WET: DUDLEY BROWN CLEARS THE WATER

DUDLEY BROWN AT WORK AT INKWELL WINES ... CLICK IMAGE TO SEE A VIDEO OF HIS PRESENTATION AT TedX DUBBO

Wine Water Tax And Politics
Dudley Brown At TedX Dubbo
Pity He Didn't Mention Religion

Below is the full text of the former Chairman of the McLaren Vale Grape Wine and Tourism Association's speech at the recent TedX Dubbo conference

My name is Dudley Brown. I am a wine grape grower and winemaker in McLaren Vale, South Australia. Please ignore the accent, its Australian. I’m just a bit confused. In fact, I’m a lot confused. That is how I ended up speaking at Tedx. They actually invited me to share my confusion with you.

Before I became a farmer, I was in recruiting for start-ups in California. As my business education was in wealth creation and not wealth redistribution, I was poorly prepared to understand the politics of agriculture in Australia.

I moved to Australia in 2003 not long after I realized that my three biggest expenses in California were my mortgage, property taxes and wine. The idea was to raise my kids in a beautiful place and eliminate my biggest expenses by buying a vineyard and drinking my own wine. What could go wrong?

I considered three wine regions in California and five in Australia. I hired a viticultural expert and researched grape and wine quality, soils, climate and water before choosing McLaren Vale above all others.

My plan was to eke out a living selling grapes and building a very small high-end wine brand to support my family.

After arriving, I worked as a laborer in my vineyard for three years improving so-so vines into some of Australia’s best using principles we now call sustainable farming.

In 2005, the risk of water shortages resulting from the drought made me realize that I could be driven out of business and lose my life savings. Mains water then cost about $900 per megalitre. It’s now approaching $2500 per ML – high enough to have put me out of business.

The good news was that I had an alternative – a privately owned reclaimed water system was nearby. The bad news was that it would cost $100,000 just to connect to it.

Reclaimed irrigation water has two advantages for the world:

1) It decreases demand for drinking water

2) It reduces the amount of pollution that flows into the ocean.

I helped start a plan with other small farmers to ask our governments to match investments made by us to substitute our irrigation source. Our approach was market based – the government’s investment would be about the market price for permanent river water rights at the time. The pollution we prevented was a bonus.

We pitched state and federal politicians on the idea but our plan became a “policy issue” to be studied by the bureaucracy. In short, it went nowhere.

In the lead up to the 2007 election, Anthony Albanese’s advisor called me out of the blue one day to ask for a meeting with Anthony the next day. After the announcement that Labor supported our plan, a political bidding war broke out that resulted in $4 million in funding from the state and federal governments for our plan. That was when I learned something big.

Big idea #1 – Politics matter more than policies. Policies don’t change until politicians need to win an election.

Four years on, we have permanently substituted around 500 million litres of drinking water – enough for 2000 households - per year and we are only halfway done.

This little project initiated my un-holy descent into the politics of agriculture in Australia.

Hopefully, you’ll understand why I was slow to catch on to my Big Idea #2. It may come as a serious shock to some of you too.

Big Idea #2: Wine is not Food.

Australia does not need more wine. It does need more food.

These two Big Ideas inform my view of three policy areas that impact the wine and grape industry – water, tax and land use.

My confusion is local in nature but has national importance. As Tip O’Neill famously said, “All politics are local.”

The wine grape industry is in long-term oversupply. Approximately 1/3 of the wine grapes grown in Australia are not required by wineries for wine. Because most grapes are substitutable for grapes from other regions, the effect of this is to drive down grape prices in all regions.

As a guy with pretty strong free market beliefs, I know that low prices drive out inefficient and unprofitable producers. But confusingly, in Australian, they don’t. Why?

In discussing this problem with those in government, their stock response is: “we’re not in the business of picking winners.” This led me to big idea # 3:

Big Idea #3:

Government policies pick winners - whether they do something new or not and whether they mean to or not.

Current taxation of wine in Australia is done on the basis of the value of the wine, not on the amount of ethanol it contains.

The rest of the ethanol industry – beer, spirits, etc - is taxed on the amount of ethanol it contains. The effect of the current tax policy is to make low priced wine – particularly cask wine - the cheapest way to get drunk in Australia.

Ethanol is a dangerous and addictive. Those with the least money and biggest thirst for ethanol logically buy cask wine. Despite their logic, these folks need help, not cheap booze.

The outcome of current policy can be most visibly seen scattered across the outback in the form of empty casks, ruined lives and decimated communities – particularly Aboriginal ones. However, the costs are spread across the entire population in the form of healthcare costs, broken families, crime, drunk driving deaths and homelessness to the tune of many billions per year.

While the wine industry isn’t solely to blame for this, it insists on maintaining its tax-advantaged status as Australia’s low cost provider of ethanol. On the other hand, it asserts that wine is a hedonic product – that we buy and drink wine because we enjoy its flavor and alcoholic properties and that overwhelmingly, we do so responsibly. Fair enough. My confusion is this: if wine tastes better and is taxed the same as other forms of ethanol, why is the wine industry worried about competition?

