Challenges ahead for Southern Hemisphere wine producers

For the wine-producing countries of the Southern Hemisphere, the coming year looks set to present some significant though differing challenges, asserts a new report from just-drinks.

According to the just-drinks report, Southern Hemisphere grape supply and wine production - forecasts to 2013, 2008 finds wine production in Australia, New Zealand, South Africa, Argentina and Chile in a marked state of flux.
    
Epitomising the "feast or famine" nature which sometimes besets agricultural commodities, 2008 sees Australia move from its much-publicised grape glut to a state of balance. However, that balance will not last long, the report warns. Having seen the last harvest hit by the country's severe drought, further small harvests in 2008, 2009 and possibly beyond will leave the industry facing a serious shortage of grapes and struggling to meet global demand for its wines.

Meanwhile, New Zealand faces a supply challenge of a different kind. While it is on course to hit its 2010 export target of NZ$1bn in sales, the objective of $2bn by 2015 is "in some doubt", according to the report. South Africa faces problems too, with the country's over-enthusiastic planting of red varieties during the 1990s resulting in a red wine glut and insufficient volumes of white wine.

In South America, the story is again different.  A victim of its own success, there are signs that Argentina will not have sufficient volume to meet global demand over the next few years. Chile to a degree is also suffering as a result of its own success. Having once been by far the most attractive target for inward investment by wine investors, by dint of cheap land, labour and a perfect climate, the strength of the peso has latterly squeezed margins and deterred investment in the wine industry.

The report contends that viticultural exploration of as yet unexplored valleys and locations will bring a broader range of premium wines to the marketplace, but at the same time Chile must be wary of losing competitiveness, pricing itself out of important markets like the UK and Germany.

While all five countries are facing challenges in 2008, the report suggests that none is greater or more pervasive in terms of its impact on the wider market than the situation in Australia. "Five different wine-producing countries - and five different sets of challenges for the years ahead, but all are subject to the same consumer trends and the same global market in grapes and wine," the report states. "And, in early 2008, nothing is having a greater effect on that market than the Australian drought. There are signs that that effect could be felt around the world for some years to come."

The report forecasts a gradual decrease in Australian export volumes from 2008 as rising costs lead Australia to "chase value over volume, deserting lower price-points and putting a stop to unprofitable sales". After 2010, the situation will begin to recover, but it is only in 2013 that stocks will reach comfortable levels, according to the report.

As the report points out, Australia's plight could create opportunities for other Southern Hemisphere countries.  For instance, it could ease South Africa's red wine oversupply problem.  But for Australian producers, the risk of losing major customers is acute, leading some to seek to outsource, which would also create further demand - albeit for bulk wine - in other countries.

"Owners of major brands cannot afford to be in a position where they are unable to supply important customers, such as UK supermarkets," the report states. "As such, the larger operators are exploring the possibility of 'outsourcing' part of the production for their key brands, buying bulk wine from countries such as Chile, Argentina and South Africa."

So the effects of the Australian drought are being felt way beyond the vineyards of Riverland and Riverina, the report concludes. For Australia and its grape farmers, however, the consequences are "harder to call".

Should large numbers of inland growers be forced out of the industry, grubbing up their vineyards in the process, then the effects will be long-lasting, the report warns. Even when water supplies return to their usual levels, Australia's key production areas could have insufficient vineyard area to meet demand.

Moreover, the report suggests there will be little respite even for those growers who manage to fend off bankruptcy. Prices are set to rise from the 2008 vintage onwards, but even a double-digit increase in prices per tonne will be little help to a farmer whose production levels have been nearly halved by the drought.

However, the report suggests there are opportunities amid the gloom. "The challenges for the industry are many, but there are opportunities too, not least in the pursuit of a value-centred strategy as envisaged in Wine Australia's Directions to 2025 document. Increased production costs will lead to a fall in bulk exports, pushing sales into higher-margin, bottled products, with Australia increasingly vacating lower price-points, simply because the industry cannot afford to compete there."

While there will be casualties in the short term, the report suggests that in the longer term Australia could be transformed into "a more premium-focused, value-oriented business, and one that is less vulnerable to the type of production peaks and troughs which it has witnessed in the past five years."