A country-wide drought, harsh frosts, bush fires and even locusts have plagued the grape-growing regions during the 2006/2007 growing season. Some growers estimate the vintage will be down by almost 30%.
Conditions have already begun to impact grape prices and could affect UK retail prices as early as the second half of this year, winemakers have warned.
"The drought has been the worst in living memory," said Bill Hardy, oenologist for Hardys, Australia's number-one wine brand.
"We are seeing grape prices creep up, particularly on varietals such as Pinot Noir and Sauvignon Blanc, of which Australia only has a small amount but they are growing in popularity."
Phil Laffer, chief winemaker at Australia's number-two brand, Jacob's Creek, said the situation could end the much-publicised Australian wine glut.
"The oversupply situation of the past three to four years in Australia looks like it's coming to an end this year," he said.
"I expect there will be an impact on next year's growing season into the 2008 vintage. If that happens there will be serious pressure on prices towards the end of next year."
For an industry that has built its UK business on sub-£5, often heavily discounted, wines the situation will require careful handling. "It's important we don't take advantage of this situation and raise our prices too high," said Brian McGuigan, MD of McGuigan Simeon Wines.
"We need to be stable on price or we will lose the loyalty of the distributors, wholesalers and multiple retailers that have helped us build the category," he said, adding, "but deep discounting may soon have to be a thing of the past."