July 16, 2006 - ST EMILION -- The view over the green vineyards, terracotta roofs and ancient stones of St Emilion, the village nestling in the heart of the Bordeaux wine growing region, gives a sense of timelessness. But beneath the tranquility a crisis stalks French wine producers. Chronic overproduction and unreliable quality have seriously undermined France's leading position in the world's wine markets.

Bordeaux, and much of the French wine industry, is under siege from competition from the New World which is draining away France's share of domestic and global markets.

The threat is not just from old rivals like Spain or Italy but from producers in Chile, Argentina, South Africa, Australia, New Zealand and California. French producers are struggling to find a response to market forces which threaten even the timeless traditions of St Emilion.

The result is bitter dissent in the wine growing community, bankruptcy and hardship. The "haves" are supporting calls for cuts in production, the "have nots" are clinging tenaciously to their precious vines, reluctant to see their woody stems uprooted for the good of others.

Bertrand Cousin, an ex-investment banker who took the Brevet Professionel Agricole diploma to qualify as a wine grower and now works as a consultant, sees the wine industry as a crucible of French society: inward looking and resistant to change.

"It's an administered economy, a state-regulated industry, which has to operate in a free market," he said. The battle between regulation and market forces has led to distortions, with low and middle market French wines losing out to New World products. Wine raises passions that few business sectors experience. The product of a hit or miss fermentation and subject to vagaries of rain, frost and sun, wine is a multibillion global business which elicits elegies from connoisseurs to concern among health professionals.

But for wine lovers, there is a relationship with the grape and the grower. Laurence Brun, who manages Chateau Dassault for the Dassault family, describes the estate's 2005 Bordeaux: "Colour black, deep. A very developed nose, exuberant, with a hint of red fruits -- blackberry -- with figs and plums. The wood is not dominant, although the woody scent would normally take the foreground over the fruit at this stage of the wine's life..."

But her heroic description of a fine wine is is a momentary diversion from the fact that the French wine industry is dividing into two markets, completely at odds with one another. "There is a problem for downmarket wines, which upmarket producers are not experiencing," Brun says. Neither understands the other, nor the gulf that is forming.

There are the select 20 to 30 elite labels such as Margaux, Latour and Cheval Blanc, whose prices for 2005 growths have smashed all records. That small segment is commanding "mad prices," Brun says. Prices are hitting E400 ($509, £276) a bottle, signalling a speculative fever in new Bordeaux wines. Prices for Bordeaux 2005 soared by an average of 68.5 percent over the previous year's, according to trade sources. Three Bordeaux producers commanded 300 percent price increases for the 2005 growth, out of 197 producers, or 1.52 percent of the community. Seven had 200-300 percent increases.

In view of the astronomical increases commanded by luxury wines, Chateau Dassault "only" managed a 33 percent price rise. Some view that as a failure, but Brun is relieved she has sold her stock to established clients at decent prices. Some 93 percent of Bordeaux cases put up for sale found buyers, up from 74 percent for 2004. The last time sales reached that level was in 2000.

But Brun's happy lot does not extend to the majority of French producers, who are struggling with declining prices.

Bordeaux makes up the world's largest Appellation d'Origine Controllee (AOC), the label that states a wine comes from a specific area. To prop up prices, the Conseil Interprofessionel de Vin de Bordeaux (CVIB), the powerful producers' guild, set a price floor of E1,000 per 900 litre barrel of red wine. But some producers were found dealing at E800 per barrel, the equivalent of selling a bottle for E0.66. To tackle overproduction, European Union (EU) agriculture commissioner Mariann Fischer Boel has proposed a huge vine uprooting programme. Under her plan, some 400,000 hectares of vines would be uprooted over five years, out of a total 3.4m hectares owned by 1.5m farmers in the EU. The plan is intended to end payments for distilling unsold wines into byproducts or putting them into storage. These payments, intended as a safety net, have become permanent subsidies encouraging overproduction, Cousin said. "There is no alternative to ripping out vines," she added sparking alarm through much of the wine growing sector. French agriculture minister Dominique Bussereau has said "non" to Fischer Bole's proposal.

France is being targeted because it feeds the EU's swelling wine lake. France and Italy lead EU output, each producing an annual 52m hectolitres of wine.

David Cobbold, a Paris-based wine expert and author, estimates that there is 15-20 percent overproduction worldwide, producing a structural problem for wine producers with too much wine chasing too few customers. He believes that France needs to be even bolder than the EU proposal and rip out 20 percent of its vines, although, he concedes, an across-the-board measure would be disastrous. He says a selective approach needs to be taken, with poor quality vines taken out, leaving the better quality ones in the ground to thrive and prosper.

For French producers it is hard to argue with the economics of New World wines. Small French producers with a few hundred hectares cannot compete with Third World producers, in Chile for example, where the cost of land, labour and transport are lower, and where a grower may have 30,000 hectares under cultivation. French producers have also failed to tackle issues such as quality, and marketing. A profusion of brands and lack of concerted marketing have contributed to the steady erosion of France's domination.

There are exceptions, however, such as Champagne where growers, producers and traders have joined forces to maintain controls on quality and output. Rose wines have outperformed, and most New York or London barmen are familiar with the names Sancerre and Chablis.

Growers in the big producer region of Languedoc-Roussillon have also adopted a common brand, South of France, backed with a E20m marketing budget from the regional council and industry. But it is in the midmarket where the problems lie and which Cobbold says is French producers main area of vulnerability.

Wine consultant Bertrand Cousin agrees. He says the E5-E15 mid-market price range with the highest sales volumes is where the quality battle will be fought and won. Besides price advantage, New World wines offer reliability of quality -- not as great perhaps as the French, but not insignificant either -- which appeals to young wine drinkers.

"Look at a wine menu and you can see a vin de pays selling at anything between E20-E140," Cousin said. "It's crazy, but a good vin de pays can cost more than an AOC." In the market, quality talks louder than regulation, he argues.

The use by New World winemakers of a single type of grape, such as merlot, cabernet franc, or pinot noir, has simplified choice for less discerning wine drinkers. French producers blend grapes and promote their wines on the local region -- the terroir -- a mix of soil, sun, and hundred and one particularities which give their wines their character and creates the brand.

Brun supports this marketing strategy and says that choosing a wine is comparable to buying a perfume. "You don't buy 20 percent rose, 10 percent musk, etc. You buy it because it is Chanel."

But the proof is in the sales figures and the French are losing out. Most producers have wine they cannot sell at anything but crazy prices and they don't want to destroy their much loved vines to bring more balance between production and consumption.

Brun is clear as to what needs to be done: Invest money in improving quality is the solution, she says at her Bordeaux vineyard. Maybe the spirit of Emilion, the 8th century monk who gave his name to the village, can work another miracle. France's winemakers certainly need one.

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