Early signs suggest that global wine production (supply) and consumption (demand) may be closer together in 2021 than they have been since 2017. However, physically bringing wine and consumers together may be harder than ever before, as turbulence in wine markets and shipping routes disrupt global wine trade.
Supply
Preliminary indications for the 2021 global harvest, based on collated industry estimates and reports, are that it will be around 25 billion litres, which would make it 4 per cent lower than the 2020 harvest[1] and the second lowest in the past 10 years.
The estimate is based on reports of a significantly reduced crop in France, below average crop in Italy, Spain and the USA, and average- to above-average harvests elsewhere. France in particular is facing one of the worst harvests in its recorded history, if not the worst, according to its agriculture ministry, which estimates crop reductions of between 24 and 30 per cent due primarily to widespread severe spring frosts, which devastated vines. If this proves to be the case, the total wine lost will be around 1.1 billion litres – almost as much as Australia’s average annual production.
In the southern hemisphere, harvest is complete. Argentina has reported a crush of 2.22 million tonnes – below average but 7 per cent above the 2020 harvest, while Chile’s production has been reported to be a record 1.34 billion litres. Australia’s crush of 2.03 million tonnes was also a record, and South Africa’s harvest was up by an estimated 10 per cent to 1.46 million tonnes. Only New Zealand experienced a significant decline, coming in 19 per cent below the 2020 crop at 370,000 tonnes. See Figure 1.
Figure 1 Change in estimated production 2021 vs 2020
Demand
While global production is expected to decline in 2021, global consumption is expected to increase slightly compared with 2020. Global consumption in 2020, according to the OIV, was the lowest recorded consumption since 2002 at 23.4 billion litres[2]. The main driver of the overall decline was China, where consumption decreased sharply for the third consecutive year, indicating an enduring reduction rather than short-term effects of COVID-19.
The 2020 figure will not be finalised by the OIV until early 2022, and a final global consumption figure for 2021 is more than 18 months away. However, the IWSR has forecast that global wine consumption will increase overall by 1.7 per cent in 2020–21 and by 0.9 per cent in 2021–22.
Applying the IWSR growth forecast to the OIV figure for 2020 gives an estimated global consumption of 23.7 billion litres in 2021.
If correct, this would be 1.3 billion litres less than production – the smallest gap since 2017 but still indicating a surplus (see Figure 2). It should also be noted that according to IWSR, consumption is not forecast to return to 2019 levels during the forecast period. In fact, it is expected to be almost flat between 2023 and 2025.
Figure 2 Global wine supply (production) and demand (consumption) over time
Source: OIV, IWSR and Wine Australia
Forecasting demand across this timeframe is particularly difficult due to the after-effects of COVID-19 in terms of recessions, ongoing disruptions to travel/international tourism and enduring changes in purchasing behaviour are hard to predict. Even reductions in immigration can affect consumption through creating a lack of hospitality staff.
It is also not clear how much market distortions such as over-ordering in anticipation of Brexit and ‘pantry-loading’ in response to COVID-19 lockdowns have artificially raised sales figures in 2020; these would in turn cause demand to fall in the next 12 months as the excess stocks are consumed.
Bringing wine and consumers together
Getting wine to market has possibly never been more difficult. More than 10 billion litres of wine were imported globally in 2020, meaning that more than 40 per cent of all wine consumed has to cross an international border to get to the consumer.
After an era of favourable trade tailwinds due to the introduction of numerous free trade agreements, wine trade has become more difficult over the past few years, due to trade disputes between the USA and the EU that saw both markets impose tariffs on each other’s wines, tariffs on Australian wines imposed by China and the uncertainty and negotiations in the run-up to Brexit.
Traditional global wine trading arrangements have been disrupted by Brexit, COVID-19 and China’s tariffs on Australian packaged wine. The UK has overtaken Germany as the world’s largest importer of wine as a result of increased ordering prior to Brexit, while established paths for wine into the EU via the UK are now likely to change. Lack of international tourism means that more wine is being consumed domestically, and markets where the main consumers are tourists (e.g. Indonesia and Malaysia) have seen consumption plummet. Chilean and French wine are taking the place of Australian wine in China, leaving Australian wine to fill the supply gaps left elsewhere.
Further challenges to meeting demand in the most literal sense have recently been reported, in the form of world-wide transportation issues – including a shortage of shipping containers (and ships), port congestion and increases in costs.
On a positive note, the Australian dollar has been weakening against the US dollar since the beginning of 2021. After peaking at just under 80c in early February, it had dropped to 71 cents by late August. This makes Australian exports more competitive. In addition to this, The Economist’s ‘Big Mac Index’, which uses the price of Big Macs in different countries to assess each currency’s relative purchasing power, indicates that the Australian dollar is under-valued by about 15 per cent compared with the US dollar, giving our exporters a cost advantage. The Big Mac Index can be accessed here.
In summary, 2021 and 2022 are likely to be particularly difficult years for selling wine globally, with increased uncertainty and disruption in an already over-supplied and complex market facing a long-term decline in demand. The slight improvement in balance between supply and demand that is forecast for 2021 is a small positive for Australian wineries, as is the relative competitiveness of the Australian dollar.
[1] The International Organisation of Vine and Wine (OIV) reports that global wine production in 2020 was 26 billion litres – very slightly above the previous year and similar to the 5-year average (OIV state of the world vitivinicultural sector in 2020 – published April 2021)
[2] The OIV sounds a particularly strong note of caution in the interpretation of their own estimate given that 2020 was an ‘extraordinary year’ in terms of consumer behaviour.