Posted October 2008
New whine, old battles
Foster’s decline Being
brewers, they should have known better. Mixing beer and wine is
a bad idea. But, hey these were the days of Globalisation Mach
I. Anything seemed possible. You got a good story? The banks
got the money. Almost a decade ago, Foster’s went out on a
shopping spree. Chivvied on by low interest rates and high
hopes, they hoped that buying into wine would propel them to the
top of the pops. And pronto. Unfortunately, their story proved
too fantastic to come true. As the era of easy-dosh-globalisation
draws to a close, the Foster's Group still grapples with turning
around their under-performing wine division.
For months now, Australia’s
newspapers have shouted: “Water Crisis.” Or “Australia’s Epic
Drought”. Or “Crime and Drought in Australia’s Murray River
Basin”. Readers not familiar with the situation could be
forgiven for thinking that they are falling victim to the usual
media hype: After all, “crime” and “crisis” seem to be the most
popular catch words on Google that even level-headed
publications feel prompted to resort to full-blown hyperbole in
order to make themselves heard and read on the internet. Sadly,
but truly, Australia’s drought has already reached a level of
severity that does not require any more embellishment.
Not that you would have
noticed, though. Travelling 2,500 km from Australia’s red centre
down to Adelaide in late August your correspondent saw
lusciously green fields, ditches filled with water and cars
covered in mud – which meant that rainfalls must have been
plenty and frequent. However, this was towards the end of
Australia’s winter season when temperatures in Adelaide barely
rise above 12 degrees Celsius during the day and people never
leave home without an umbrella or a hoodie.
If you walked through
Adelaide’s leafy suburbs the symptoms of drought still would
have been evident to expert gardeners only: To them the
unusually small lemons that hung on trees or the droopy branches
of an old avocado tree would have been tell-tale signs of water
As said, you could have been
forgiven for thinking that Australia’s water crisis was not
worth a story until you saw the mouth of the Murray River or
rather what’s left of the Murray River when it reaches the
ocean. The Murray River is part of the Murray-Darling Basin, a
vast expanse of land that runs down the continent's eastern
coast and covers the states of Queensland, New South Wales,
Victoria and South Australia. The basin represents 14 percent of
Australia’s land area. This is slightly larger than the Danube
Basin but the average flow of the Danube is over 17 times that
of the Murray River.
Even at the best of times, the
Murray River is a very dry river. It flows through nationally
and internationally-listed heritage areas such as the RAMSAR
wetlands of the Lower Lakes and Coorong. As well as sustaining
important ecological communities, the Murray River also provides
drinking water for over 3 million people, including Adelaide,
and more than 40 percent of Australia's agricultural production.
Australia's biggest river
system is coming out of its fifth-driest winter in more than 115
years and the forecast is for more dry weather during spring.
Where, under natural conditions, more than half the water that
flowed into the river would flow right through to the Murray
Mouth, that has now been reduced to a trickle.
Water inflows in the past two
years were the lowest since records began. Water storages are
just 20 percent full at a time when they should contain three
times that volume.
As if the drought were not
enough, the over-use of water has left the Murray River’s bed
exposed, producing a toxic chemical reaction that is spreading.
Dramatic conditions call for dramatic actions. That’s why the
authorities have dared to discuss openly a controversial option
of flooding the areas most affected with seawater. The action is
risky and unpopular, but it could help save an eco-system that
would be dying otherwise. A weir would be constructed to prevent
salt or acidic water contaminating Adelaide's drinking water
You can blame Australia’s
drought on global warming or the climate change. But there is no
avoiding the other painful truth that too much water has been
taken out of the system for irrigation. In fact, very little
would grow in the Murray-Darling Basin were it not for
irrigation. On average about 20 percent of the total water
volume diverted is used for cotton production, 20 percent for
rice, 25 percent for pasture and cereal crops, 25 percent for
dairy and the remaining 10 percent for all horticulture (grapes,
citrus, stone fruit etc) plus urban use.