The second aspect of the current tax is the 31% WET rebate. The intent of this policy is to refund taxes paid by small wine producers – who generally produce higher priced wines – to compensate them for the high expense of the value based rate of tax they pay. Yea, I know – it’s confusing!

As growers have found winery buyers of grapes vanishing, they are increasingly lending their grapes to middlemen who offer the grower the proceeds from making their grapes into bulk wine a few months later less the cost of production. What could go wrong?

But, crucially, the middleman then pockets the 31% WET rebate on the sale price. This money is earned with almost no capital invested and no risk while the people who have invested their lives in their vineyard just get even lower prices the next year because the wine glut grows.

The net of this is that the taxpayer is funding middlemen who have no capital at risk and grape growers with unviable businesses to make our very worst grapes into wine to be sold around the world with “Made in Australia” stamped on every bottle for as little as 50 cents per litre. Which winner has the government picked? Do they even know?

In the 2011 vintage, it is believed that about 900,000 tonnes of wine-worthy (this means disease free) grapes were harvestable for table wine this year. Despite this, Australia processed over 1.6 million tonnes of grapes. This means that as much as 45 million cases of truly awful wine was made and added to the oversupply.

The only “demand” for bad fruit in 2011 was from rent seeking middlemen who made common cause with desperate farmers to take taxpayers’ money legally. Unintended consequences are called unintended for a reason. They’re unintended! Is this outcome what taxpayers’ want?

In the grape growing industry today, inland regions use seven to ten times more irrigation water to grow one dollars worth of grapes than coastal regions like the Barossa or McLaren Vale. If you factor in reclaimed water usage, inland regions today use up to 25 times the amount of drinking water to grow one dollar’s worth of grapes as in McLaren Vale.

Twenty years ago, McLaren Vale produced similar yields of grapes with similar amounts of irrigation to many inland regions today. But, we realized we were destroying our aquifer in the process. To protect our long-term sustainability, we limited water extraction in the nation’s first managed basin. The effects were:

1) Prices for McLaren Vale grapes rose as quality rose

2) Growers suddenly owned water rights worth $15,000 per megalitre instead of nothing

3) Our aquifer is re-charging, even in drought years

4) Water restrictions wrecked our lower value almond growing industry

This step change in water management led me to:

Big Idea #4:

Regulatory changes can be a good thing as long as they are applied broadly and equally.

The saying on the River Murray is “if you’re downstream, you are dirty with everyone upstream.”

To understand inland water usage, up to 1000 litres of river water are required to produce one litre of wine that sells for less money than one litre of bottled water in the UK or the USA. Confused yet?

Here’s a silly idea - why don’t we cut out the winegrower and make some real money selling a thousand bottles of water?

The peak bodies of the wine industry have defined the industry in terms of cool climate coastal regions vs. warm climate inland regions. But, the consumer doesn’t care about the climate of the region of production – they value price and quality.

But, if we extend this industry definition to the analysis of serious data, what we discover is that the highest value coastal regions create 4.3 times as much economic value and 5.5 times as many jobs “per grape” as low value inland regions.

Now, I want you to think like a business owner for a minute - if you owned Australia, would you want to invest in those that create more value, jobs and trade from wine or less? Would you use your scarcest resources to grow food or un-needed wine?

As it stands, SA Water is entitled to extract 200 GL – that’s two billion litres - of water from the River Murray for free every year. Even in drought years, Adelaide didn’t need a lot more than this because of local catchments.

Now, SA Water is building a 200 GL desalination plant to “drought proof” Adelaide for $1.8 billion plus annual operating costs in the hundreds of millions, whether the plant is in use or not. On top of that, South Australia has had to build new gas fired generators to make up for the expensive “green energy” that the de-sal plant bought. Most folks up the river think these are responsible ideas.

Instead of a de-sal plant, the government could have invested the same amount by buying water licenses totaling 200GL from unprofitable grape farmers in the Murray Darling basin by paying them above market rates of $2500 per megalitre for their permanent water entitlements.

Under this approach, these farmers would have been able to retire in dignity with their mortgages paid off or been able to purchase annual water to grow food on their land.

The entire national grape surplus of 500,000 tonnes of annual production could have been wiped out and the wine industry restored to a profitable level of production.

Australia would not have lost one calorie of food production.

And Adelaide’s water needs would have been met in perpetuity.

Now, here’s the pointy bit – after buying these water rights and solving the wine industries problems, the government would have still had $1.3 billion left over. This is almost enough to build the new Royal Adelaide Hospital without Macquarie Bank’s assistance. But, governments would have had to pick a winner.

So, whether you care about the wine industry, CO2 emissions, inland communities, the water supply, the health of the river, banker’s profits, better health care or your tax dollars, these choices matter.

The truth is that there has always been plenty of water in the river – we’ve just let the government allocate it very poorly. As Ronald Reagan once said, “if we put the government in charge of the Sahara Desert, in five years we’d have a shortage of sand.”

