The way I see it (and there are multiple ways to see it), we have four different taxonomies that exist in tandem with one another, overlap, and at times compete:
[1] The Prädikat system (Kabinett-Spätlese-Auslese-Beerenauslese-Trockenbeerenauslese-Eiswein) emerged from centuries of history, tradition, and trial & error.
[2] The German Wine law of 1971 attempted to inscribe upon this a more defined and regulated regionality by decreasing the amount of Einzellagen (vineyards) and creating clearly defined Grosselagen (subregions).
[3] The VDP (Verband Deutscher Qualitäts- und Prädikatsweingüter) is an association of growers founded in 1910. They have their own terroir-based philosophy and labeling system that once used Erstes Gewachs (first growths), Grosses Gewachs (great growths), and Erste Lagen (first positions) to categorize their top sites. They recently changed to using Grosse Lagen, Erste Lagen, Ortswein, and Gutswein to categorize. The VDP tends to (at least recently) value dry wine production.
[4] EU Regulations. Though not particularly pertinent to this article, all of these systems must assimilate with the overall EU regulations that distinguish between Table Wines (TW) and Quality Wines Produced in Specified Regions (QWpsr).
The German Prädikat labeling system can be confusing to the uninitiated, but once you can read the labels the shear amount of information is incredible-- if only all wine labels could be so detailed and transparent! In comparison, lots of wine laws from many EU countries (usually to protect their finest wines) actually prohibit transparency and don't allow winemakers to include bits of information (year/place/grape) that could help guide consumers. A single German AP number will give you so much information. Yet despite all of this availability of German wine information, there are still several points of contention and confusion in the various labeling systems; one of the most prominent issues revolves around the production of dry wine, discussed in further detail below.
The VDP has found a way to avoid the Prädikat confusion of dry wine production in part by abandoning/augmenting key elements of the Prädikat system. Currently these two different systems-- one a set of historic guidelines for the entire country and the other a taxonomy created by a professional organization and applicable only to VDP members-- are both in play on German wine labels, sometimes in tandem with one another, at other times the different versions are at odds.
Sound confusing? That's because it is. I've met many a German wine producer that has admitted that they can barely keep up with all the changes and systems themselves.
The German Prädikat system has six subcategories that have emerged over the centuries. These are not necessarily intended to create a hierarchical status but, in part because of the rarity and higher production costs of the BAs/TBAs/Eisweins they've been vernacularly rated according to grape hang time. Essentially, a Trockenbeerenauslese is considered higher quality than a Kabinett (even though it's sort of like comparing apples and oranges) because of the TBA's higher cost and smaller production. The stratification of the extremes of German Prädikat wines has ended up stratifying the Kabinett, Spätlese and Auslese wines as well, so that consumers tend to believe that a Spätlese is better than a Kabinett; an Auslese is better than a Spätlese, etc. Price also mirrors this grade and tends to buttress the false hierarchy concept.
Of course, it is more complex than simply associating quality with Prädikat level, but the Prädikat system subconsciously leads us to do this-- I even catch myself oogling at TBAs in wine shops, wondering how they did it-- how many baskets of "raisins" were crushed for that bottling? One?

We can tell several things from this label:
Producer: Carl Schmitt-Wagner
Year: 2003
Grosselage and Einzellage: Longuicher Maximiner Herrenberg
Grape: Riesling
Preferment Must Weight: Spätlese (though we are unsure by looking at the label wether this is sweet or dry)
AP Number: this gives us even more detailed info
Anbaugebiete: Mosel
Time bottle left cellar: We know that this bottle left the winery cellar after 2007 because the Anbaugebiete says "Mosel" and not "Mosel-Saar-Ruwer." The shortened "Mosel" was only initiated in 2007.

The label indicates several things:
Year: 1966
The preferment Must Weight: Spätlese (late harvest) so we might expect some sweetness here though we do not know for sure.
Sang- the particular part of Kartäuserhofberg
VDP member- the black eagle is the symbol of the VDP
The Grape: Riesling
The Region: Mosel-Saar-Ruwer (you can see this written out on the other side of the label)
Because of the longer hang times, and because in the imposed hierarchy BAs/TBAs/icewines at the "top end" are always sweet, consumers expect there to be a progression, a rise in sweetness from a Kabinett to a Spätlese, and from a Spätlese to an Auslese. This is a massive misconception, and one that is being challenged by many winemakers at the moment. Within these three categories (Kabinett/Spätlese/Auslese), it is very possible to take the fermentation of the sugars through to a point of dryness (this is not really possible with the BAs/TBAs/Eisweins). The majority of consumers, however, have been trained to expect sweetness in an Auslese, and some sweetness in a Spätlese. This preconception makes the average consumer confused when they purchase a Spätlese and it turns out to be bone dry. It also drives dry wine seekers away from Spätlesen and Auslesen that may indeed be dry.