Interestingly, for once it is
not the urban population that is accused of squandering
Australia’s precious water on such sinful activities as hosing
down cars and taking full baths because less than 4 percent of
the water that is taken from the Murray River is used for urban
or domestic use.
This is not to say that many
of the more puritanical suggestions as to save water are beside
the point. Even if Australia’s “worried –well” (read Middle
Class) stopped washing their fruit with water before eating them
that would save only one litre of the 3,000 litres of water that
go into the food that they eat each day according to estimates
by the International Water Management Institute, a research
outfit based in Colombo, Sri Lanka. As the Economist newspaper
argued recently, most people may drink a maximum of two litres
of water a day. Still, they “eat” a staggering amount of 5,000
litres of water a day—especially if they eat lots of meat.
Perhaps Australians, who have
been more immediately affected by climate change than those of
us who live in the northern hemisphere, have also become more
sensitive to the water issue than we have. That does not mean
that they have found a solution to the grim problem that the
world is facing: coming to terms with a water shortage not a
Water in Australia remains a
complex and highly emotional issue, irrespective of the fact
that Australians have moved beyond the fundamentalist battle
between free market economists who regard water as a tradable
commodity and their opponents who claim that water is a common
good and free access to it a human right. Nonetheless, these
irreconcilable standpoints still serve as a backdrop for many of
the current debates and help explain the passionate involvement
of the protagonists.
The controversy over water
licenses illustrates this point. With water being scarce, the
state of South Australia began issuing water licenses in the
1960s. Many of the farmers who got licenses in those days got
them for free. The licenses went to farmers who just used to
take water from the Murray River. That may have been the right
thing to do. But was it just? Especially since these water
entitlements considerably increased the value of their
properties. If a farm was valued at AUD 2 million, the water
licence alone would have been worth AUD 1 million. Consequently,
if a farm had no water license it was worth a lot less.
Perhaps the South Australian
government was shrewder than others and soon saw the error of
their ways because they stopped issuing water licences in 1969.
Other states went on giving out water licenses until the 1990s,
when all the states in the Murray-Darling Basin were forced to
agree on a cap as the system had turned unsustainable.
Agreeing to disagree
The Australian Constitution
provides the individual states with responsibility for water
resources in their state. Because of the situation with the
Constitution, the states got together in 1902 (one year after
the constitution was signed) to develop a cooperative approach
to manage these cross-border resources. This took 13 years and
a Royal Commission but in 1915 the River Murray Water Commission
was finally formed.
Under this agreement the water
resources were shared by three states (New South Wales, Victoria
and South Australia). These sharing rules have effectively been
retained until the present day. Under the circumstances that
prevailed until a few years ago, these rules have proven to be
have had to learn to their distress that in a prolonged drought
these rules do not provide for a conflict-free water allocation.
Hence the Commonwealth Government has announced that they will
take over responsibility for the management of the
Murray-Darling Basin but this requires the states to delegate
powers to the Commonwealth for the management of some water
resources. As this would be tantamount to calling out a state of
emergency – the national government is suitable reluctant.
With the issuing of water
licenses, farmers became aware of how intimately the price of
water was bound to what they produced. Very few farmers could
make do with the water they were entitled to, so a trade in
water began. In a normal year in South Australia (but what is a
normal year under conditions of scarcity?) a mega litre of water
(that’s 10,000 hl) would trade for AUD 30 to AUD 80 plus
delivery charges. However, last year farmers had to pay up to
AUD 1,200 per mega litre. At the end of August this year, the
price per mega litre stood at AUD 400.
Now consider this: if you grow
cotton or rice, your yield is AUD 50 for each mega litre of
water used. If you are a dairy farmer, your yield will be AUD 3
to AUD 5 per mega litre. However, if you are a grape grower your
yield is AUD 500 to AUD 1,500 per mega litre of water. Be
honest, wouldn’t you rather be a grape grower?
