price points.

“But I fear we are fighting a real boredom battle with consumers.

“You can see it in Australia - it doesn’t matter how good our rieslings or semillons are, drinkers want New Zealand sauvignon blanc.”

If the international market doesn’t recover in the short term and domestic sales remain stagnant, what is the outlook for vineyard properties?

“For many vineyard operators it will depend on how long the banks will back them,” he said. “I think we will see a lot of vineyards disappear, particularly in new regions which are never going to make it. I would be worried if I had a vineyard in Victoria anywhere other than Mornington Peninsula and the Yarra Valley. The classic regions in SA will survive - Barossa Valley, McLaren Vale, Coonawarra and Clare Valley. Langhorne Creek is on a knife-edge but if it can overcome its water problems, then its reputation is strong enough to sustain the downturn.

“My hope is that the real long term family growers will be supported by the banks and remain while the speculators and investors disappear.”

So where will the next round of vineyard investment come from?

“I don’t expect to see any Australian equity investment in vineyards for at least ten years,” David said. “Having said that I think we should be open to Chinese co-investment both in vineyards and wine brands.

“China (and perhaps India) are the best opportunities we have and while these markets may not mature for another generation, the most successful players will be those who collaborate rather than compete.”

RBS analyst David Cooke believes ten years may be a little too pessimistic - but he agrees there is a minimum three to five year outlook before investors will return to the wine industry.

“Things can turn around quite quickly,” he says. “All you need is a favourable currency impact or a supply disruption to a competitor and the market will open up.

“But basically Australia is stuck in the mid-ground. We are no longer the lowest cost - lowest price producers, but we never quite got a hold on the premium ground in the 90’s either. We’re stuck at $10 - $15 where margins are tough and we are too often used as loss leaders by retailers.”

“THE AdJUSTMENT WE HAd TO HAvE”

VALUER&BROKER

6 Edition 2

SOLdIn the previous Valuer and Broker, we introduced directors of Gaetjens Langley and Gaetjens Pickett Valuers and provided a snapshot of its business growth as wine sector sales specialists. This edition, we introduce the company’s Western Australian consultant Mike Calneggia.

INTROdUCING: Mike Calneggia Western Australian Consultant

Mike provides consultancy services for wine business activities in Western Australia. He has been extensively involved in the wine industry since 1986. Career highlights include establishing the highly successful contract processing and wine trading business, Selwyn Wines. He has been a director of Evans & Tate and played a key role in its transformation to a publicly listed company in 1999. He also directed the company’s winemaking operations. Mike spent time as Managing Director of ASX listed company Australian Wine Holdings Limited, which has investments in the Australian wine industry. Today he is a shareholder and Director of Viticultural Asset Management, which provides management, strategic planning, and consulting services to the Australian wine industry. Mike has extensive vineyard holdings in Margaret River and owns specialist wine producer Wine Shack. Outside of work he has a strong interest in aviation – flying helicopters and fixed wing aircraft. He attempts to play golf, although admits he is better at fishing and he follows the West Coast Eagles in AFL. Mike is married to Sally with two children Amy (21) and Jack (12). Tempranillo,Sangiovese,ShirazandMargaretRiverSBSarehisfavouritedrops.

OUR WINE INdUSTRy’S FUTURE IS IN THE BALANCE...

SALES REvIEWMount Barker purchase provides growth opportunities

Great Southern Wine Partnership (GWSP) has purchased Constellation Wines’ Mount Barker winery and vineyards, which was featured in the last Valuer & Broker.

GSWP is made up of the owners of West Cape Howe, with winemaker GavinBerry;financiersRinzeBrandsmaandIanCrockett;andviticulturemanagement specialist Rob Quenby, among its partners. The Mount Barker assets presented a perfect solution for GSWP’s growth aspirations given their Denmark facility was already bursting at the seams. West Cape Howe managing director Gavin Berry says the long term wine supply agreement that came with the sale was integral to ensure the winery facility would be fully utilised. “We envisage the winery will be re-branded ‘West Cape Howe’ and additional contract processing work will be sought,” said Gavin. “We are also excited this sale will provide ongoing employment opportunities for the local community.”

Settlement is set down for the end of June 2009.

How this industry of $5.5bn annual sales - Australia’s fourth largest exporter deals with the next couple of years, will be critical, according to PPB partner Peter Macks.At a recent PPB breakfast seminar, an experienced wine industry consultant was brutally frank. The industry is where it is now, he said, primarily because over the past five years "it has shot itself in the foot."

I have to agree with that, and I've yet to encounter an industry leader who - admittedly sometimes after a forthright exchange of views - fails eventually to admit that most of the industry's pain is self-inflicted. To assume, as many people did, that export sales, having grown substantially in the past decade to 800 million litres (mL) would continue growing, was rashness, approaching madness - especially knowing that oversupply has been with us since 2001.

