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Photo: Andre Castelluci / Wine Australia

Signs of softening: global wine market update

Market Bulletin | Issue 136
Photo: Andre Castelluci / Wine Australia
04 Dec 2018
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A large global wine harvest in 2018, economic uncertainty and static consumption are putting downward pressure on world bulk wine prices as Australia heads into harvest 2019.  Australian wine prices are holding up thanks to strong demand from China and a favourable exchange rate, but international competition is likely to increase in the medium term as supply pressures ease.

2018 production bigger than expected

The Organisation Internationale de la vigne et du vin (OIV), in its recently-released 2018 Statistical Report on World Vitivinculture, estimates that world wine production in 2018 was 27.9 billion litres. This is 13 per cent higher than 2017 and (if realised) will be the fourth largest production in the past 18 years.

The big increases have come from the world’s largest wine producers: Italy, France and Spain. Between them, they are estimated to have produced an additional 2.4 billion litres – roughly double Australia’s total annual wine production.

Difficult global conditions for wine sales

Difficult global trading conditions are also affecting the market. The United States of America (USA) has seen exports to the UK drop dramatically due to Brexit uncertainty and the unfavourable exchange rates. According to Ciatti (November 2018), the USA has high volumes to sell as a result of the large 2018 harvest and carryover stock from 2017, and the relatively strong USD is making sales more difficult. Meanwhile, Argentina also has excess supply, with its normal export markets being satisfied by European producers and a recession at home reducing local demand.

According to the OIV report, world wine consumption in 2017 rose slightly to 24.4 billion litres. However, this is nowhere near enough to absorb the additional wine production. While consumption is growing in developing countries, it is largely offset by declines in mature markets. This means that the world has returned quickly to a situation where supply exceeds demand (Figure 1).

Figure 1 Global wine supply and demand historical (source: OIV)

Downward pressure on bulk wine prices

The global conditions have already led to a significant softening in bulk wine prices. Figure 2 shows the percentage change in price for generic red across the major wine producing countries since June 2018, when most countries’ prices peaked following the low 2017 global harvest.

Figure 2 Percentage change in bulk generic red wine price June 2018–November 2018 (source: Ciatti)

Note: changes are calculated in USD so they do not take into account changes in exchange rates.

Australian prices are holding up

Of all the major wine producing countries, only Australia and (drought-affected) South Africa’s bulk wine prices are still higher than this time last year (Figure 3).

Figure 3 Australian bulk wine prices by variety 2016–18 (source: Ciatti)

Demand for Australian wine on export markets has been growing since 2013, driven largely by China. In the year ended September 2018, Australian wine exports increased by 11 per cent in value to $2.71 billion and 5 per cent in volume to 842 million litres (or 94 million 9-litre case equivalents), over the previous corresponding period. Average free on board (FOB) value increased by 5 per cent to $3.21 per litre. China (including Hong Kong and Macau) imported 19.5 million cases of Australian wine. This equates to around 250,000 tonnes, or 14 per cent of Australia’s 2018 crush.

Outlook into 2019

Demand is expected to remain strong for Australian wine in the medium term. However, with additional wine available from competitor countries, the global market environment will become increasingly competitive.

Australia’s 2018 harvest was close to long-term averages but 10 per cent below the record 2017 crop. This means existing stocks are likely to have been drawn down to support the increase in exports over the past 12 months. The annual Wine Production, Sales and Inventory report will be published in late January, giving an indication of the supply–demand balance in the sector at the end of the 2017–18 financial year.

This content is restricted to wine exporters and levy-payers. Some reports are available for purchase to non-levy payers/exporters.

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This content is restricted to wine exporters and levy-payers. Some reports are available for purchase to non-levy payers/exporters.