The emerging tragedy of another short Australian vintage in 2019 is compounding the supply-demand imbalance faced by Australian wine. Last year, China-driven export increases and a small 2018 harvest saw Australian wine producers make an estimated 7 million cases less wine than they sold (Wine Australia). In 2018 Australians sold 1.35 billion litres of wine but made just 1.29 billion, 7% less than in 2017. This year stories from the weighbridge are hardly encouraging, for as one winemaker put it, ‘the fruit which we hoped would fill a 20-tonne fermenter hardly made it half-way’.
Outside Australia, he large global vintage in 2018 – estimated by the International Organisation of Vine and Wine (OIV) at 27.9 billion litres – was 13% higher than the previous (small) year. It will become challenging for Australian brands to maintain their market share.
China is driving the global demand increase for Australian wine and in 2018 it accounted for 15% of all grapes harvested in Australia, a truly staggering figure. But even taking into account recent reduced growth in this market and a 5% decline in export value to the US, Australia still sold more wine overseas than the previous year. Overall, in the year ending December 2018, Australian wine exports increased by 10% in value to $2.82 billion (FOB) and 5 per cent in volume to 852 million litres. The average value of exported wine increased by 5% to $3.32 per litre FOB (against the average value of domestic sales around $6.91 per litre), a figure that is boosted by the average FOB per litre price to China of $6.64.
Factor in a stable domestic demand (a 1% decline to 496 million litres), and the overall value of Australian wine sales increased by 6% or just under 8 million cases to $6.25 billion – up by $641 million or 11% from the previous year.
But here’s the consequence of all that good news – a 5% reduction in Australian wine inventories to 1.88 billion litres. And this is the figure – with sorry results from 2019 pending – that is about to get a lot worse. Wine Australia currently puts Australia’s stock-to-sales ratio for reds (which equate to the number of years of stock the country has on hand ) at 1.34 times annual sales and 1.4 times annual sales for whites, against average figures of 1.63 and 1.31 respectively. While the figure for white wine won’t break anyone’s stride, the number for red should ring the alarms – because our export growth is selling red wine to China. The ratio of 1.34 years is significantly lower than at any time since 2005 and will certainly shrink by the end of this year.
So what are the consequences of not having enough red wine? More expensive grapes, to begin with. The average for the 2018 vintage was $609 per tonnes (the highest since another short year in 2008), up from $565 in 2017. And of course, fruit is indeed more expensive in 2019, provided you can find it…
Furthermore, expect a re-purposing of fruit from wine companies as they divert fruit from lesser-priced brands for domestic sale towards brands that can fetch higher prices in China. Not good news, indeed, for either Australian wine drinkers or retailers. Look out for a reversal of the increasing volumes exported in bulk, but a continuing increase in the value per litre of bulk sales. China took 54% more bulk wine from Australia in 2018 than 2017, for a number of uses of which but one is to appear under labels saying ‘Wine of Australia’.
Where does all this lead? If we’re going to really take advantage of the China market, we’re going to need more vineyards, in regions able to deliver good quality. Sure, we can repurpose some existing vineyards for higher quality brands, but that won’t deliver the volumes that can sustain current growth into the future.
Who is going to plant these vineyards? Good question.
