Record wine production combined with a slight reduction in sales has seen inventory levels and stocks-to-sales ratios increase in the year ended 30 June 2021, according to Wine Australia’s Wine Production Sales and Inventory Report 2021, released today. In this Bulletin, we look at the key findings of the report and the outlook for the sector heading into vintage 2022.
Wine production
Total Australian wine production in the year ended 30 June 2021 is estimated to be just under 1.5 billion litres, or 165 million 9-litre case equivalents, after near-perfect growing and ripening conditions in most states and regions delivered a record crush of 2.03 million tonnes.
Production of red wine was 854 million litres or 95 million 9-litre cases, making up 58 per cent of production and increasing its share by one percentage point since 2019–20. Red wine production was 40 per cent above 2019–20 and 32 per cent above the 10-year average.
White wine production was 628 million litres (70 million cases), an increase of 27 per cent compared with the previous year and 10 per cent above the 10-year average. The overall extraction rate also increased slightly, which meant that the increase in production was greater than the increase in the crush (see Figure 1).
Figure 1 Wine production by colour over time
Based on these figures and preliminary estimates from the International Organisation of Vine and Wine (OIV)[1], Australia was the fifth largest wine producer in the world, accounting for 5.7 per cent of the 2021 harvest.
Wine sales
The total sales volume of Australian wine in the year to 30 June 2021 was 1.17 billion litres (130 million 9-litre cases), a reduction of 4 per cent compared with 2019–20, and just below the average for the past 10 years of 1.23 billion litres. The reduction was a result of both domestic and export sales declining.
Domestic sales declined by 3 per cent in volume, reflecting a gradual long-term decline in the volume of wine consumption that is in line with other mature markets globally, combined with short-term COVID-related disruptions and some competition from imported wine. Exports declined by 5 per cent in volume as a result of reduced wine availability for the past two years, as well as the tariffs imposed on Australian wine to mainland China in November 2020.
Domestic sales made up 41 per cent of total sales, an increase of 1 percentage point since the previous year, and 4 percentage points higher than in 2017–18, when exports were at their peak. This is the highest the domestic share of total sales has been since 2013–14 (see Figure 2).
Red and rosé wine accounted for 52 per cent of total sales, and declined by 6 per cent, while white wine accounted for 40 per cent and declined by 5 per cent. Sparkling wine sales accounted for 7 per cent and increased by 15 per cent, while fortified and ‘other’ accounted for 2 per cent and increased by 16 per cent.
Figure 2 Total sales of Australian wine by destination over time
The combined revenue to Australian wine producers from export and domestic sales is estimated to be $5.89 billion, a decrease of 9 per cent compared with the previous year. The decrease reflects the combination of the reduced volume and lower average value for both exports and domestic sales. The lower average value for exports is primarily due to the loss of premium wine sales to China, while the lower average value for domestic sales is consistent with changes in the mix of sales channels, particularly the reduction in on-premise sales, as a result of COVID-19 restrictions.
Inventory
Inventory of Australian wine at 30 June 2021 is estimated to be 2.1 billion litres, an increase of 400 million litres (24 per cent) compared with the same time last year. The additional volume reflects the gap between the record production in 2020–21 (including other grape products) and sales in the same year, which were constrained by supply from the previous year and affected by the China tariffs that were introduced in November 2020.
The total inventory is the highest since 2005–06, and 17 per cent above the 10-year average.
The inventory of white wine increased by 30 per cent to 706 million litres, 8 per cent above the 10-year average, while the inventory of red wine increased by 25 per cent to 1242 million litres – 25 per cent above the 10-year average and the largest reported during that timeframe.
Supply–demand balance
For the past three years, the red share of total production has exceeded its share of total sales, despite the high proportion of red wine in exports. Consequently, the stock-to-sales ratio (SSR) for reds has been increasing, while the SSR for whites has been declining (see Figure 3). After being below average in 2019–20, the SSR for reds has jumped dramatically in 2020–21, exceeding 2.0 for the first time in at least 15 years. This means that the stock of red wine as at 30 June 2021 was equal to two years of sales.
The SSR for whites also increased sharply from being the lowest in at least 15 years to the highest since 2005–06 at 1.53 – the equivalent of 18 months of sales.
Figure 3 Stock-to-sales ratio for red and white wine over time
Outlook
The market conditions over the next two to three years are likely to be challenging, with increased uncertainty and disruption in an already complex market facing a long-term decline in demand.
The large crush in 2021 means that the volume available for export in the next 12–18 months will not be constrained by supply shortages. The loss of around 100 million litres in exports to mainland China and the increase in production in 2021 mean that Australian winemakers will be looking to sell around 300 million litres of wine (mostly red) more than in 2019–20. The domestic market has very limited capacity to absorb additional volumes and has recently been experiencing unprecedented competition from imported wine (predominantly white and sparkling).
A crisis in global transportation, described by The Economist as ‘a perfect storm for container shipping’[2] has emerged in the second half of 2021, hampering wineries’ ability to get wine into markets particularly in the United States of America (US) and Europe. The combination of a fundamental shortage of container ships and a sudden and strong rebound in global demand driven by the US and China, compounded by COVID-19 related labour shortages, industrial action and other factors have led to port congestion, schedule delays and increased costs that have escalated and snowballed over the past six months (see Figure 4). Costs of freight (when available) have substantially increased. The World Container Index assessed by Drewry in July 2021 was around US$9000 per 40 ft container, compared with US$2000 in July 2020[3]. More recently, this issue has begun affecting not only exports but also imports of goods required for vintage such as barrels and chemicals. Industry commentators such as The Economist and Hillebrand do not expect these issues to be resolved before the end of 2022.
High inventory levels combined with transportation difficulties in getting wine to market have the potential to put pressure on winery storage capacity heading into vintage 2022.
Figure 4 Factors affecting global shipping – October 2021 (source: Hillebrand)
Average winegrape values for red and white have been increasing generally since 2010–11, but the average value for red winegrapes decreased in 2020–21 while the average for white increased, reflecting the differential in current demand between reds and whites. White wine is in short supply on the global market, and this is not likely to be corrected by the small 2021 global vintage, meaning whites are in relatively high demand.
The large crop in 2021, compounded by a reduction in sales, has seen stocks-to-sales ratios increase significantly. This is likely to put downward pressure on grape prices for both reds and whites in the 2022 vintage (Figure 5). A large vintage in 2022 could exacerbate capacity issues and place further downward pressure on prices for the 2023 vintage.
Figure 5 Inventory and average grape value by colour over time
The Wine Production Sales and Inventory Report 2021 can be found here.