Exports are now around 700mL and declining, but it's also a sad fact that we've never sold anything like 800mL of wine abroad at a profit. Call it greed, lack of industry foresight or resolve to balance supply and demand, blame whoever or whatever you will, but the fact is we saddled ourselves with a 500mL surplus. Thus we've had to sell at dumping rates of AU30 cents per litre and below, to Continental Europe, America and China. In the UK, Australia's biggest customer for wine, four supermarket chains account for 80% of wine sales from

all sources. Some 70% of wine is sold worldwide on average for less than $10 a bottle, the retail environment is rapidly changing everywhere, and producers' gross profit margins, once between 40% and 50%, are now half that - if they're lucky.

As far back as 2002, there were early warning signs that the industry needed restructuring, and because these went unheeded, the next two years will be critical for many companies.

Here's where we are now: •Thehugeoversupplyofayearagohasbeenreduced

by drought to a likely medium over supply, mainly chardonnay and premium wines from lesser recognised regions;

•Thisisgoodforeliminatingthelowmarginbottomend of the market, bad for an over-capitalised, debt burdened industry. Bankers see $3bn of over-investment in winery and vineyard capacity being threatened further by global financial chaos, and it's making them very nervous;

•Waterproblemswillbedominantinthesurvivalequation in the foreseeable future. Production costs will go up but prices won't.

Most vulnerable in the next one to two years will be small, highly geared wine companies that have over-capitalised in vineyards, wineries, bottling and in various intangibles. Seriously at risk will be any wine producer

who does not control the end product, its distribution and pricing. Yet it seems 90% of wine companies fail to understand the importance of establishing direct routes to markets, and tracking progress of their products all the way to consumers. We are advised that as little as 10% of companies have any idea where their products end up, from whom consumers are buying their wine, and are on top of detailed arrangements for transport.

So what should the industry be doing?•Winecompaniesshouldbemergingtosharefacilities

and overheads (but family ownership and the WET rebate are standing in the way of this);

•Everyeffortshouldbemadetoreplacedebtwithequity, difficult though this may be in the current economic climate - but bank security has halved recently and they're looking to reduce their loan exposure.

The industry is fragmentally marketing a low gross margin product, globally competing against other alcohol products in situations where consumers have thousands of choices and alcohol taxes can only go up.

The obvious need is for a "Brand Australia" marketing approach in which companies must be increasingly focused on customer/distribution marketing, rather than individual brand marketing - unless it's an ultra premium brand. Australia must work hard to re-position its brand offerings and have retail pricing established at higher levels - a major challenge. But above all, a supply and demand balance must be established and maintained in the Australian wine industry.

Do I see signs of this happening? I'm afraid not, as yet - although I believe I'm at least sensing a whiff of urgency in the wind.

EXPERIENCE • KNOWLEDGE • RELATIONSHIPS

Edition 2 7

REGIONAL PROFILECLARE

THERE’S MORE TO THIS REGION THAN RIESLINGAdELAIdE

CLARE

OvERvIEW:First planted in the 1840’s, Clare is widely regarded as Australia’s finest riesling producer - particularly from the two unofficial sub-regions of Watervale and Polish Hill River, which produce wines of two distinctive styles.

There has been a lot of discussion about recognising the two sub-regions officially within the Clare Valley GI, and with the current push for Australian wines to express and define their regionality, it may be time for more serious consideration.

Located 1.5 hours north of Adelaide, the region is home to about 5,700 hectares of vineyard and considerable variation in topography, soil types and aspect. Its elevation rises from 400 to 500 metres - similar to the Adelaide Hills and Eden Valley.

Aside from riesling, Clare also has a long history of producingwell-structuredandfull-bodiedshirazand cabernet sauvignon (often blended with malbec) and, surprisingly, the area planted to these varieties comfortably exceeds the area dedicated to riesling.

In the late 1990’s many of the winemakers in Clare decided to adopt screw caps (somewhat against market sentiment at the time) and are largely responsible for its resurgence.

Constellation and Foster’s ( for now) have a large presence in the region, although it is well suited to smaller boutique producers. There are about 50 wineries in the Clare Valley with some of the better-known premium producers being Crabtree of Watervale, Killakanoon, Skillogalee, Grosset, Pikes, Paulelts and Tim Adams.

PROPERTy vALUES:Like most other wine regions around the country, there has been little in the way of market transactions for wine industry assets in recent times in the Clare Valley.

Over the past decade, vineyard values have remained relatively stable in the area compared with the fluctuations evident elsewhere.

Generally, values for good quality Clare vineyards have been in the range of $50,000 to $60,000 per planted hectare, although expectations in the current market would be somewhat less.