There is a correlation between alcohol and sugar-- as sugar is transformed into alcohol, there is less sugar. Thus we can expect a higher alcohol wine to be less sweet than a lower alcohol wine. Though this is a handy hint to guess the sweetness or dryness of the bottle, it isn't entirely foolproof. Ultimately, this means that to the already small, initiated following who fluently understand the labels, there is still confusion and misunderstanding about exactly what kind of wine is in the bottle. That is just the tip of the iceberg of confusion when you consider that in my job, I meet at least one person every day who thinks that all riesling is sweet.
But as educated consumers, if we want to understand what the winemakers are doing we need to look at it differently. We should see Kabinett/Spätlese/Auslese as an indicator of pre-fermentation must weight as opposed to post-fermentation sweetness levels. An Auslese fermented through to dry will have a dense concentration and complexity that a Kabinett cannot achieve. How do you know if the Spätlese or Auslese has been fermented through to dryness? Unless the producer has mercifully included the word "trocken" on the label, you simply don't, and this--to me-- is where I have the main difficulty in choosing wine labeled according to the Prädikat system. If I'm trying to pick a wine off a list to pair with certain food, and I haven't had the chance to try every available vintage of every producer listed, I can make an educated guess, but I cannot really know what the sweetness perception will be. Even if you start looking up RS levels, there is the variable of perception. The truth is, even for experienced wine professionals, when we start choosing Kabinett/Spätlese/Auslese wines from vintages we haven't yet tried, identifying how sweet or dry it will taste is a shot in the dark.
Some producers are frustrated that they cannot sell their dry wines that happen to be Spätlese or Auslese. We are starting to see a lot of this:

Not everyone knows that "trocken" translates to "dry." And not every market knows the word "dry" either. So, is there another way that producers can sell their wines? An entirely different labeling system perhaps that looks more like other international wine labels? A system that doesn't depend on a tiny word printed on the back label to guide consumers?
Because of this dry-sweet confusion, The VDP has been working on such a new labeling system. Many producers interested in dry wine production have, in the last few years, stopped labeling their wines according to Prädikat system and have chosen to label through a different system based on Grosses Gewachs (GG), Erstes Gewachs (EG) and Erste Lagen (EL). Ten years ago, these same producers were making and labeling dry Auslesen-- intense dry wines with incredible density and richness-- but couldn't sell them because consumers looking for dry wines passed them over assuming the Auslese would be sweet, or because consumers looking for sweet wines were put off by the dryness.
For example, Markus Mleinek (with Dr. Heger / Weinhaus Heger) talks about the Dr. Heger pinot gris and pinot blanc Ihringer Winklerberg Grosses Gewachs. "We used to sell these as dry Auslesen, but nobody wanted them. They said 'No, we don't want sweet.' I'd say 'It's not sweet.' But all the consumers think an Auslese is sweet." So, instead they switched to labeling the wines as Grosses Gewachs, while continuing to pick at Auslese must weight (Mleinek 2012).
Dr. Heger is not alone. Especially in the last 2-3 years, many producers have followed suit.

Okonomierat Rebholtz is a VDP member who uses an interesting and clear labeling method. This Spätbugunder (pinot noir) is picked at Spätlese must weight, but it is fermented to dry. Here, on the front label, they clearly indicate "Spätlese trocken."

The choice to leave off the Prädikat category for the American market is a telling decision, and one that makes sense if you are trying to sell this wine to a wider market.
By abandoning the Prädikat system, you sidestep the entire issue of explaining to your consumers that your late harvested wine is dry. Judging by the American label alone, this could be an off-dry pinot gris; but if I saw this on a shelf I'd assume that it was dry, because it just looks like a dry wine label. But if I saw the German label, I would see the word "Spätlese" and I might unwittingly pass by if I happened to be looking for a dry wine that night.
