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 – as one winemaker put it, “the fruit which we hoped would fill a 20-tonne fermenter hardly made it halfway”.
The 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, which means 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 free-on-board (FOB) and 5% in volume to 850 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 to $6.25 billion for the 2017-2018 financial year – up by $641 million or 11% from the previous year.
But here’s the consequence – 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 (which equates to the number of years of stock the country has on hand) at 1.34 times annual sales for reds and 1.4 times annual sales for whites, against 10-year 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 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 tonne (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 repurposing 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 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, one being to appear under a ‘Wine of Australia’ label.
Where does all this lead? To really take advantage of the China market, we’re going to need more vineyards. Sure, we can repurpose some existing vineyards for higher quality brands, but that won’t deliver the volumes to sustain growth into the future.
Who is going to plant these vineyards?