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Wine shortage signals change

THERE is, believe it or not, a chardonnay shortage emerging in Australia.

Non-lovers of wine will say, so what? Investors who have watched the wine sector crash and burn over the past year will say don’t believe you, adding that if there’s a shortage of grapes why has the wine sector all but disappeared from the stock market.

Both are valid comments. Shares in wine companies were once an essential part of a portfolio.

Not today, when everyone believes there is a grape glut, and they can see the price of top quality wine tumbling in liquor shops.

The point being made by Briefcase is that the wine sector shake-out is nearing an end. Wholesale takeover activity has decimated the listed component of the industry, the glut has boosted supply and some of the biggest producers, such as Southcorp, have shot themselves in the foot with misdirected marketing strategies.

All of these factors have led to the point where there are just seven listed wine stocks left on the stock exchange, and some of those are very ordinary operations.

The real choice for anyone wanting exposure to a pure wine company is down to three or four.

That is the first significant point about wine today.

Investors do not have a choice and the stockbroker and merchant banking industry will soon spot the opportunity because of the gap and because the pattern of supply and demand is changing.

A shortage of investment-grade material has also developed in an industry (one of the few) in which Australia retains a significant natural advantage – we can grow excellent grapes and make good plonk.

This is why there was so much corporate activity in the first place, leading to the disappearance of listed companies such as Petaluma, Piper’s Brook, Banksia, Normans, Hotham, BRL Hardy, Cranswick, and Simeon Wines.

Staff at Peter Lehmann, the latest to fall, are currently learning how to yodel as the Hess family of Switzerland takes control.

Takeovers have created a corporate shortage, which takes us back to the second example of shortage, the chardonnay shortfall.

In South Australia, Hardy’s Wine, part of the Constellation Brands mega-group (which acquired BRL Hardy earlier this year), has asked some of its growers to graft chardonnay onto their cabernet sauvignon vines.

The aim is to get an extra 5,000 tonnes of chardonnay into Hardy’s wineries. It will take time for the extra chardonnay to appear in bottles, but that is not the point.

The graft-over instruction is a sign that market conditions are changing.

The glut we all know about is starting to apply only in certain categories, especially white grapes, while red wine grape varieties, such as shiraz and cabernet, remain in abundance, for now.

Out in the real world of markets and demand there are other hints that the worst is over for the wine industry. There are early signs that the 2004 vintage will be about the same in tonnage as 2003. In other words, the stellar rise in production that came from record vine plantings in the 1990s has reached a peak.

From next year there will be comments about the need for new plantings to match the worldwide demand for Australian wine which hit an export value of $2.42 billion last financial year (up from $991.1 million in 1999) and remains on track to become Australia’s biggest agricultural export by 2010 – just seven years away.

From an investment perspective wine has reached the crossover point where downward pressures will soon be overtaken by upward forces. That leads to the questions of where do you invest, and if there is a genuine shortage of investment-grade opportunities what happens next?

The answers are that the few high-quality wine stocks listed will start to rise.  McGuigan Simeon and Evans & Tate are probably the pick of the current crop.

However, never forget the fundamental laws of supply and demand, and the ability of supply to always rise to meet demand – a sure fire pointer to some of the better run, medium-sized, private wineries going public to fill the listed stock gap.

 

EXPECT a bit of news over the next few days about a new company created by the CSIRO.

Intellection has been set up to market a very smart piece of technology that automatically analyses mineral and ore samples.

What once took days, or weeks, can now be done in minutes using the Qemscan machine which is based around a scanning electron microscope.

The process has been under development for almost 20 years inside the CSIRO but has been slowly making its way onto the world stage via sales agreements with some of the world’s biggest miners, such as BHP Billiton, Rio Tinto and the Brazilian iron ore giant, CVRD.

Briefcase is full of praise for the way the Australian Government’s science agency has once again proven itself to have the smarts.

Qemscan is a world-beater with one American copper company, Phelps Dodge, claiming to have recovered the $1 million purchase price in a matter of weeks.

But, two thoughts nag away. Why has it taken 20 years to move from research to production?

Perhaps it is the way world-class technologies evolve though there is a worry that this might be more a case of the speed with which government functions.

The second worry is the decision to keep Intellection as a wholly-owned CSIRO company, which could mean more of the same slow-speed development rather than rapid commercialisation which is how a successful business must function.

 

 

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