For anyone wondering, this wine is very dry, and has a dense and crystaline concentration of flavor due to the high must weight. Because the word Spätlese is inaccurately associated with sweetness, in this instance, by leaving off information, you actually are able to communicate better to your consumers.
This brings us to the Grosses Gewachs concept that is the precursor to the newest VDP charter. Many producers in Germany, especially ones who make focused wine from incredible pieces of land, have yearned for a system that clearly indicates the quality of the land and terroir. Before 1971, they were on track, with extremely specific Einzellagen, and needed only a tiered categorization. But the German Wine Law of 1971 changed all this and combined Einzellagen in an attempt to simplify things. If, say, Germany had a tiered land categorization similar to Burgundy's Cru system they could more easily showcase the best of German wines. In the Prädikat system, some of the best pieces of land are lost in the mix among thousands of other bottles-- only a small group of those in-the-know have memorized the best plots of land. Sometimes, price is an indicator, but until the concept of Grosses Gewaches and Erste Lagen came to be, there was no official guideline.
Observing all of this, I got the overall feeling that producers liked the Prädikat system (or at least were comfortable with it), but became so frustrated at how poorly the system interfaces with the global wine market and with how it disregards terroir, that most were ready to abandon the idea of Prädikat for its clear inefficacy, and many grew willing to embrace an alternative, even a budding system with changing terminology.
What is the Fundamental Issue with the Prädikat System?
And why does the international market have such trouble accepting the Prädikat system? I think this is because at its foundation it is fundamentally different than every other major wine taxonomy system. The Prädikat system revolves around the state of the fruit-- wines are different and achieve different statuses based on the state of the actual fruit berry and how much sugar it has gathered. Pretty much every other European wine taxonomy system revolves around real estate and treats the actual fruit as secondary consequence. To illustrate: Grand Cru Burgundy is high quality because of the expressiveness of the vineyard site-- not because of the brix levels achieved in the final moments before harvest.
Suddenly with the VDP, producers are offered a chance to market their wines in a completely different way-- this time, linked to real estate and not oeschle. This is a concept that fine wine consumers can easily understand: My wine is superior because it comes from X place. You start to lose the attention of the fine wine collectors when the fundamental argument for quality is: My wine is superior because my grapes were picked at X oeschle. Most consumers get the link between quality and terroir, while only a few will forge a link between quality and a variety of pre-fermentation sugar levels. [Of course, there has always been the meticulous though oft misleading Prädikat Einzellagen vineyard site labeling system that functioned in tandem with the oeschle indicators of Kabinett/Spätlese, etc., but as I mentioned earlier, the VDP's system takes this to a whole new level and stratifies the pieces of land into Erstes, etc. The VDP's method takes out the guess work and tells you how good the vineyard site is, while the Prädikat's method only tells you where the site is located, leaving the quality judgement to the drinker].

To tackle the sweetness perception issue, some producers are putting visual scales on their labels. This is a global problem that producers in several countries are dealing with-- not just Germany.
To some extent Alsace faces the same challenges that Germany does concerning dry and sweet wine production. Domaine Gresser in Andlau, Alsace has one innovative answer: he includes a dry-to-sweet meter on the back of each label to help guide consumers.
In the last year, I have seen countless producers add similar images to their label backs, to help guide consumers to a bottle with the level of desired sweetness.
The IRF Scale is a scale specific to Riesling, and it is growing quite popular.
Still, even these systems have flaws. A wine can have loads of RS but still be perceived as dry if the acidity is at certain levels and if it is very malic. Another flaw is the fact that the scale assumes that dryness and sweetness are mutually exclusive, and they are not. One of my favorite kinds of wines is a wine that is both dry and sweet at the same time.
Ok, just when we were starting to get a handle on the Grosses Gewachs, things really changed in January 2012. The VDP released their new charter that outlines this system:
Grosse Lage (like Grand Cru)
Erste Lage (like Premier Cru)
Ortswein (like Village AC)
Gutswein (like regional AC)
This is an amazing step forward that is a well-thought out attempt to solve the issues laid out above. We will start to see the effects of this new system when the 2012s start to be released.
But the main problem with this great system is that it is only available to VDP members.
I often ask myself, If I were a producer of German fine wine, how would I chose to label it and what would inform my decision? Or, if I could install an entirely new system that made sense for everyone, what would it be?
