July is the month when the export of current vintage Australian wine tends to start in earnest. Unpackaged wine is generally exported ahead of bottled wine, as is shown in Figure 1 using 2018 vintage wine as an example. More than half of the unpackaged 2018 wine was exported by January 2019 whereas bottled wine reached the half-way mark around 6 months later and has a much longer tail.
Figure 1 Exports of 2018 vintage wine by month – unpackaged and glass bottle
Australian bulk wine prices on the global market are generally lower than in 2019
Looking at the world bulk wine market in 2020 (see Figure 2), Australian bulk wine prices for the three major red varieties: Shiraz, Cabernet Sauvignon and Merlot all softened in July 2020 compared with the same month in the previous year, when calculated in United States dollars (USD)[1]. Prices were well below the levels reached in the first half of 2018, following the record low global vintage of 2017.
White varieties generally stayed the same or also softened slightly. They have not declined as much as the major reds since 2018.
Generic red, although fetching a much lower price than the other reds (USD 0.91 per litre compared with USD 1.08) increased in value in July compared with 2019 and was close to matching its price of USD 0.92 per litre reported in July 2018, indicating the relatively high current demand on the global wine market for Australian red wine at this price point.
Figure 2 Ciatti bulk wine prices for Australian wine by variety and by year (month of July)
Although prices have generally been slowly declining in USD over the past 12 months, the monthly trend in global bulk Australian wine prices shows a recent increase in price for all varieties since most reached at least a 12-month low in March 2020. The uptick in prices was particularly evident in June, when supply switched to the new (2020) vintage.
Figure 3 Monthly trend in prices of Australian wine on the global bulk wine market by variety
The influence of exchange rates is favourable but no more so than last year
The low price in March also coincided with a recent low in the Australian dollar (AUD) to USD exchange rate and could indicate that prices did not change in AUD but converted to a lower price in USD.
Exchange rates have an important bearing on global wine prices. If the Australian dollar (AUD) declines in value compared with the USD, an Australian seller will receive a higher amount in AUD for selling wine at the same price in USD. Another way of looking at this is that an Australian exporter can sell a wine at a lower price in USD and still receive the same amount in AUD – making the wine more competitive internationally without affecting local profitability (all other things being equal). Figure 4 shows the AUD/USD exchange rate since mid-2014. The AUD depreciated by 10 per cent from January 2018 to January 2020 and since mid-2019 has stayed around USD 0.70– its lowest level for more than 10 years. However, the degree of competitive advantage this provides to Australian businesses depends on their individual financial arrangements, the exchange rates of competitive currencies and the market into which the wine is being sold.
Figure 4 Exchange rates between USD and AUD from 2014–20 (source: Reserve Bank of Australia)
Australian wine is relatively high-priced – especially reds
Compared with other countries (except for the USA), Australia had the highest global price recorded by Ciatti for generic red in July, and close to the highest prices for the other major reds (Figure 5). Higher prices generally indicate relatively strong demand, higher quality and/or short supply, but can make Australian wines less price competitive from a buyer’s perspective.
Figure 5 Comparison of average bulk wine prices by country (July 2020)
Grapes prices increased in 2020
The National Vintage Report 2020 released earlier this month reported that average grape prices increased overall by 5 per cent compared with 2019. Red grapes from the Riverland, Murray Darling–Swan Hill and Riverina increased on average by $68 from $591 to $659 per tonne. $68 per tonne is the equivalent of approximately 10c per litre of wine, based on an extraction rate of 700 litres per tonne. White grapes from the same regions increased by an average of $36 per tonne or approximately 5c per litre of wine.
Global demand is likely to decline in 2020–21 while supply may increase
As reported in our recent market bulletin on global supply and demand, global consumption of wine is expected to drop significantly in 2020–21 as a result of the social and economic impacts of the global COVID-19 pandemic, while supply may well increase as a result of generally favourable conditions so far in the major northern hemisphere wine-producing regions. An Emergency Distillation Plan is expected in France, Spain and Italy, which will help reduce inventories in those countries, but has not yet been implemented.
In its July Global Market Report, Ciatti describes bulk market activity as ‘hesitant and conservative’ as a result of an anticipated softening in demand, average to above-average supply forecasts for 2020 in France, Spain and California and uncertainty regarding how both the coronavirus pandemic and international trade tensions will play out over the next few months.
Summary: 2020 will not be an easy year to sell wine but Australian winemakers have some advantages
Overall global wine market conditions are tougher in 2020 and costs have increased. However, favourable exchange rates and a shortage of supply following the below-average sized 2020 winegrape harvest should assist Australian wine businesses negotiating export wine sales.
The latest Bulk Wine Market Update can be downloaded here.
For more on this topic, Ciatti will be hosting a free webinar to discuss current global market conditions on 12 August.
[1] Ciatti Global Wine Market Reports – high prices per litre reported.