In March, ABARES published its latest Agricultural Commodities Report, which contains their forecasts for the value, volume and price of Australia's agricultural production and exports for the next five years, including wine and winegrapes.
Like all ABARES agricultural commodity forecasts, the wine grape production forecast is based on a scenario analysis approach, particularly around a range of macroeconomic and seasonal climate scenarios. This is overlaid with feedback from representatives of the grape and wine community and numerous other factors.
ABARES have forecast winegrape production to fall over the outlook period to 1.2 million tonnes by 2027−28, or even lower if their ‘drier scenario’ comes to pass. Their forecast is based on a combination of consistently low prices for red grapes and a globally over-supplied red wine market creating an incentive for growers to reduce their red wine bearing area. This is exacerbated by a forecast drop in yield in line with reduced rainfall compared with the past three years, and overlaid with a negative global economic outlook, which is predicted to remain subdued due to persistent inflation and high interest rates. They suggest there are many downside risks to economic growth in the current global environment. Global inflation may remain elevated for longer, partly from surging demand from China fuelling higher energy prices. They also expect the Australian Dollar to appreciate against the US Dollar, which decreases the competitiveness of Australia's agricultural exports including wine in international markets.
Global growth is assumed to be very uneven between advanced and emerging economies in 2023. Growth in advanced economies is assumed to be 1.2 per cent in 2023. In contrast, growth is assumed to be higher at 4 per cent in emerging and developing economies in 2023. Inflation to date has been lower on average in emerging economies, particularly in Asia. Growth in Southeast Asian countries, which include some major export markets for Australian agriculture, is expected to slightly decline in 2023. While ABARES expect most agricultural commodities to benefit from higher growth in mainland China in 2023 and 2024, this is not the case for wine due to the tariff situation. They have assumed no change in the tariffs in the winegrape and wine forecasts.
The scenario analysis employed by ABARES highlights a very challenging outlook and this outlook underpins the 1.2 million tonne winegrape production forecast.
This forecast tonnage may be on the low side, for a few reasons:
- the starting point for the reduction is ABARES’ estimate for the 2023 vintage is around 1.4 million tonnes, rather than Australia’s average crush
- the forecast reduction in vineyard area may over-estimate the inclination of growers to remove vines, and
- there is a proposed decline in yields in addition to the decline in vineyard area, which may not allow for the ability of irrigation to mitigate the effects of drought on production.
The calculated reduction in production starts from a low base
ABARES forecasts a 20 per cent reduction in the crop, from an estimated 1.4 million tonnes in 2023 to 1.2 million tonnes in 2028. The size of the 2023 crush will not be known until July, when Wine Australia’s National Vintage Report is published, however, anecdotal indications are that the crush will be well below the average of 1.8 million tonnes, as a result of seasonal factors, widespread flooding and some uncontracted fruit being unharvested. However, the production potential of vines in 2023 is at least the average of 1.8 million tonnes, based on the current area of vines. Even if production reduced by 20 per cent over the outlook period (as per the ABARES estimate) this should only be to 1.44 million tonnes if the starting point is 1.8 million tonnes.
The forecast reduction in vineyard area may be an over-estimate
With the economic and climate scenarios as a basis, along with a range of other inputs such as lower red grape prices and lower returns to growers leading to them leave the sector, ABARES have assumed national vineyard area will decline from 150,000 ha to 136,000 ha by 2027–28, which is a 10 per cent reduction or around 2 per cent per year. That would certainly be much higher than in recent times (the South Australian vineyard area has declined by a total of 3 per cent over the past 10 years[1]).
Given the current pressures on demand, reduced water availability, significant input cost increases, ageing vines and grape prices at a historic low, along with a cohort effect where a large share of growers are now aged over 60, this forecast outcome may not seem unreasonable. However, many growers have other sources of income outside of grapegrowing that may keep them from selling up despite being unprofitable, and if any vineyards are sold to other growers, they remain part of the production base. Only the removal of the vines will reduce future potential production.
In addition, unlike annual crops, grapes are a permanent crop and thus decisions to plant and/or remove are based on long-term decision-making. Given that it could take seven years to get an income from an alternative crop such as citrus or almonds, most growers would think that winegrapes would be back in favour by then, and that the cost of replanting is not justified. Therefore, an ‘economically rational’ decision could legitimately be to stick with vineyards rather than change crop, as there will be a loss of income in the medium term either way. ABARES acknowledges it is difficult to factor these issues into their forecasts and that the quantum of the vineyard reduction may be at the higher end.
The proposed decline in yield does not allow for the compensatory effect of irrigation in drought conditions
A lack of seasonal climate forecasts beyond the current year means that ABARES has to make assumptions about the likely climate conditions in years 2 to 5 of the medium-term forecasts. They use two scenarios – a baseline scenario and a dry scenario.
Based on statistical analysis and current climate model projections they have assumed that the agricultural sector, following consecutive La Niña events over the past three years, will be affected by a flip into El Niño or positive Indian Ocean Dipole (IOD) led drought like conditions in year 1 (2023–24) under both climate scenarios.
Under their baseline scenario they have assumed a return to neutral climate influenced years in 2024–25 and 2027–28, as most dry climate driver years since 1969–70 have been immediately followed by a neutral climate signal. They are assuming one additional El Niño affected – dry year – in 2026–27. Their baseline scenario will see a return to La Niña or negative IOD conditions in 2025–26. Their analysis of past events suggested a decreased probability of this forming in the first two years of the projection period. This pattern is consistent with a continued oscillation between wet and dry climate drivers that has been seen since 2002.
Under their dry scenarios they have assumed that the agricultural sector will be affected by 3 dry years over the 5-year projection period. This scenario is assuming back-to-back dry climate driver years 2023–24 and 2024–25 and the third dry climate driver year falling at the end of the projection period 2027–28.
ABARES acknowledges climate outcomes (i.e. rainfall deciles) in any given year do not always correlate with the production outcomes for any given agricultural commodity. This is particularly the case for winegrapes, which for a large proportion of the national crop is irrigated. The impact of the cost of water on decision-making in the wine sector has only been considered at a broad level by ABARES and not been factored significantly into the wine grape production forecast.
The combination of the reduction in yield and reduction in area leads to the forecast overall 20 per cent reduction in estimated crush. If this were revised to a more moderate 10 per cent, it would give a production forecast of 1.6 million tonnes[2]. This could come from a mix of a reduction in vineyard area and reduced yield due to drought and/or reduced water availability. It should also be noted that when prices reduce, growers often respond by increasing yields to maintain their income per hectare.
Summary
Overall, the reduction in the size of the winegrape crop forecast by ABARES in the forecast period may be on the high side. However, their overall modelling and assumptions on which it is based are sound and do reflect the reality of the very tough global economic outlook and a move into a drier climatic period. While the quantum of the forecast future tonnage is debatable, it does serve as an important stimulus for conversations about how the sector will respond to the challenges over the next five years.