Opportunities for growth but wine oversupply must be tackled

By | 23 May 2007

Wine production in the Northern Hemisphere remains dogged by over-production, but according to a recent report published by just-drinks, there is plenty of opportunity for innovative and consumer-aware producers, while the success Germany has had in transforming its wine industry shows the benefit of structural reform and market-orientated planning.

The wine-producing countries of the Northern Hemisphere are facing a whole host of challenges but chief among these is without doubt oversupply. And according to a new report published by just-drinks Northern Hemisphere Grape Supply and Wine Production - Forecasts to 2011 this is not just a European problem, with California too wrestling with over-production issues, not least after the mammoth 2005 harvest, which sent grape prices tumbling.

Nevertheless, it is in Europe where the long-running problems of over-supply are most acute. The EU produces around 60% of the world's wine, and while it has an annual budget of EUR1.3bn (US$1.75bn) to promote and subsidise the wine sector, in 2005 the EU spent just over EUR500m of that turning wine into industrial alcohol because there was no market for it.

At the same time, programmes to encourage growers to exit the wine business, such as Bordeaux's three-year vine-pull scheme, have been unsuccessful. European Agriculture Commissioner Mariann Fischer Boel put forward a drastic change in policy late last year, proposing that rather than paying growers to produce something no-one wants, they should be compensated for digging up their vineyards and doing something else instead.

Fischer Boel's plan envisaged ripping out about 400,000ha of vines, about 12% of the total vineyard area of the EU. This may make sense in terms of supply and demand, but for grape growers in countries like France, Italy and Spain, there are often few obvious and profitable alternative crops.

Europe's politicians therefore found Fischer Boel's plans unpalatable, and in February voted them down in favour of a report written by Greek MEP Katerina Batzeli, who called for the retention and even expansion of the current subsidy system. However, the Fisher Boel plan isn't altogether dead in the water. Her formal proposals are expected by May 2007, with the aim of a final agreement with the European Parliament and national governments by the end of 2007.

Notwithstanding the grave structural issues that need to be faced across Europe, the just-drinks report paints a picture of contrasting fortunes for the major European wine-producing areas.

The report looks at three French regions facing very different futures in 2007. Bordeaux is experiencing unprecedented demand for its top wines, but is suffering at the value end thanks to increased plantings in the 1990s. Generic Bordeaux urgently needs to rid itself of about 15,000ha of vineyards as wine prices sink to new depths, and the short-term future is bleak in this sector of the market.

Champagne, meanwhile, faces the opposite problem. Escalating demand in established and emerging markets alike has driven grape prices to worryingly high levels as the region nears the limits of its production.

However, Beaujolais is a classic case of a wine region not adapting to the economic realities of its market. Yield reductions are capping production, but rule changes and physical alterations to the vineyards to cut costs are urgently needed.

The report also suggests that structural reform is desperately needed in Portugal. Even though grape prices are showing signs of rising after years in the doldrums, the beneficio system, which controls Port production, is coming under increasing pressure, and is effectively distorting the market by subsidising the production of table wine.

The picture in Germany is rosier, and arguably the fact that the German wine industry is in relatively good shape shows how structural reform and market-focused planning can benefit a wine region.

Germany has reinvented itself viticulturally speaking over the past quarter of a century. From a country producing mostly sweet or medium-sweet white wines - many of them exported to markets like the UK at very cheap prices - it has developed red varieties including Dornfelder and Spätburgunder (Pinot Noir) alongside its trump card in dry white wine terms, Riesling.

The transformation has been remarkable. Red grapes now account for close to 40% of the national vineyard, while old-style whites have been replaced on a grand scale.

So unlike so many of its European counterparts, Germany has no real oversupply problem in 2007. The phenomenal increase in plantings of red varieties has kept pace with demand, leaving the market mostly in balance, while whites in general, and Riesling in particular, are very much in demand. Prices are rising fast - but increased plantings should stop them from going through the roof in the years to come.

In addition, both Spain and Italy have successfully capitalised on the growth in white wine. Italy, in particular, is benefiting from the current popularity of Pinot Grigio, of which it has an abundant supply. While average Italian crops over the past few years have helped to counteract the effects of 2004's bumper harvest, some growers of red grapes in the south are still suffering.

Areas in Spain known more for red wine are increasing white wine production, while specialist white wine regions such as Rueda and Rias Baixas are prospering. Moreover, Spain is seen as Europe's winemaking land of opportunity, offering great potential for winemaking innovation. While many small-scale grape growers are finding life there every bit as tough as their colleagues in France or Italy, the forward-thinking are being rewarded as the global market for innovative Spanish wines, especially a new generation of dry whites, expands by the year.

 

For more information or to download this report, go to http://www.just-drinks.com/store/product.aspx?ID=50761&lk=sup

Sectors: Wine

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