More $10 Wine Headed to Shelves Thanks to Drop in Aussie

(Bloomberg) - Australian winemakers prayed for a weaker exchange rate as a record-high currency made their bottles less profitable overseas. Now they have a new problem: getting what they wished for.

While a drop in the Australian dollar means they can sell better wine for the same cost, a bumper grape crop threatens a glut that could encourage price-cutting and lower quality instead. That may not be good news for companies such as Treasury Wine Estates Ltd. (TWE), which hope to lift prices and goose profits by shaking off the country’s low-cost reputation.

“I’m genuinely fearful what will happen,” said Jeremy Oliver, a Melbourne-based wine critic and author of the Australian Wine Annual guide. “There is a double whammy of a change in the dollar and a large vintage that could do a lot of damage to our export reputation.”

Australia’s wine industry soared in international markets as the local currency fell to a decade low of 60.09 cents in October 2008. At the same time, oversupply of wine grapes drove down prices for local bottles, causing quality and profitability to slump, according to a 2009 report by Deloitte.

An 84 percent gain in the Aussie from that low point to its 2011 peak made things worse, as increased global competition left local producers with little leeway to raise prices and squeezed profit margins, according to Wine Australia, a government-backed industry body.