The Australian wine industry is in trouble.  Pretty serious trouble too, and from more than one source.

Five years ago, Australia looked like a juggernaut in the wine world, with production and exports growing by leaps and bounds and a very strong competitive profile.  When the Aussies surpassed France in exports to the United States in both volume and value, it looked from here in the USA as though the sky was the limit for Australian wine.

Apparently, it looked that way from Down Under as well.  Plantings boomed across the country, and bright commercial prospects touched off a remarkable series of mergers and acquisitions both within the country and beyond.  Viewed from the USA, the most stunning development in this series was the purchase of Beringer, an American icon of the first order (and flagship of an armada including other large producers like Meridian), by Mildara Blass, which was in turn gobbled up by Aussie brewer Foster's.

But things have started to turn sour in the past couple of years.  The planting spree, which seems attributable in retrospect to what Alan Greenspan famously termed "irrational exuberance," produced a massive excess of grape supply relative to demand.  This produced a sharp decline in prices and, naturally, a number of bankruptcies and buyouts.  In some vineyards, fruit was simply left to rot on the vines, either for lack of a buyer or because it would cost more money to pick a crop than could be gained from selling it.

A second evil in the Unholy Trinity that has struck Australian wine is drought.  We Americans have seen some very scary droughts in California and the southeast this year, but nothing to compare with what has been experienced in Australia.  The sheer duration of the drought Down Under boggles the mind:  10 years and counting.  The situation is so bad that whole vineyards are already being abandoned, and entire regions are threatened with death if not irrigated.  And this is not an implausible prospect, as irrigation may simply be precluded in order to conserve resources for drinking water.

The situation is most grim in New South Wales, where the Riverina and Murray Darling regions grow vines that are deeply dependent upon irrigation, which is permitted only at the discretion of the national government.  These areas account for more than 60% of Australia's total production, though at the lower end of the quality scale.  In the absence of irrigation, Mike Stone, CEO of the Murray Valley Winegrowers Association has predicted that "there will be mass death of vines."

In the worst case scenario, Australian government officials would not even have discretion to exercise in permitting irrigation to prevent this outcome, since the Murray and Darling Rivers could simply run dry.  This actually happened 17 times in the years between 1900 and 1950.  It only happened 5 times in the second half of the 20th century, but some experts believe that the first half was more normal for Australia than the second, and that the current "drought" is actually a return to normalcy.

"Drought is too comfortable a word" according to John Williams, the New South Wales state Commissioner for Natural Resources, who was quoted in Cosmos magazine.  "Drought connotes a return to normal."  Williams regards the last 50 to 60 years, when Australia developed much its water infrastructure and current usage patterns, as times of relative plenty.  But now, in his view, Australia is reverting to the drier conditions of the past, exacerbated by other factors associated with global climate change.  For example, Australia seems to be particularly affected by the increasing frequency and severity of drought-causing El Niño weather patterns, which many experts attribute to global warming.

Prime Minister John Howard acknowledged in April of this year that the prolonged dry spell was "unprecedentedly dangerous" for farmers, and for the economy as a whole.  Mr. Howard was quoted in The Independent as saying, "It is a grim situation, and there is no point in pretending to Australia otherwise.  We must all hope and pray there is rain."  One of the grimmest indicators of the severity of the situation is that the rural suicide rate has "soared," according to The Independent.

Lovers of fine wine can take little comfort in the fact that prime growing regions have been less drastically affected to this point.  Even well established vineyards that have never needed supplementary water are in real peril.  In an interview last month, Peter Gago, Chief Winemaker for Penfolds, told me that drip irrigation lines had to be installed to prevent massive losses in the famous Magill Estate vineyard in Adelaide.  And of course there is no guarantee that irrigation might not be forbidden at some point in the prime regions around Adelaide if the situation continues to worsen.

For the moment, there's no end in sight to the drought, which is officially predicted to continue through the 2008 harvest by the quasi-governmental Australian Wine and Brandy Corporation (AWBC).  A conference being conducted in Melbourne this week is expected to result in the issuing of a new forecast for the Australian wine industry, and I will report on developments in the Wine Review Online Wine Blog.

A third source of trouble for premium Australian wine is a boom in the export of lower-end wines, which have then been deeply discounted (particularly in the U.K.) as grape prices continued to fall in the past few years.  In the United States, we've seen relatively little of the really low-grade wine being exported from Australia, but of course we have seen an astonishing influx of inexpensive brands such as Yellow Tail.  These wines are causing serious image problems, and Australia is increasingly being identified by consumers with inexpensive, vaguely sweet wines marketed to novices with purportedly cute "critter" labels.  Moreover, this identification is especially strong among younger consumers, whose notions will color the market for Australian wines over a long period.

That this development is unhealthy for Australia's industry seems indisputable, though I'm sure that one could turn up an industry spokesperson someplace who would be willing to dispute it.  Be that as it may, there's not much question that any wine producing country would much prefer to be regarded as a source for high-performing wines at all price points than to be considered a relatively unserious first stop for novices.  And there's not much doubt that this is exactly what Australia's profile is becoming in the minds of countless consumers.  Is that a big deal?  Ask a producer in Chile who is now trying to sell excellent Cabernets for $30 whether it is difficult to appeal to consumers who used to buy Cabs from Chile for $3 in the late 1980s.

Importantly, this problematic situation is not merely a figment of consumer imaginations:  Statistics from AWBC show that as production has climbed steadily in recent years, the average value of Australian wines has declined just as steadily.  Both curves are very smooth, and a current AWBC report actually plots them on a single graph that shows both trends--one sloping up and one sloping down--in seemingly perfect relation to one another.  Of course, those who know and appreciate Australian wine in all of its wonderful diversity know that all Aussie wine isn't Yellow Tail.  Yet, the numbers show clearly that Aussie wine is moving precisely in that direction.

So, is Australian wine headed inexorably for disaster?  I do not think that it is, though the smart money should bet on a serious shakeout and reconfiguration.  By "shakeout" I mean that an alarming number of growers and producers are likely to confront the demise of their businesses.  By "reconfiguration" I mean that the geographical center of gravity will shift from warmer regions to cooler ones, with certain inland areas likely being virtually abandoned while others, such as Tasmania, will probably see increased planting even as the production pipeline remains choked with excess output.

Although drought is a rather brutal means toward the end of bringing grape supply into line with demand, it is indeed having that effect over time, and hence rendering the industry more stable.  Moreover, we should recall that one of the great strengths of Australian wine is the remarkable group of highly innovative, resourceful, hardworking people behind it.  Australia has a very healthy, dynamic culture where wine is concerned, and that is not likely to change.

Since Australian wine will likely prove resilient over time, I look forward to profiling some success stories while continuing to report on the industry's woes during the coming year.  I'll be back next month with a column on Peter Gago and Penfolds, which remains a solid, stable lodestar amid all the turbulence that is roiling the industry and, in 2008 will cover the rise of Western Australia as well as the exemplary imports of Robert Whale.  Although the talents of the people behind Australian wine will be seriously challenged in coming years, it would not be prudent to bet against them.

Comments or Questions?  Write to me at mfranz@winereviewonline.com