Chinese Tariffs on Australian Wine!

[Kent_Comley]

WET is payable on all wine in Australia, imported or domestic, as is GST. The only difference is the 5% import duty.

Do importers get WET rebates or credits like exporters or domestic producers?

WET is applied to all wine at the wholesalec level…
The domestic producer receieves a rebate of 29% WET on wholesale and cellar door sales up to $350,000 per FY. Very little benefit to teh likes of Treasury but very significant for small producers.

[Andrew_Hamilton]

Andrew,
Loss leaders is a myth. Large retailers do not take a loss on certain items. The producers pay for the privelege of having their product promoted. In some instances the invoice price may suggest an unsustainably skinny margin for the retailer, but rebates ensure the retailer does not lose. They are in the business of maximising return per square foot and they are very adept at it.
I would be very surprised, in fact amazed if there has been any dumping into China. Until a few months ago demand for our wine was very strong with high grape prices and high bulk prices especially on the back of a meagre 2020 crop. This is politics, pure politics.
It is very much adversely effecting my little corner of the world - crayfish, timber, wine all major industries in our region. Next will be milk solids, beef etc. everything but iron ore, which they need. Australia is being made an example of to remind other trading partners of the need to toe the line.
It will be nigh on impossible for Australia to find new markets for the $1.3B Chinese exports.

Thanks for the response Kent. To your comment of “The producers pay for the privilege” what happens when the producer is the retailer? Granted these are things I’ve been told, I’m not ITB, YMMY, etc. But take Dan’s for instance. Woolworth’s (Dan’s owner) owns a large portion of the wine industry nationwide. They own the majority of mobile bottling trucks, the largest retailer, and Langtons, our biggest wine auction house. Excluding farming they have the best visibility of the wine market domestically as they’re heavily involved at every step.

So the story I’ve been told is that they pitch up at your winery to bottle your vintage and after tasting it during bottling decide they’re interested in buying the lot. So they dangle a check in front of the grower/winemaker which just might allow them to break even. But it provides certainty, allows them to move the entire vintage in one go, etc. Basically it’s easy. So woolies pitches up again the next year and offers you the same deal. But at year 3 they come in, give you a song and dance about costs, the market, and what not, and then offer you 20-25% less than they did the previous year. And now you’re stuffed. Sure, you can decline and attempt to move your stock via more traditional channels and the cellar door, but you’ve not been in that space for a few years, your relationships aren’t in place, and it’s a very hard road. So most take the L. My point being is that even if the retailer isn’t taking the loss someone is. And in this instance it’s the grower/winemaker.

I agree that these moves are adversely affecting multiple industries as the same is happening over here. I expect we’ll all be eating some cheap crays this Christmas. And while I do think the dumping investigation had merit I also believe the blanket tariffs on wine exports are a purely political move. But I’ve also seen stats that the total impact of these tariffs is less than 4% of our total exports to China. Also I thought they had already targeted beef, which unlike barley, did appear to be unwarranted and political.

And while you’re right about their need for iron ore, Australia is being propped up by those iron ore exports to China. Mining of iron ore, a high dollar price, and the royalties that are delivered off the back of those exports is what has kept Western Australia in the black this year and to a lesser extent it has propped the country’s finances as well. We’re somewhat fortunate Brazil’s covid exposure is what it is as that’s forced their ore industry to spin down, effectively making us the only game in town. I’m worried what will happen to us once that’s no longer the situation.

Expect some cheap Grange and 707 at a store near you.

I’ll pass.

[Andrew_Hamilton]

WET is payable on all wine in Australia, imported or domestic, as is GST. The only difference is the 5% import duty.

Do importers get WET rebates or credits like exporters or domestic producers?

WET is applied to all wine at the wholesalec level…
The domestic producer receieves a rebate of 29% WET on wholesale and cellar door sales up to $350,000 per FY. Very little benefit to teh likes of Treasury but very significant for small producers.

And before July 1, 2018 the rebate was capped at $500,000 per FY.

[Kent_Comley]

Andrew,
I call it dancing with the devil.
The major supermarkets produce a lot of wine, buying bulk juice, packaging the wine and on selling. The bulk juice market is very large.
They also enter into arrangements with producers for BOB (buyers own brands).
Ultimately these are the wines at $15 or less retail, and the margins for the reatilers can be very good.
To me loss leaders implies the retailers are takinga loss, which they are not.
The closest thing to loss leaders is cartons of beer, which have traditionally been sold at way lower margins than wine.

[Andrew_Hamilton]

Andrew,
I call it dancing with the devil.

Lol. It does have a bit of a Faustian vibe to it.

The closest thing to loss leaders is cartons of beer, which have traditionally been sold at way lower margins than wine.

The fix for that is to import your beer from Vietnam!

Private Label beer customised for you | Pomegranate Asia (Private Label beer,...

[John_Morris]

This chart of the export markets of Australian wine that the American Association of Wine Economists tweeted out this week shows how Aussie exports have shifted dramatically toward China, and away from the US and UK:

[James_Billy]

I also think the Chinese have a limited appetite to being lectured to by western countries regarding human rights abuses and when evidence emerges that highlights we’re not so innocent (like the ADF investigation into the SAS murdering innocent Afghans) they leverage that.

This is like comparing mountains to molehills.

Nah! More like comparing a grain of sand with a desert. Well, kinda!

[Paul_Fountain]

I think Treasury’s response to this has been fairly instructive. It also shows they were fully aware of the risks and had a contingency plan in place. Part of that included more vineyard capacity for both Wynns and Seppelt which were both identified as being constrained from a grape supply perspective. An acknowledgement of sorts that they had been funneling Wynns and Seppelt fruit into the Penfolds label, presumably to satisfy Chinese demand.
You’d think they would easily have the biggest exposure. I wonder how many of the wineries I regularly buy from have any sort of exposure.

