Wine and wine grapes: March quarter 2021
Peter Collins and Charley Xia
Average prices of wine grapes and wine exports to fall
The average price of Australian wine grapes is forecast to fall from $694 per tonne in 2019–20 to $540 per tonne in 2020–21. The major reason for this is the loss of China as a significant export market for Australian wines. This is also expected to constrain prices over the remainder of the projection period. The price is expected to rise slightly to $556 per tonne in nominal terms in 2021–22.
Wine grape and wine production are forecast to increase in 2020–21 on the back of improved seasonal conditions after below average production in 2019–20. Labour has proved to be less of an issue for wine and wine grape producers in 2020–21 than it has for other horticultural industries. Australian wine production is expected to remain around 1.2 million litres over the projection period to 2025–26. This represents a return to 2006–07 and 2014–15 levels – before the China export boom.
Wine exports are forecast to fall in 2020–21 following the sudden loss of China as a significant market. The impact of that market loss is forecast to keep exports relatively constant between 2021–22 and 2022–23 before rising slightly at the end of the projection period. The average export price of wine will be lower over the projection period compared with the 3 years to 2019–20. This is expected to hold down the average price of Australian wine grapes.
The recovery of the world economy in response to vaccine rollouts for COVID-19 is expected to provide a modest boost to demand for Australian wine, lifting exports and wine grape prices in nominal terms towards the end of the projection period. However, wine grape prices are still expected to remain below $600 per tonne over the projection period to 2025–26, about 15% to 20% lower than in 2019-20.
Sources: ABARES; ABS
Medium term scenarios for forecasts
Medium-term forecasts from 2022–23 to 2025–26 for Australian wine and wine grapes are based on the average outcomes of 4 possible seasonal climate scenarios. A very dry season in the wheat-sheep zone is likely to occur in one of the 4 years. Each scenario places this dry season in a different year, with other years assumed to receive rainfall of deciles 3 to 4. For a more detailed explanation see the Agricultural overview.
The range of outcomes forecast to result from each scenario are then averaged. Unless otherwise indicated, these average forecasts – or their ranges – are discussed in this note.
Upside and downside scenarios are also considered. The upside scenario combines a faster economic recovery from the COVID-19 pandemic with another high rainfall year in 2021–22. A very dry year is still assumed in 2022–23. Because it follows an assumed wetter year, negative effects on production are reduced. The downside scenario combines a slower than expected economic recovery with very dry years in 2021–22 and 2025–26.China trade disruption
The loss of China as an export market will shape the Australian wine industry over the projection period.
Australian wine exports to China were negligible before jumping to 22 million litres in 2006 and 41 million litres in 2014. Over the next 4 years, these exports grew dramatically, to peak at 164 million litres in 2018. In that year, 19% of the 859 million litres of wine exported from Australia went to China. Between 2014 and 2018, Australian exports of red wine to China increased by 117 million litres to 153 million litres and comprised 93% of all wine exports to China.
Much of the 117 million litre increase in exports of red wine to China between 2014 and 2018 came from increased Australian production. Some came from diversion of bottled red wine from other export markets, which in turn was backfilled by exports of bulk red wine. However, the extent of Australia's trade diversion from third markets to China was small. Red wine exports to the United States fell by just 12 million litres and the United Kingdom by 1 million litres over this period, and volumes diverted from other, smaller export markets were too insignificant to make up the increase in exports to China.
On 27 November 2020, the Chinese Ministry of Commerce announced that from 28 November 2020 Chinese imports of Australian wine will be subject to anti-dumping security deposits. These duties are sufficiently high to curtail exports of Australian wine to China. The average price of wine exported to China was around 17% higher than the average price of wine exported to all other markets. Given that around 60% of Australian wine is exported, the loss of the China market is expected to flow through to the price wineries pay for wine grapes.
Production and exports in the absence of China
After 2 years of below average production, wine grape and wine production are forecast to recover to longer-term averages in 2020–21 at around 1.5 million tonnes of wine grapes and around 1.2 billion litres of wine. The recovery is a result of more favourable seasonal conditions. Negligible exports to China combined with low prices are forecast to keep wine grape and wine production in Australia at around these levels over the projection period to 2025–26. This is 14% below the 1.4 billion litre peak of wine production reached in 2016–17 during the China export boom. Red wine represents most of the recent variation in wine production. The forecast production levels are expected to be achieved by maintaining the bearing area of vines at around the same level as the last 5 years and by managing yields.
Sources: ABARES; Wine Australia
The Australian wine industry is forecast to remain export focused and continue to export around 60% of production. The volume of wine exports is expected to be around 709 million litres in 2020–21 and rise slightly over the latter part of the projection period to 730 million litres in 2025–26 as the world economy recovers. The export volume forecast for 2020–21 is down from 744 million litres in 2019–20. This contrasts with a peak of 867 million litres in 2017–18 at the height of the export boom to China.
From the second half of 2020–21, the United Kingdom, the United States, Canada and New Zealand are expected to be the major destinations for Australian wine exports. All export markets other than China are expected to absorb around 15% more wine from Australia annually in the first part of the projection period than these markets imported in 2019 and 2020. Expansion into these alternative markets is assumed to extend through the projection period.
