Global bulk wine market – the state of play going into 2020

The global bulk wine market provides a good indication of the general state of play for the world wine sector and the competitiveness of Australian wine. The past two years have been something of a rollercoaster for the market, but Australia has fared relatively well and is better placed than most of its competitors going into 2020.

Wine prices reflect ‘extremely volatile’ global supply

There was a near-record low harvest globally in 2017, followed in 2018 by the second largest vintage for 20 years. This led the International Organisation of Vine and Wine (OIV) to describe this period as ‘extremely volatile’^[1]. Following these two extremes, the preliminary estimate from OIV for 2019 is for a near-average harvest of 26.3 billion litres^[2] (see Figure 1).

Figure 1                              World wine production since 2000

^{Source: OIV}

The short-term reduction in supply in 2017 led to a tightening of supply and consequent increases in bulk wine prices for most countries and varieties in 2018. This was followed immediately by a softening in 2019 that has carried through to 2020 as the bigger global harvest of 2019 has come onstream. Figure 2 illustrates this for Spain, which is generally seen as setting the floor price for the market.

Figure 2                              Bulk wine prices for Spain by year and variety

^{Source: Ciatti (maximum estimated bulk price)}

Australia’s prices have held up relatively well

Prices for Australian bulk wine on the global market have also softened since reaching a peak in mid-2018 (Figure 3).

Figure 3                              Monthly trend in bulk wine prices (USD) for Australia by variety

^{Source: Ciatti (maximum estimated bulk price)}

However, generally Australian prices have not softened as much as those of other competitor countries. This is a result of Australia having a below-average harvest in 2018, when the major European and South American countries had above-average harvests. Figure 4 shows that Australia and Italy were the only two countries where the generic red price (the most comparable variety across countries) increased in the 12 months from February 2019–20.

Figure 4                              Percentage change in generic red bulk wine price February 2019–20

^{Source: Ciatti}

While prices for Australian varieties have generally declined in US dollars (USD) on the world market, most have still increased in Australian dollar terms (see Figure 5). The increases in price in local currency reflect the competitiveness of the Australian dollar against the USD as well as the strong demand for Australian wine.

Figure 5               Change in average value of Australian wine by variety year-on-year USD vs AUD

^{Source: Ciatti}

Australian export figures demonstrate strong growth in average value

In the year ended December 2019, Australia’s bulk wine exports declined by 18 per cent in volume and increased by 6 per cent in average value, reflecting the tight supply and strong demand for Australian wine on export markets. Figure 6 below shows the results for the main varieties.

Figure 6                              Australian bulk wine exports (major varieties) 2018 vs 2019

These price increases are consistent with the increases in grape prices in the 2019 vintage. Red varieties were up by 9 per cent on average ($73 per tonne), while white varieties were up by 4 per cent ($18 per tonne). Assuming an extraction rate of 700 litres per tonne, a 10c increase in wine price is equivalent to an extra $70 per tonne.

Challenging world wine market conditions

Prior to the outbreak of the COVID–19 (novel coronavirus) in late 2019, conditions on the world wine market going into 2020 were already looking slightly unfavourable overall.

A long-term gradual decline in consumption in mature markets has been exacerbated by the slowdown in China’s overall wine imports in 2019 and an increasing over-supply of domestic wine in the USA – the largest wine market in the world.

Uncertainties in the trading environment including tariffs on European wine imposed by the USA and impending changes to trading arrangements following Brexit have particularly affected the large European wine-producing countries. On the other hand, the smaller global harvest in 2019 took some of the pressure off stock surpluses and early indications are that the 2020 harvest in the southern hemisphere (including South Africa, Chile and Argentina as well as Australia) will not be particularly large, given a widespread lack of water.

As at the end of February, the impacts of COVID–19 on wine trade in 2020 are unknown, but it can reasonably be expected that there will be a reduction in global demand for wine in the short-term. However, it is too early to determine the extent or the permanence of this reduction.

Australia well-placed to face uncertain times ahead

Australia’s wine sector is in a relatively good position going into the 2020 vintage. It has a reduced stock-to-sales ratio after two below-average harvests. The 2020 vintage is not expected to be above average.

Australia is not caught up in any trade wars and has good relationships in key markets, including a number of free trade agreements. While China is its largest export market by value, only 11 per cent of Australia’s wine overall was sent to China in 2019, limiting our exposure to demand shocks in that market.

Constrained supply, diversification of markets and an Australian dollar at 10-year lows against the USD give Australia the key ingredients to maintain profitability in what will none-the-less be a difficult year for the global wine sector.