Actually, the answer is not as
simple as that. Sometimes it’s even more economically feasible
to grow nothing at all. Sell your water rights to the highest
bidder and spend the rest of the year at the Costa del Sol
nursing a cocktail. That’s what some farmers have been doing in
the state of New South Wales. They sold their water entitlements
to grape growers – and still made a hefty profit. But did this
make them popular members of their communities? Err, no.
Farmers like to be
opportunistic in their decision making. Rice and cotton are
annual crops and allow for short-term choices. Grapes, on the
other hand, require quite some investment and do not provide for
immediate returns. There is a four year lag between planting and
vineyards bearing. So when the New World wine boom took off in
the early 1990s, the government had to devise a policy that
would stimulate Australia’s wine exports.
Wine has been one of
Australia's great export success stories. While drinkers at home
have enjoyed the delights of domestic tipples for decades, it
was the mid-1990s before Aussie wine captured attention
overseas. The consistent quality and affordable pricing of
Australian wines made them a fast hit in Britain, where wine
lovers had long been hostage to the French, Italians and
Spaniards. In 2006 wine was Australia’s number three
agricultural export, behind beef and wheat but ahead of wool.
Among the vanguard of
Australian wines were wines from the state of South Australia
where most of the nation’s wines are produced. The venerable old
vines found in South Australia’s Barossa Valley and Adelaide
Hills, through their isolation, had survived the great
phylloxera plagues that wiped out the vines of North America and
Europe, and somewhat later, devastated Australia’s eastern
vineyards. In addition to being host to some of the world’s
oldest vines, the state also has a diversity of regions ranging
from the relatively warm temperate climate of the Barossa Valley
through to the maritime precincts of the McLaren Vale, Southern
Fleurieu, Currency Creek and Langhorne Creek regions on the
Fleurieu Peninsula and across the cooler Adelaide Hills region
to the hotter Riverland region on the Murray River.
In 1997, aided by industry
visionaries, the Australian government launched “Vision 2025”,
which forecasted that by the year 2025 the Australian wine
industry would achieve AUD 4.5 billion in annual sales by being
the world's most influential and profitable supplier of branded
wines, pioneering wine as a universal first choice lifestyle
Initially, the surge in demand
had been too much for winemakers to deal with - in 1995 they
could have sold another 300 million litres if only they had had
the grapes to make it, figures from the Australian Wine and
Brandy Corp show.
How were the government to
increase Australia’s acreage under vines? Not wanting to
interfere directly, they came up with the idea of a tax break –
Managed Investment Schemes or MIS – which were to bring external
investors into the wine industry at a time when additional grape
supply was required. Unfortunately, Australian farmers
themselves started an orgy of planting vines in the late 1990s.
Thanks to prices for grapes going through the roof, farmers had
placed their bets on vines. Orchards in irrigation zones such as
South Australia's Riverland were ripped up and vines put in. In
1998 alone, some 16,200 ha of land were planted with wine
grapes, increasing the national cropping area by 22 percent.
Between 1996 and 2006, Australia's vineyards more than doubled
in size to 154,000 ha.
If truth be told: Australia
overplanted. In only five years farmers planted as many vines as
the consultants had projected for the 1997 to 2022 period. Even
when the overproduction of grapes became a serious problem in
early 2000, the MIS continued to put areas under vines. They got
their tax break – so why worry about zero profits?
You could argue that if
investors wanted to burn money, it was their right to do so. The
trouble is that these MIS overruled market mechanisms.
Representing only 10 percent’s of Australia’s total acreage
under vines, they nevertheless proved the last that broke the
camel’s back (apologies for this crass mixing of metaphors).
These MIS were so cashed up
they could afford to buy water licences at inflated prices and
push other growers out of the market simply because running a
profitable business was not their first business objective. The
tax break was abolished in July this year but that has not
stopped new MIS vineyards from being planted.
Australia’s farmers are a
hardy lot. Just take the aforementioned Riverland farmers.
