abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Wine and wine grapes

Outlook to 2013-14

Thomas Jackson, Tara Stokes, Brenda Dyack

The demand for Australian wine has declined in the past 18 months as export markets, historically the stimulus for industry growth, have become significantly more competitive. Deteriorating global economic conditions have also contributed to lower demand for Australian wine in the domestic and international markets. In the short term, sales of Australian wine are expected to continue to decline. Sales are expected to recover from 2010-11 onwards, but at a slower rate than the historical average.

Wine grape production in 2008-09 is forecast to be around 1.7 million tonnes, a fall of 8 per cent from the 1.84 million tonnes produced in 2007-08. This decrease reflects the forecast effect of ongoing shortages of water for irrigation in some regions, high temperatures in late January and early February 2009 and bushfires in Victoria. The greatest effect of the high temperatures on total Australian grape production was in the inland regions of the Murray Valley and the Riverland. Cooler-climate regions have also been affected, including the Barossa, McLaren Vale and the Yarra Valley. Assuming average yields over the remainder of the outlook period, wine grape production is projected to be 2.1 million tonnes in 2013-14.

Expected wine sales and grape production imply there will potentially be large increases in the volume of wine stocks over the outlook period. Because holding stocks is costly, wine producers are expected to limit these increases. To achieve this in the short term, given the outlook for sales and present stock levels, wineries are expected to purchase fewer grapes. In the medium term, wineries are expected to increase exports of bulk wine, assuming profitability of this market segment increases as economic conditions improve. Reflecting the downward pressure on grape prices which both these strategies imply, wine grape prices are projected to remain low throughout the outlook period. Once adjusted for the assumed inflation rates, average wine grape prices are expected to fall to $635 a tonne (in 2008-09 dollars) in 2013-14.

Australian wine sales fall

Following more than a decade of steady growth both the volume and value of wine exports declined by more than 10 per cent in 2007-08. The relatively small size of the 2006-07 grape harvest contributed to this fall. However, demand for Australian wine also contracted as competition in major export markets increased and the value of the Australian dollar rose. In 2007-08, sales of Australian wine in the domestic market declined by 4 per cent, while the volume of imports surged by more than 50 per cent, to around 11 per cent of total sales.

Wine grape production increased by 31 per cent in 2007-08 to 1.84 million tonnes, despite ongoing dry conditions, as producers purchased water to meet irrigation requirements. Wine grape prices increased by 22 per cent to around $787 a tonne. Reflecting increased wine production and weaker demand, the volume of wine stocks increased, to around 1.9 billion litres at the end of 2007-08. Given the outlook for sales and production, average wine grape prices are forecast to decline by 12 per cent to $690 a tonne in 2008-09.

Competition increases in world wine market

Since the late 1980s the demand for Australian wine has grown in overseas markets, particularly the United Kingdom and the United States. Increased demand for wine resulted in higher wine and grape prices, and this created a planting incentive which caused rapid expansion of Australia’s vineyard area. Throughout this period, the uniqueness and good value of Australian wine were key characteristics responsible for demand growth. However, in the past five years, competition has increased in Australia’s key export markets, as exports from other New World wine producers and Old World suppliers have grown. This has provided consumers with a wide range of new, price competitive, wine choices.

In the past decade, New World wine producing countries such as Chile, Argentina, and South Africa have gained significant shares of the world wine market. These countries generally have low costs of production, and compete with Australian wine in relatively low-priced segments of the world wine trade. Additionally, wine production in the United States has continued to grow, increasing competition with Australian wine in this key market as well as in other export markets. At the same time, reforms of the Old World (European) wine industry to reorient production to match consumer demand, have begun to take effect. Between 2000-01 and 2004-05, these reforms saw 341 000 hectares of vines (more than twice Australia’s total vineyard area) replanted with high quality wine grape varieties, further increasing competition in the world wine market. The effect of increased competition is also evident in the Australian wine market. In 2007-08, imports of wine to Australia increased from a variety of New and Old World wine producers, including New Zealand, Chile, Italy and France.

Increased competition and changing consumer preferences have resulted in declining export unit prices of Australian wine since 2000-01. In May 2007, the Australian wine industry released a strategic plan, Directions to 2025, in an attempt to reverse this decline. The aim of this plan is ‘to increase the value of the Australian wine trade over the next five years by a cumulative $4 billion.’ Shifting wine sales from low to high-priced categories is a key element of this strategy. The average export unit value of Australian wine increased slightly in 2007-08. However the relatively small size of the 2006-07 wine grape crop was one of the main reasons for this, as the proportion of bulk wine shipments fell significantly in that year. Reflecting the larger wine grape crop of 2007-08 and weaker demand for Australian wine, average export unit values are estimated to have declined by 7 per cent in 2008-09, to $3.51 a litre.

Over the outlook period, the Australian wine industry is expected to continue to face challenges resulting from the consumer perception that Australian wines are not high value wines, because of the low prices at which many have been offered over the past five years in particular. Australian wine producers seeking higher prices will face ever-increasing competition from other high-quality producers from countries including New Zealand, the United States, Chile and the European Union. Over the outlook period, the ability of the Australian wine industry to increase exports will depend on producing wines which satisfy consumer preferences. This may mean significant changes to wine styles, varieties, alcohol content, packaging, environmental practices and production methods.

