Hundreds of Australian wine grape growers faced financial ruin without a multi-million dollar bailout fund, their

industry chief said today.

Up to 40 per cent of growers will be shunted on to the social security system within two years without urgent action,

Wine Grape Growers Council of Australia executive director Mark McKenzie said today.

Mr McKenzie will present plans for a federal government bail-out fund to a crisis meeting at the Wine Industry

Summit in Melbourne on Friday.

The bail-out could cost up to $60 million to remove a glut of wine grapes from an oversupplied market.

Under the council's proposal, growers would be compensated for not picking their grapes for the next two vintages -

either by leaving grapes on the vine or taking measures to stop the vines producing fruit.

"We have a short term problem where we need to put a circuit breaker in our system," Mr McKenzie said today.

He said significant numbers of wine grape growers were struggling with up to 40 per cent under financial threat, and

hundreds facing the threat they may not survive another season.

"If nothing happens, then those growers would be thrown back on to the social security system," he said.

"We need to take 15,000 hectares, or 300,000 tonnes (of wine grapes) out of the system for the next two years."

Mr McKenzie said the final figure of the proposed bail-out plan had yet to be finalised but could be about $30 million a

year.

Friday's meeting will be attended by Agriculture Minister Peter McGauran, wine industry leaders and chiefs of

Australia's six largest wine companies.

But Labor's agriculture spokesman, Gavan O'Connor, said the summit to address the wine grape glut was in danger of

being a "talkfest".

The warnings came as the Winemakers' Federation of Australia released its 2006 vintage report, showing the glut was

continuing to hurt the industry.

The federation said a smaller 2006 vintage - the annual grape crush fell by 79,000 tonnes to just under 1.85m tonnes

- failed to take the sting out of the oversupply.

The overall crush was 4.1 per cent smaller than the 2005 vintage.

"The 2006 wine grape crush would have been higher, probably another record, were it not for some wine grapes

being left on the vine or harvested on to the ground," federation chief executive Stephen Strachan said.

"Although slightly down, this vintage is likely to continue to place pressure on inventory levels and highlights the

importance of continued efforts to grow both domestic and export opportunities to address current surpluses."

Questions:

(i) Explain, with the aid of the above diagrams, how this industry may have ended up

in this situation. Please note the left diagram represents the market and the right

one illustrates the situation for an individual grape grower.

(ii) There are two solutions to this problem. Either the government can implement a

subsidy which keeps the grape growers in business (bail-out solution), or the least

efficient growers will have to shut down, sell up, pack up and leave the market

(the market solution). Compare the natural market solution with the bail-out

solution and identify the advantages and disadvantages for both solutions.