Sources: ABARES; ABS
The recovery of wine production in 2020–21 to a longer-term average, and the loss of China as a major export market in December 2020, are expected to result in a slight increase in wine stocks in 2020–21. Wine stocks fell in each of the previous 3 years as sales outpaced production during the drought. With lower projected production and exports over the medium term, stocks are forecast to remain relatively stable over most of the projection period, falling slightly in 2025–26.
The value of wine exports is forecast to fall to $2.8 billion in 2020–21, down from $2.9 billion in 2019–20 and from the peak of $3 billion in 2018–19 during the export boom to China. This is due to the forecast fall in the volume of exports and an expected fall in the average unit value of wine exported from Australia following the loss of China as a major export market in December 2020. In the 5 years to 2019, the average unit value of wine exported to all markets, including China, was $3.28 per litre. The average unit value of wine exported to all markets, excluding China, was $2.73 per litre. The exclusion of China deducts 17% from the average unit value because the average unit value of wine exported to China over the 5 years to 2019 was $6.24 per litre.
From 2021–22 until 2023–24 the value of wine exports is forecast to be around 14% to 17% lower than in 2020–21, at between $2.3 billion and $2.4 billion. It is expected to increase slightly to around $2.6 billion towards the end of the period as the world economy recovers after the rollout of vaccines for COVID-19.
Adjustment to new wine blends
The composition of forecast falls in Australian production and exports is expected to change over the period to 2025–26. Following the loss of China as a major market, substitution by winemakers is expected towards lower-valued wines. It is likely that some grapes formerly used to produce high-value wine will be blended with other grapes to produce lower-value wine. It is expected this will happen relatively quickly because China was lost as a major export market before wineries started making wine from the 2020–21 wine grape harvest.
The expected fall in the share of high-value wines in production and exports could be mitigated if marketing campaigns designed to sustain demand for high-value wine are successful. However, such campaigns take time to generate benefits for the industry. It will also be difficult to replace a market the size of China. These forecasts assume minimal success in growing demand for high-value wine over the projection period.
Alternative scenarios
The upside scenario has very much above average rainfall early in the projection period, followed by 1 year of very much below average rainfall and 3 years of just below average rainfall. The economic outlook is more positive, with a rapid recovery in the world economy following vaccine rollouts for COVID-19.
Wine grape and wine production are higher in the upside scenario than in the forecast in all years of the projection period. The year with very much below average rainfall comes after 2 years of well above average rainfall, so well-stocked water storages can reasonably be expected to buffer wine and wine grape production. Wine grape prices would be expected to be higher than in the baseline scenario with the more favourable economic outlook likely to drive higher export demand for wine.
The downside scenario assumeswell below average rainfall in 2021–22 and 2025–26, with just below average rainfall in the intervening years. The well below average rainfall early in 2021–22 follows a year of well above average rainfall that would replenish water storages, but not to the same degree as the 2 years of above average rainfall in the upside scenario. Consequently, wine and wine grape production are forecast to be more adversely affected by the well below average rainfall early in the period than in the upside scenario.
Similarly, well below average rainfall in 2025–26 would have a more significant adverse impact on production of wine and wine grapes. This is because it follows 3 years of just below average rainfall.
The economic environment in the downside scenario is assumed to be difficult, with ongoing outbreaks of COVID-19 leading to measures that restrain economic activity. Economic activity would be dampened for much of the period, with some recovery late in the projection period. This delayed recovery would delay increases in export demand for wine and rises in the price of wine grapes until late in the projection period. This late rise in demand would provide a partial buffer to lower production caused by unfavourable rainfall late in the projection period.
Opportunities and challenges
Overcoming low industry growth after losing China as a market
The loss of China as a major export market for Australian wine looks set to usher in a period of low growth in the wine industry, similar to between 2006–07 and 2014–15. Overcoming this low growth is likely to be challenging.
Trend growth in domestic wine sales slowed after 2009–10 so the small-size of Australia's domestic market may provide only limited opportunities for industry growth. The sheer size of the global wine market means it will most likely provide the best opportunity for future growth. But the industry may be challenged to identify opportunities to expand exports to existing major export destinations.
For example, the United States remains one of Australia's largest wine export markets, but the volume of Australian wine exported to the United States has trended down since 2009. In 2019 it was around 103 million litres lower than in 2009, a 42% fall, and the value of these exports fell by 37%. Similarly, the volume of Australian wine exports to the United Kingdom has trended down since 2008, and in 2019 was 37 million litres less than in 2008, a 14% reduction. The value of these exports dropped by 54%. This was the result of a shift away from bottle wine exports towards bulk containers of wine, with bottling undertaken in the United Kingdom.
The best opportunities for growth may lie with a group of low volume but exceedingly high value markets such as Singapore, Malaysia and the United Arab Emirates. The value of these markets for Australia's wine industry has grown rapidly, and may represent the best opportunity to sell high-value wine formerly exported to China.
A boost from wine tourism
Interstate travel remains problematic and the peak summer holiday season has passed, but intrastate winery tours will remain a popular weekend leisure activity for the rest of the year. This is especially the case for the many wineries in close proximity to major urban centres. These provide a positive opportunity for wine tourism and cellar door sales. These activities were curtailed by COVID-19 restrictions and their revival will provide a welcome boost to wine sales.
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