REGIONAL STATISTICS:

Clare, SA Adelaide Hills, SA

Eden valley, SA

Frankland River, WA Henty, vic

Vineyard area (ha) 5,628 3,901 2,264 1,600 160

Altitude (metres) 400–500 400–500 380–550 200–300 15–100

Heat degree days, Oct-Apr 1,770 1,270 1,390 1,441 1,204

Growing season rainfall (mm) 200 310 280 310 300

Mean January temperature (°C) 21.9 19.1 19.4 19 17.7

Source: Wine Australia

‘ExCEPTIONAL’ CLARE CAN SURPRISEWine consultant, David LeMire M.W, reflects on ClareTo some extent Clare flies under the radar, considering the exceptional brands from the region. A quick review of Langton’s Classification shows 11 wines from Clare with super-brands like Wendouree, Grosset, Petaluma riesling, and Jim Barry, compared to five from McLaren Vale. That’s not a ratio that I would have anticipated.

If someone asked me what percentage of Clare’s vineyard area riesling accounts for, I would have guessed something in the range of 40-50%. It’s the grape that is synonymous with Clare, and subregions like Watervale

and Polish Hill River make versions with distinctive characters. Surprisingly though, riesling makes up only 22% of Clare’s vineyards, comparedtoshirazat33%andcabernetsauvignon about 21%.

Although some terrific wines are made from shirazandcabernetintheClareValley,rieslingis the ‘regional hero’, to use the Wine Australia language. As we see more investment in promoting specific variety and ‘terroir’ matches, it will be interesting to see if that percentage of riesling in the Clare Valley gradually grows.

VALUER&BROKER

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It is timely in these recessionary circumstances to look at the notions of value and price and see what we can make of them. Colin Gaetjens investigates.

Warrren Buffet, the investment guru, states that “price is what you pay, value is what you get”. The standard definition of market value is based on a compulsory acquisition court case in Australia in 1901 known as Spencer versus The Commonwealth. More than 100 years later, the definition is now generally accepted throughout the world as the price at which an asset was exchanged after informed negotiations between a willing buyer and a willing seller, taking into account all current circumstances and after an adequate period of marketing.The key element here is the assumption of a willing buyer and a willing seller.In a property transaction in balanced market conditions, the value arrived at and the price paid will be pretty much synonymous.When markets become unbalanced, because of a one-sided shift of demand or supply combined with, or caused by, an absence or over-abundance of buyers or sellers, value and price can be widely divergent.This was very obvious in the recession of the early 1990’s and is plain to see on the stock market in Australia at present and over the past many months. For example, respected financial newsletter Huntleys’ has a fair value indicator for shares which, at present, is often way above the stock price on the sharemarket. Rio Tinto has a market price as we write of AU$70, but Huntleys’ suggests fair value to be AU$106.In valuing vineyards and wineries at the moment, there will generally be a significant differences between market value and achievable price depending on the available timeframe in which to negotiate a sale.

‘WHAT yOU PAy’ vS ‘WHAT yOU GET’PRICE vS vALUE:

www.wineryforsale.com.au

Gaetjens Langley185 Fullarton Road, Dulwich, South Australia 5065

PO Box 722, Kent Town, South Australia 5071Telephone: +61 8 8364 5600 Facsimile: +61 8 8364 5622

Email: info@gaetjenslangley.com.auABN 64 471 514 369

A reasonable selling period is generally considered to be between three and six months, but in a large or complex vineyard or winery transaction, the selling and settlement period can easily be in the order of twelve months. Given the current industry conditions and economic times, let us suggest that a reasonable selling period might even extend (or at least be accepted) to six to twelve months. This means that if a business is being valued just on the basis of a three to six month selling period, then realising “market value” will be difficult.The moment a time limit is imposed on a sale in a market where, within that period, there may be no willing buyers, this introduces the strong possibility of a gap between market value and price realised. Whilst on the one hand we may have a willing seller, it would generally be the case that no transaction would take place within the period defined if there were no willing buyers.If however the time limit becomes the trigger for the transaction, the willing seller becomes a forced seller and the lack of willing buyers leaves the field clear for opportunistic buyers or the buyers prepared to take a risk at a price. The most likely result

will be a sale price below market value.

Some would then argue that this price is, in fact, the market value, but as the table below of Australian equity values shows, the relationship between price and value in this asset class also follows predictable boom and bust trends.

One of the difficulties with valuing wineries and vineyards when there are few willing buyers is that if the only transactions occurring are those based on distressed or not entirely voluntary transactions, it becomes difficult to maintain the line on a hypothetical market value in the face of the sales evidence.

The solution is to correctly define the valuation conclusion as market value with a given selling period. However we should also note that in tough markets there can be a significant difference between market values and realised prices. On the basis of market value in recessionary times, it is therefore quite likely that there will be a decline. The trick is to guard against flouting the market value assessment by evidence of prices that were not negotiated within the definition of market value.

Gaetjens Pickett Valuers 185 Fullarton Road, Dulwich, South Australia 5065

PO Box 146, Kent Town SA 5071Telephone +61 8331 1633

Facsimile: +61 8 8364 5622Email: info@gpvaluers.com.au

ABN 90 791 710 106

Source: I/B/E/S and Macquarie Private Wealth Research