Global Wine Challenges and Opportunities

Annual Unified Symposium in Sacramento opens with forum about global market

by Andrew Adams and Paul Franson
unified wine grape symposium
Economist Mike Veseth discusses globalization at the opening session of the Unified Wine & Grape Symposium in Sacramento, Calif.
Sacramento, Calif.—The largest wine exhibition in North American opened today with a discussion about the wine industry as an international business.

A grapegrower in Fresno, Calif., may still feel worlds apart from a farmer in Australia’s Barossa Valley, but the two are linked by the same market dynamics and are essentially competitors. While U.S. growers and vintners may see their margins pinched by imports, the global market also offers new markets and bolsters overall demand.

Organizers at the Unified Wine & Grape Symposium said they received about the same number of registrations for the event that opened today as at last year’s symposium, which was attended by about 12,000. Wednesday’s schedule includes the State of the Industry discussion with Nat DiBuduo, president of Allied Grape Growers, and industry expert Jon Fredrikson of Gomberg Fredrikson and Associates. The annual trade show also opens Wednesday and will feature 643 exhibitors.

Globalization driven by bulk
Jeff O’Neil with O’Neil Vintners & Distillers moderated the session and opened the panel discussion attended by about 400 people by remarking on how quickly the industry changed in the past two decades. “Twenty-five years ago we were concerned about the franc and the lira and a little oversupply,” he said. “Today we’re concerned about a lot more.”

It wasn’t until the 1990s that wine first became a global product, said Kym Anderson, director of the Wine Economics Research Center at the University of Adelaide (Australia). He said in the in the 1930s the biggest wine exporter in the world was Algeria, which was sending wine to France.

In the 1990s and early 2000s, currency fluctuations and new technology to help facilitate the shipments of bulk wine turned wine into an international commodity. Anderson said Australia took advantage of its dollar’s weak value to triple its production capacity to export to the United States. After Argentina devalued its currency by two-thirds in 2001, its U.S. exports saw a seven-fold increase. “We’re all in the international competition business now,” he said. “Even grapegrowers are vulnerable to currency rate fluctuations.”

Anderson noted that China’s insatiable demand for resources has led to a mining boom in Australia that in turn drove up the value of the Aussie dollar and weakened demand for the nation’s bulk wine. In the United Kingdom, the dollar’s rise against the pound has softened demand for imported wine.

All eyes on China
The wine industry’s best bet for future global growth will be in Asia—and especially China. Anderson said he estimates Asia will command 30% of the global spending power by 2030, up from 11% today.

China already is showing strong demand for wine across all segments. Anderson said Chinese vintners use bulk wines to raise the quality of their own products as the nation allows a winery to label its product as being from China even if only 10% of the wine is made from Chinese grapes. China’s growing middle class is gaining an appetite for premium wines, and the nation’s elite continues to buy the world’s very best wines.

China’s domestic production is growing rapidly, but Chinese wineries can’t keep up with consumption. This creates a good opportunity for imports to blend with local wines and satisfy demand by the burgeoning middle class as well as the desire for ultra premium iconic wines for gifts.

Overall, Anderson said wine still has far to go in terms of globalization. Most countries have low rates of regular consumption and high tax rates on imports.

Mike Veseth, author of The Wine Economist blog and an economics professor with the University of Puget Sound in Tacoma, Wash., likened the globalization of the wine world to that of the apple industry. He compared the cheapest bulk wines to the apples and concentrates used for juice boxes and patented, specialty hybrid apples like Honeycrisp to premium wines. Both have demand in the global marketplace and it underscored Veseth’s wider point that globalization is really just regular business but at just so large a scale it becomes hard to fathom.

Steve Rannekleiv of the Food and Agribusiness Research and Advisory Group at international bank Rabobank noted that, ironically, prices of grapes from the San Joaquin Valley are growing much faster than those from Napa, Calif., for example, but their customers haven't been able to raise wine prices. Rannekleiv said that Fresno growers had somehow figured out how to break the law of supply and demand, but added it really is a function of global demand and the bulk market.

Rannekleiv’s comments came on the same day the bank released its outlook for the wine industry in the coming year. Growing demand in the United States and Canada has offset consumption declines in Europe. Overall global supply will likely be tight in the coming year because of the light European harvest and bulk prices will likely rise.

A case study on Moscato and Cabernet
Greg Livengood, president and partner with Ciatti Co., examined the market for Moscato and Cabernet Sauvignon in 2011. He said that year California found itself short on Cabernet and unprepared for the intense consumer demand for Moscato. “We weren’t sitting on enough Cabernet, and there certainly wasn’t enough Moscato; it just wasn’t in the ground,” Livengood said.

When bulk California Cabernet shot to $7.50 per gallon, Livengood said major U.S. producers quickly went to Chile, Spain and Australia, which were all selling Cab at around $5 per gallon. The move enabled them to hold the line on prices at a time when the U.S. consumer was in no mood to pay more for their favorite brands. “The net of it all was they were able to hold price point rather than increase margin,” he said.

For Moscato, producers faced either finding an import source of supply or being shut out of the market completely. Again, Chile and Australia had the necessary wine, and Livengood said U.S. wineries were able to bottle the needed Moscato under their brands and retain valuable shelf space. If U.S. wineries had not been able to find that source of imports they would have lost that shelf space to foreign competition and it would have been a challenge to regain it.

He reminded the audience that California could increase its exports. In 2011, the state shipped out 45 million cases—or about 600,000 tons. While importers are focused on preserving their price points and specific varietal wines, California’s bulk wine is often bottled and marketed as being from the state and is seen as a premium product.

For the coming year, Livengood said Ciatti estimates a strong harvest for California in the range of 3.85-3.9 million tons, but South America looks to have a strong harvest as well. He noted grapegrowers could have seen higher profits of late without having to face foreign competition, but added if it wasn’t for the availability of bulk imports U.S. wineries would have lost more market share in the domestic market. And like the rest of the speakers, Livengood noted the world does not end at the boundary of one’s grape district or AVA. “You need to think about what’s going on around the world,” he said.

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