Drop in global supply presents opportunities for Australian wine

World wine production in 2017 is expected to be 24.6 billion litres – 2 billion litres (8 per cent) below last year’s figure and the lowest since 1961, according to the recent announcement by the International Organisation of Vine and Wine (OIV). This equates to 222 million cases of wine that is now not available. To put this in perspective, Australia’s total production in 2016 was 1.3 billion litres or 144 million cases.

The OIV reports that there were falls in the three top producing countries – Italy, France and Spain – which recorded historic low harvests, while Chile had another small year compounding an existing short supply (see Figure 1).  

Argentina recorded significant growth from a very low crop in 2016, but 2017 is still well below the long-term average.

The USA’s harvest is slightly down on 2016, but it the size of the crush is not expected to be significantly impacted by the recent wildfires

The only major wine producing country to record an above-average harvest in 2017 was Australia.

Figure 1

Since the drought of 2007, Australian wine production has been very consistent. The 2017 vintage was the largest crop since 2006, but pricing firmed regardless helped by favourable global supply and demand dynamics (Figure 2).

Figure 2

Consumption likely to match or exceed production for the first time

The drop in global production comes at a time when consumption is on the rise after a period of decline following the Global Financial Crisis. The OIV estimates that consumption will be between 24.1 and 24.6 billion litres in 2017 – which will bring it equal to, or above, production for the first time ever, putting pressure on existing stocks and prices (Figure 3).

Figure 3

Export opportunities

The lowest global harvest since 1961, combined with the increase in global consumption, presents a significant window of opportunity for Australia.

In 2017, Australia had its largest harvest for at least 10 years and moved ahead of Chile and Argentina to be the fifth largest wine producer in the world. Australia is well positioned to take advantage of the opportunity, with stocks at reasonably high levels and well-established routes to market in the four largest wine markets in the world: the United Kingdom, China, Germany and the United States. All are significant net importers of wine and rely heavily on Italy, France and Chile. The Export and Regional Wine Support Package will further enhance the sector’s ability to develop new export opportunities.

However, the opportunities are not entirely predictable. It’s not necessarily a matter of replacing French Syrah, Italian Pinot Gris or Chilean Merlot, with the same variety from Australia – particularly at higher price points. ‘It’s like playing whack-a-mole’, says Austwine’s Chief Enthusiasm Officer, Jim Moularadellis. ‘Supply of one product from one country disappears, and you can’t be quite sure where demand for another product will pop up.’

The main driver is lower supply. This means that sellers are under less pressure to discount, which increases the average price and reduces competition among suppliers. Compound this with lack of availability, and suddenly buyers may look more favourably at a different product to fill a gap on the shelf or the menu. For example, an Australian Chardonnay may replace an Italian Pinot Gris, if it fills a similar style and price point specification. ‘The last time we had an opportunity like this was in 1986 after Chenobyl’, says Mr Moularadellis. ‘Australia was seen as clean-and-green, which opened the door for us and led to sustained export growth for many years.’

This supply pressure in the market may be short-lived – depending on what happens with harvests in the next few years in Australia and its competitor countries. However, it could be a launching pad to establish new products firmly in the market, which may then have an advantage over products trying to re-enter.

For more information on global wine supply and demand, visit https://www.wineaustralia.com/market-insights or contact market.insights@wineaustralia.com