Initially, they planted citrus trees. When the market fell out
because imported citrus concentrate was cheaper, they switched
to planting vines and almonds for the higher yields. Now they
seem to have reached the end of their tether because their
belief in the market economy and the self-regulation of supply
and demand has been seriously shattered. Whereas the
introduction of the water market in Australia was supposed to
make water distribution fairer and more transparent, the
premises on which the system was based have finally turned out
to be pure fiction.
In plain English: what do you
call a market that has nothing to trade? There is trade in
entitlements, abstract rights and pieces of paper. But this does
not mean that these entitlements entitle you to any water
allocation. The fact is that for the past three years in South
Australia farmers have not received their full allocation of
what their licenses said. This year, it is forecasted that the
allocation of water will be two percent of people’s
entitlements. This may improve during the season. Still, who
Rather than calling the “water
market economy” a big sham, Australians have taken to pointing
fingers. As the majority of Australians depend on the
Darling-Murray Basin for some of their water, South Australians
blame the Queenslanders, Victorians the people of New South
Wales; city dwellers blame the farmers, dairy farmers blame the
grape growers and together they give the finger to politicians.
The water shortage is poisoning relations between Australians at
all levels: from the local communities up to the states, whose
bureaucrats and politicians cannot agree on whose needs are more
urgent. In September this year the decision of the New South
Wales authorities to release water for use by its irrigators and
cattle farmers caused an outcry because this water was “wasted”
at the expense of South Australian farmers.
To all intents and purposes
the whole issue of who’s responsible and who’s to do what in
Australia’s current water crisis is conveniently obfuscated by
Australia’s federal system. For as long as four states have to
slug it out among them who can take how much water out of the
Darling-Murray Basin, politicians, bureaucrats and the stalwarts
of public opinion will continue their cacophonous shoutfest and
painful but necessary actions will be deferred.
Readers who have been
following this discourse on water diligently may begin to wonder
what on earth Foster’s current woes have got to do with this.
Actually, a lot. Both reveal that our trust in the absolute
rationality of markets needs to be questioned. Globalisation
Mach I, which we presently see coming to an end as Wall Street
investment houses crash and stock markets tumble, rested on the
belief that everything was possible, necessary and doable if it
made economic sense. The reduction of strategies and policies to
purely economic logic helped conceal the fact that it was people
after all who were pursing and implementing them and that their
reasons for pursuing them had as much to do with shareholder
value ideology as with personal vanities.
Foster’s story is remarkable
as a brewer that had been reduced to ashes when their first
global structure crashed, rose from the self-same ashes only a
few years later in order to re-invent themselves as a global
wine company. Foster’s probably knew better than anybody else
that ranking was everything. Being the world’s 18th
largest brewer sucked.
Investors, or rather the
gentlemen in their tailored suits who issued credit and
subscribed to bonds, had been praying the mantra of “only the
first five count” for so long that they began to believe it.
Like they believed in the so-called immutable law of market
economics that no less than 60 percent market share would do. Or
that you have to achieve an EBIT of 30 percent.
Foster’s executives listened
carefully and then did as told. Whether they really believed
wholeheartedly that they could pull this stint off – becoming
the number one wine company in the world - only the
autobiographies of Mr Kunkel and Mr O’Hoy, Foster’s past two
CEOs, will tell. One thing is certain, though. They knew that
they were driven by their bankers as much as they were driving
their company. And for as long as they could engage their
bankers in their favourite pastime – mergers and acquisitions -
they were safe. Sort of.
Listed companies like
Foster’s, Scottish & Newcastle and Anheuser-Busch, for that
matter, whose shares are spread widely, may have prided
themselves in their good investor relations. Yet only those
suffering from some sort of megalomania would have forgotten
that their investors are the enemy in their bed. Here today,
gone tomorrow and with them the family silver!
In retrospect the first period
of globalisation resembled a session in auto-suggestion.
Whatever was desired to be true, had to be true. The trouble is
that as brewers dashed forward in their scramble for companies
and markets they discarded any luggage that could have proven
heavy and cumbersome. That meant the history books but that also
meant people who would have issued some caution.
If you want to know why beer
and wine do not mix – there’s going to be a Part II.