[AndrewH]

1. The standard for dumping isn’t does it make the product cheaper than domestic producers, it’s whether it’s being sold below cost. Even if the product is above the price of domestic producers it could harm them from a trade perspective by reducing the price differential.

From my reading “Dumping occurs when a company exports a product at a price lower than the price it normally charges on its own home market.” But I take your point. I was just trying to highlight the curious situation that Australian imports were cheaper than domestically produced wine. That seemed strange to me and illogical from a high level perspective. Do you expect Australian budget wines to be cheaper in China when compared to domestically produced budget offerings?

Assuming the Australian wine is being sold to China at a price that could constitute dumping, there still is a requirement of material injury to a domestic injury, and tend to agree (without any particular knowledge of the Chinese wine industry) that Australian wine is not likely causing such injury. But it’s certainly possible. Maytag succeeded in getting tariffs places on Korean washing machines even though those offerings were, even if not dumped, being sold at lower prices than Maytag’s offerings. The goal of the domestic producer is to reduce the existing price differential to make its products generally more attractive to at least some consumers. Even if Chinese wines are being sold for $10 against Australian wines that are $12, Chinese wines will sell better if the Australian wines have to be priced at $14 instead because some consumers value the quality difference as less than $4.

[Rich_K0rz_nk0]

1. The standard for dumping isn’t does it make the product cheaper than domestic producers, it’s whether it’s being sold below cost. Even if the product is above the price of domestic producers it could harm them from a trade perspective by reducing the price differential.

From my reading “Dumping occurs when a company exports a product at a price lower than the price it normally charges on its own home market.” But I take your point. I was just trying to highlight the curious situation that Australian imports were cheaper than domestically produced wine. That seemed strange to me and illogical from a high level perspective. Do you expect Australian budget wines to be cheaper in China when compared to domestically produced budget offerings?

Assuming the Australian wine is being sold to China at a price that could constitute dumping, there still is a requirement of material injury to a domestic injury, and tend to agree (without any particular knowledge of the Chinese wine industry) that Australian wine is not likely causing such injury. But it’s certainly possible. Maytag succeeded in getting tariffs places on Korean washing machines even though those offerings were, even if not dumped, being sold at lower prices than Maytag’s offerings. The goal of the domestic producer is to reduce the existing price differential to make its products generally more attractive to at least some consumers. Even if Chinese wines are being sold for $10 against Australian wines that are $12, Chinese wines will sell better if the Australian wines have to be priced at $14 instead because some consumers value the quality difference as less than $4.

Per the article posted previously, they don’t appear to be the cheapest option…

“Australian wine is by no means subsidised, it is by no means sold at or below anything other than market rates in the world market,” he said. “Australian wine during the first half of this year proved itself to be the second-highest priced wine sold in the Chinese market.” - Australian Minister for Trade Simon Birmingham

China-Australia trade dispute extends to wine as Beijing targets cheap imports in anti-dumping probe | South China Morning Post

Granted that’s a course-grained statement, however I’m sure he’s not out and out lying. My gut is telling me that China’s newly developed stance is just flexing.

One of the reader comments below that article made me laugh, and doesn’t sounds outlandish…

"Meanwhile Chineae wine tends to be overpriced - look at Greatwall Cabernets that fetch 99 yuan and taste like boiled tar! "

[R_M_Kriete]

Maybe China is planning on planting vineyards on the new islands they are building in the South China Sea and just want to protect that investment

[R_Scott_Hughes]

I think that it is impossible to meaningfully participate in this thread without getting political. For decades now, growth focused business executives have looked at the demographics of China and viewed it as a massive untapped market that could propel significant growth without taking the time to understand the political realities of doing business there - or that the Chinese gov’t views relationships with a very short-term transactional mindset. Their leadership realized that from 1949 through the early 90’s, the country had fallen far behind much of the world in terms of technological capabilities and have since been making a concerted effort to catch up through any means necessary - beg, borrow, or steal (with an emphasis on one of those methods). While wine production may not be technology or a strategic imperative for China, it is certainly a club that they can use for other purposes now that AU is dependent on their market, leaving folks who are primarily focused on making tasty grape juice the subject of geopolitical posturing. And yet, with countless examples of forays into China ending badly, there are still countless companies lined up and ready to chase that market - I guess they think ‘this time will be different’.

[Andrew_Roper]

I wish to thank all for the comments to date and sorry if post this was listing on the political side of life! It was difficult to balance it.

Whilst I agree with the detailed summary of many including Andrew Hamilton - thank you for putting it into perspective, and yes the main reaction has as said been highly emotional from an Australian perspective.

I think the there are some major lessons to be learned for all wine producers world-wide:

1. Don’t rely on one source of income imo in operating a small business - the less reliant on a major customer you become the safer you will be long term.
2. Don’t always follow the big corporates into a foreign market - you will only ever pick up the scraps if you can’t match the size of investment in marketing, wine expos, advertising and use of on-ground sales people.
3. Don’t be drawn into price scraps with distributors, stick to your ethos of creating quality over quantity.
4. Always find a point of difference to your competitors and research the foreign market to the extent that you know how this market ticks with trends etc.
5. Boutique is wonderful and create a saleable and believable story around your wine.

Thanks again to everyone putting their point of view and I shall be using these for an article on my LinkedIn page.

Ive put up a positive hashtag #cheerstoaustralianwine and we are getting some good traction there. Far too many negatives to dwell on and dealing with China is always going to be a challenge regardless of who you are!