Which leads me to:

Big idea #5 - let the government do what it does best – collect taxes – and let the market do what it does best – allocate resources.

For instance - what if we put a $50 per megalitre levy on all water extracted from the Murray Darling system and put the money into a trust fund? If this seems like a lot of money, remember in Adelaide we pay $2500 per megalitre for city water.

Then the government could hold auctions where water license owners voluntarily tendered their water entitlements to be bought by the fund until permanent environmental flows were guaranteed on the river.

The levy would immediately drive the most inefficient and unprofitable water users to sell entitlements for the most efficient price, while those who stay on the land would have a permanent guaranteed water supply as well as incentives to invest in efficiency and quality.

The caveat to this would be for flood based crops like rice and cotton - we could give them free water in flood years. And, because water would be in the river all the time, floods would be more frequent and more water available for annual purchase.

This approach offers pain and gain for everyone. Everyone would have an equal incentive to be more efficient while guaranteeing Australia’s long-term food supply and the health of the river.

The reactions to proposals for step changes to current policies are predictable: “we’ll bankrupt farmers and destroy communities” and “we don’t pick winners.”

The short answer is this - we’ll get these outcomes anyhow – just more slowly and less rationally and with worse outcomes for taxpayers, the rest of the agricultural industry and the environment.

In Australia, the best regions for agriculture are mostly near the coast because they have more rainfall. This is also where it is cheapest to dig mines or drill for gas because of access to transportation. Unfortunately, this is also where 90% of us live.

Our best land and food security is being sacrificed for housing estates and mining because:

1) The government is usually the owner of the land and needs the money to fund infrastructure for bigger cities and mines

2) The government earns stamp duties and royalties from these projects, which it uses to fund infrastructure for bigger cities and mines

Does anyone else see a pattern here?

In McLaren Vale, the Labor government just sold land for a 1000 house estate on some of the best cropping and viticultural land in the world despite furious local opposition. An adjoining property grows grapes that end up in wine that sells for $250 per litre – 500 times the price of the drek produced by our tax incentivized middlemen.

The new housing estate will be on land classified as “low value” because the government only share-farms grain on it. The fact is that if agricultural land isn’t in highly valued use, it gets sold for housing.

The only serious solution is to embrace denser, smarter cities where the best agricultural land is ring-fenced in perpetuity from urban sprawl.

DUDLEY BROWN (LEFT) AT LAST YEAR'S TRACTOR ACTION DEMONSTRATION OPPOSING THE SA LABOR GOVERNMENT'S PROPOSED SUBURBAN DEVELOPMENT ON PRICELESS AGRICULTURAL LAND AT SEAFORD HEIGHTS, McLAREN VALE. ALSO PRESENT (LEFT-TO-RIGHT) ARE LAURA JACKSON (WE OPPOSE SEAFORD HEIGHTS), GRAPEGROWER JOHN HARVEY, PHILIP WHITE, AND PETER DAWSON (CHAIRMAN, AUSTRALIAN WINE RESEARCH INSTITUTE) photo LEO DAVIS

Having lived in California, I’ve seen the best and worst models for protecting valuable land in Los Angeles and Napa Valley. We have a choice.

In McLaren Vale – agricultural land has risen 30 times in value in the last 40 years. We have prodded the current government to embrace a long-term protection strategy for our best land after a five-year campaign. It isn’t law yet bit it’s a Big Idea we stole from the Napa Valley where agricultural land has increased in value by 300 times in 40 years under a similar protection model.

The nexus of interests between treasury departments, developers, engineers, construction companies, miners, unions and “planning departments” may be too strong for this to change. Maybe.

This leads me to revise Big Idea #1: Politics matter. But, politics - and politicians - could matter a lot more if we make Big Ideas political ideas.

Tedx is a brilliant forum to air the Big Ideas governments find unthinkable - taxing alcohol rationally, building denser cities, ending the dream of endless sprawl, putting levies on irrigation water, spending the proceeds to future proof our food and water supplies, protecting people without means from cheap ethanol, picking real winners, whatever.

This will only work if you leave Tedx and start thinking the unthinkable, saying things your neighbors won’t agree with, calling your MP every week (ask mine, I call him at least three times a week), building new kinds of community groups, blogging, writing, talking, and generally upsetting people. This also means bypassing traditional industry and policy structures.

Politicians, not bureaucrats, need to know that they need to change their policies or that they will be changed out at the next election. Voting for the party you have always voted for ensures that you keep getting these same crappy results because of:

Big Idea #6:

Politicians take you for granted and your silence as permission.

The truth is that you own this country. You are the person who can turn Big Ideas into political ideas. Politicians and bureaucrats are your employees. Its your job to make it clear what you want and to keep Big Ideas in the air and on the table.

It’s no fun figuring out whom to upset every day but neither is running out of great land, clean water or healthy food.

Or, good wine. Now, that would be disaster. Thank you.