Last Friday Australia’s biggest winemaker Fosters Wine Estates gave a trading update with advice that earnings would slip from the firming of the exchange rate. The Aussie dollar is eroding Australia’s declining export earnings as Christmas closes in. Meanwhile, any Aussies travelling at this time of the year will be delighted – except wine exporters.

“Unfavourable exchange rate movements are expected to negatively impact first-half wine earnings by between AUD 80 to 90 million,” the company said in a statement. “The major currency impacts are expected to be an approximate 9 cent increase in the average USD dollar and an 8 pence increase in the average pound sterling exchange rates compared to the prior period.”

Foster’s added that they believed many analyst forecasts were out of step with reality given the current prevailing exchange rates. Despite this, they remain confident in the future of the wine business.

Beer revenues have been propping up the wine side which has made substantial divestments and continues to offer vineyards for sale.

As Australia heads into the 2010 vintage in less than a month the trading position for the country does not look good as few producers have addressed the chronic oversupply situation.

The Big Four – Fosters, Constellation, Pernod Pacific and Australian Vintage (AV) have addressed the structural nightmare with downsizing, divestment and relentless cost cutting in progress.

To an extent Constellation and AV are progressing a collective which will see the US listed Constellation take a shareholding in AV to consolidate both Groups’ commercial wine businesses.

Winemakers and grapegrowers alike planted grapes in all Australian regions over the past decade and now need to take responsibility for the over-supply; not just a few. That means ripping some out as many Sunraysia growers have now done.

However, struggling growers in southern New South Wales are expected to hang on to their vines for another 12 months, despite the continuing glut. The Riverina Wine Grapes Marketing Board says some varieties have been pulled out, but not to the same extent as vineyards in the South Australia.

Chief executive Brian Simpson told ABC radio last Thursday that the industry is likely to experience another difficult season. “Here the difference from 2008 to 2009 vintage was $40 million farmgate decline in returns to growers.”

“If we see that occurring again in 2010 and indications are that is expected, that a further decline in prices will occur, we will see growers looking to mothball perhaps in the first instance,” he says. “But taking the drastic step of removing large areas of vineyards, I think they’ll probably put that off for a further 12 months.”

Unlike the European Union where a free market does not exist, Australian production will need to continue to slide downwards to receive some balance and profitability.