Australian wine exports to remain subdued

Australia’s export markets for wine are highly concentrated. In the five years to 2007-08, an average of 75 per cent of the value of wine exported from Australia was shipped to the United States, the United Kingdom and Canada. The United States and United Kingdom are the largest markets by far, accounting for 28 per cent and 33 per cent of total wine exports by value in 2007-08, respectively. Demand for Australian wine in both of these key export markets is expected to remain constrained until the end of 2009-10, before gradually recovering to 2013-14. The increase in exports in the later part of the outlook period is expected to occur as economic growth increases, and industry efforts to revitalise the demand for Australian wine take effect.

The value of the Australian dollar appreciated significantly against the US dollar and the British pound throughout 2007 and the first half of 2008. This reduced the competitiveness of Australian wine in these markets, and contributed to the fall in exports in 2007-08. However, the depreciation of the Australian dollar against these currencies, which occurred in the first half of 2008-09, has not yet resulted in an increase in wine exports to either of these markets, as deteriorating economic conditions have reduced the demand for wine.

The Australian dollar depreciated by 30 per cent, relative to the US dollar, in the first half of 2008-09, increasing the competitiveness of Australian wine relative to US wine. However, because the US dollar also appreciated against the currencies of other trading partners, the change in the competitiveness of Australian wine relative to other imported wines in the United States has not been significant. As economic conditions deteriorated in the United States following the global financial crisis, demand for wine weakened, and this is expected to result in a further decline in Australian wine exports to the United States in 2008-09.

The Australian dollar also depreciated against the British pound in the first half of 2008-09. However, because little wine is produced in the United Kingdom, changes to competitiveness in this market depend on exchange rate changes relative to the currencies of other wine exporters. The European Union is Australia’s major competitor in the United Kingdom. In 2008-09 the Euro appreciated against the Pound, increasing the competitiveness of Australian wine. Despite this, Australian exports to the UK continued to fall in the first half of 2008-09 because of generally weakened consumer demand, and changing consumer preferences away from Australian wine.

Throughout the medium term, average export unit values of Australian wine are expected to remain low compared with previous years. This reflects the assumption that relatively low-priced bulk wine shipments will represent around 25 per cent of total wine exports, as they have in previous years when wine stocks increased beyond preferred levels. This is expected to maintain downward pressure on wine grape prices in the medium term.

Domestic market to remain competitive

In 2007-08, the total consumption of wine in Australia declined by 1 per cent, and sales of Australian wine declined by 5 per cent. This reflects the relatively small size of the wine grape crop in 2006-07, which is likely to have reduced the competitiveness of Australian wine relative to imports, a situation exacerbated by the relatively high value of the Australian dollar in 2007-08. Imports represented 11 per cent of total domestic wine sales in 2007-08, up from 7 per cent in 2006-07. Domestic wine sales are estimated to have declined by a further 1 per cent in 2008-09, to 423 000 litres, and the share of imports increased to 15 per cent.

As well as possible changes to relative competitiveness, declining purchases of Australian wine and increased wine imports reflects changes in the tastes and preferences of Australian wine consumers. For example, the main reason for the increase in imports of wine from New Zealand in 2007-08 was a change in preferences toward sauvignon blanc. Furthermore, imports of wines from France, Italy, Spain and Portugal all increased significantly in 2007-08 because these wines satisfied consumer preferences for new varieties and wine styles at prices which were competitive with domestic wine prices. This shift in preferences is expected to be maintained throughout the outlook period. In 2008-09, the volume of imports are forecast to increase by more than 30 per cent, despite the depreciation of the Australian dollar relative to the New Zealand dollar and the Euro. By 2013-14, imported wines are expected to represent around 18 per cent of total domestic wine sales.

Over the outlook period, domestic sales of Australian wine are expected to decline further in 2009-10, before increasing to approximately 560 000 litres in 2013-14. Because Australian wine is a substitute for imported wine and other alcoholic beverages, increased domestic sales will also depend on the success of industry efforts to increase the demand for Australian wine.

The New Zealand wine industry
The New Zealand wine industry is relatively small compared with the Australian industry. In 2008, New Zealand produced 205 million litres of wine from 29 000 hectares of vines. In the same year, the Australian wine grape industry produced 1.3 billion litres of wine from 166 000 hectares of vines. Both New Zealand and Australia are significant exporters of wine. In 2008, New Zealand exported 43 per cent of wine produced, while Australia exported 56 per cent. Between 2004 and 2008, the volume of wine exported from New Zealand and Australia increased by 185 per cent and 9 per cent, respectively. However, while the value of exports from New Zealand increased by 83 per cent during this period, the value of Australian exports declined by 10 per cent. In 2008, New Zealand exported 89 million litres of wine at an average value of A$7.54 a litre, while Australia exported 698 million litres at an average value of A$3.53 a litre.


In 2008, Australia was New Zealand’s largest export market by value. The average unit export value to Australia was A$8.38 a litre, compared with a unit value of A$6.80 a litre for exports to the United States and A$6.87 a litre to the United Kingdom. The higher export unit value to Australia primarily reflects the strong shift in the preferences of Australian wine consumers toward New Zealand sauvignon blanc in 2008. Sauvignon blanc is the main wine grape variety exported by New Zealand, accounting for 76 per cent of exports in 2008. Other major varieties include pinot noir and chardonnay, with 7 per cent and 6 per cent of exports, respectively. In Australia, the variety of exports is more evenly distributed, with chardonnay, shiraz and shiraz blends accounting for around 52 per cent of total exports. The divergence in export unit values between Australia and New Zealand reflects the importance of satisfying consumer preferences for particular wine varieties and styles.