And I'll tell you this: If the Prädikat system ever goes defunct I will dreadfully miss the creative variety of wines that this system encourages. The Prädikat system is so special and unique to me, because it presents the vineyard as a prism, and in a single vintage a producer can express his or her land in many hues. A producer who passes through first to collect the bunches for the Kabinett, then returns later for an Auslese is allowing us the unique opportunity to taste the same land/vintage expressed in two different ways. This is fascinating, and it is a level of matrixized vineyard expressions that no other systems have successfully achieved. Though at first glance the Prädikat system seems to abandon terroir for oeschle, the Prädikat system has a backdoor way of honoring terroir by unfolding its many potential expressions during a single season.
I believe that historically, the Prädikat system emerged out of need-- multiple vineyard passes were a way to gather crop in stages to hedge bets against a poor harvest in Germany's marginal climate. This need based practice has evolved into a highly specialized method of production-in-stages that is a pretty unique phenomenon in the wine world.
I'll also tell you this: My mind has been blown by the crazy awesome quality of some of these dry Spätlesen and Auslesen that producers are releasing in the VDP. These are some of my all-time favorite wines. This shift in fundamental dogma toward a more terroir-focused discussion is far reaching, and it has really shaken the foundations of what German wine means today. This shift revolves around the concept of sweetness, and the idea that sweetness is undesirable.
Sweet and Dry
Before I continue I'd like to make it clear that sweet and dry are not mutually exclusive in wine (though you probably already know that if you have read this far in the post). I'd also like to make it clear that I enjoy sweet wines, dry wines, and wines that are both sweet and dry at the same time. For me, the perceived sweetness or dryness of a wine has little to do with its overall quality. Before reading on, know that I am not criticizing or supporting sweet or dry wines; I am simply curious as to why some producers are taking stances on dry wine.
From what I've observed (and, please, leave a comment if you disagree), VDP producers seem to look down on sweetness, and drive toward these dry wines. I can't help but wonder: What seeded the concept of dry wines being superior? Why try to avoid RS? Is this impetus driven by the outside demands of a global market? Is it driven by the internal whim of personal preference? Is it driven by a desire to produce more natural wines that don't stop their ferments? Did later harvest wines used to be drier when there were more plentiful ambient yeasts? Did chemical farming cause a shift in the '50s that caused many late harvest types of wine to taste sweeter because the ambient yeasts had been killed? Or, is it simply a quest for more of those seemingly magical esters that we can only get with a fermentation?
In a way, this is puzzling to me, because I appreciate both dry wines and wines with RS. I'm afraid that if we move too far from the Prädikat system we may lose an entire kind of wine (high must-weight & partially fermented) that is beautiful in its own way. Though neither system (Prädikat or the VDP's system) outright aligns with sweetness or dryness, that is what is happening. Producers of sweet wines find an easier time marketing their wine under the Prädikat system, and producers of dry wine have an easier time marketing their wine under the VDP's system.
Conclusion
I wish that there were some way to assimilate the Prädikat system of must weight classification and the VDP's terroir based 2012 system, and to make these systems available to all producers regardless of membership in an organization. Yes, creating a nation-wide Cru-like map of land will be time consuming and frustrating-- it is a politically charged task where powerful wineries would have a better chance of getting a higher status in the system, but a necessary task that should be hashed out nonetheless.
The VDP's system is a major accomplishment. I'm curious to see how it plays out in our market as the 2012s find their way onto our shelves and tables. How will each Anbaugebiete react to the changes? Upon what basis were the Grosse Lagen chosen? Will it be confusing now that we have the Prädikat's Grosselagen and the VDP's Grosse Lagen to distinguish between? If using the system is based on membership, how will they reconcile this system for longevity in the event that, say, a member leaves the VDP-- will their superior site no longer be a Grosse Lage?
I have this feeling that we are all witnessing a major wine revolution (in its early stages!) spurred on by the changing needs of the VDP members-- but the revolution is happening slowly and quietly, and mostly in German. It will take some time for their true meanings to ripple over to the US. There will also be lasting consequences for non-VDP members. Will the Prädikat system evolve and catch up to the issues that the VDP is attempting to address?
I'll be here, waiting... puzzled and confused, but thirsty enough and ready to try and taste it out.
Mleinek, Markus. (2012 April) Quote from a talk he gave at Rudi Wiest's Dry Wine Tour.
Torri, Tre. (2010) Deutschlands Weinelite Wiesbaden: Tre Torri Verlag.