Abstract
Australia’s wine industry is coming out of the bottom of its latest cycle – its 5th since 1850. A key question is: how, and how soon, might producers be able to earn sustainable profits again? This paper briefly examines the anatomy of the latest cycle, which began in the late 1980s.
Summary
The Australian wine industry enjoyed a boom for nearly two decades from the late1980s, but the past five years have been challenging for its producers and exporters. The strong appreciation of the Australian dollar (AUD) is part of the explanation for the slump in profitability, now that two-thirds of Australian wine production is exported and one-sixth of domestic consumption is imported. (By contrast, in the 1980s both shares were less than 4%). One of the two purposes of this report is to show empirically just how large that adverse influence of real exchange rate movements has been on the industry since 2007. Since that result suggests an AUD devaluation could ease the industry’s current challenges, the second purpose of this report is to assess how the industry might be affected by a reversal of those exchange rate movements, along with other expected developments over the next five years – the most important of which is the growth of net imports by China.
Needless to say, the currencies of all wine-producing and wine-consuming countries, not just Australia’s, affect each country’s international competitiveness. And there are other things happening in the world’s wine markets that also need to be taken into account. On the demand side, populations are growing and aging, incomes are mostly growing, and tastes in numerous countries are changing, sometimes rapidly. On the supply side, technologies are improving, capital investments in the industry may or may not be keeping up with depreciation, and real input costs are altering at various rates pertinent economies. Given these numerous influences on the world’s wine markets, empirical retrospective and prospective analyses require a formal model of those markets. We therefore revise, expand and update a model we developed a decade ago for similar analytical purposes.