Wine Industry Report

The Australian Wine and Brandy Corporation is forecasting one and possibly two seasons of lower than average grape yields which could result in an earlier than anticipated draw-down of wine stocks to desirable levels.

At this time last year, it was forecast that a balance between wine supply and demand may not be achieved until 2009-10, based on then current yield trends. The Corporation’s latest estimate of oversupply (as at June 2006) is now 460 million litres above ideal stock levels.

The Corporation’s Manager, Information and Analysis, Lawrie Stanford, today told the Wine Industry Outlook Conference in Perth that the impact of frost damage, low rainfall, lower water allocations and reduced fruitfulness from smaller bunch sizes meant there was a strong prospect of a low yielding season in 2007.

“Based on experience over the past 20 years, and the prospect of 2007 being an extreme season, a scenario of a 20% yield reduction is a realistic starting point to assess the impact,” he said. “This would provide for a 2007 harvest of about 1.56 million tonnes, compared with a potential 1.94 million tones in an average season.”

Mr Stanford said it was likely the impact of the recent frost damage in some cooler-climate regions would still be felt in 2008, and unlikely that even normal winter rains would sufficiently replenish water reserves to a allow a return to full water allocations.

“There is, therefore, prospect of another low yielding season in 2008, which could see further draw-downs of stock to a balanced position as early as 2008-09 if export sales continue as forecast,” he said.

However, he stressed that current plantings had the capacity to meet projected wine demand over the next five years, despite a likely increase in demand from both the domestic and overseas markets. The varietal mix may change in response to evolving consumer tastes.

“While low rates of planting over the past six years are expected to result in only marginal increase in production over the projection period, the ability to draw-down on stocks and greater production through precision vineyard management and higher extraction rates should allow supply to satisfy demand,” he said.

“However, the imbalance between inland and cooler-climate production bases is likely to continue. Cooler climate production remains high, relative to the market opportunity.”

Lower-yielding seasons are likely to provide some relief from recent downward pressure on wine prices, although this is expected to be limited by the reality of global competition.

The Corporation forecasts that export demand will rise by 33% (to 980 million litres) and domestic demand by 2% (504 million litres) by 2010-11. Australia will remain the single biggest market, although overseas sales will account for 85% of projected growth.

Growth rates for exports by volume are expected to be considerably lower in the future than in the recent past as the industry enters a period of consolidation and measured growth.

“While the rate of growth was 18% in 2000-01, it would be 9% in 2006-07 or, after taking into account seasonal influences, 6%; and then 5% in 2010-11. As recently as last financial year, the rate was 11%,” Mr Stanford said.

“Apart from seasonal factors, there are a number of reasons for this forecast, including increased competition from other wine producing countries and constrained profitability due to consolidation in the grocery retail sector and continued global oversupply of wine.”

“It also has to be kept in mind that we are growing from a larger base, so percentage growth is harder to maintain.”

While the UK is expected to still be the largest buyer of Australian wine in 2010-11, the US is predicted to be the main driver of new demand, with a growth rate of 7% over the next five years. Canada and the emerging market in China also are forecast to be important contributors.

Growth opportunities in Australia’s main current markets appear to be at the mid or “premium” price points and, at lower volumes, at the higher price points.

By contrast, the potential to take market share from competitors appears most likely at lower price points – primarily the “popular premium” category.

Mr Stanford said the increase in bulk wine sales (which now account for 27% of Australian shipments) was likely to reflect an elevated level of bulk wine shipments in Australia’s global trading into the future.

He told the conference: “The Australian wine sector continues to adapt to a new set of operating circumstances characterised by slowing rates of growth. Breaking out of this constrained phase of development will require the next innovation in the sector whether by any or all of opening new markets, new packaging developments or new wine styles. It should be recognized that innovations take time to develop.”

“On these terms, the upcoming projection period will be characterised by continued transition from a past period of strong, relatively easy growth to a period of more constrained growth requiring identification and development of targeted opportunities.”