Is World Wine Production at a 40-year Low?

Morgan Stanley report from Australia at odds with other experts

by Paul Franson
In 2012, global wine production reached its lowest level in 40 years, according to Morgan Stanley.
Napa, Calif.—A report from the Australian research arm of investment banking giant Morgan Stanley is creating buzz in the wine community with its announcement that in 2012 global wine production “fell to its lowest levels in more than 40 years.” But some North American wine industry experts see the situation differently.

By the numbers
The International Organisation of Vine and Wine (OIV) just announced that global wine production is forecast to climb 8.8%, to the highest level in seven years, as grape harvests rebound in Spain, Argentina and France.

The group said that the 2013 vintage should hit 281 million hectoliters (7.4 billion gallons), up from 258.2 million hectoliters in 2012. (The tally previously was estimated at 250.9 million hectoliters.) Italy will remain the largest producer, followed by France and Spain.

“After five modest harvests in a row and an exceptionally weak 2012 harvest, wine production in 2013 can be qualified as relatively high,” reported the OIV. “The wine world this year returns to the levels of 2006.”

Supply and demand
By contrast, Morgan Stanley reported, “Declining global production deepens supply shortage. The global wine industry has seen an excess of 600 million unit cases (almost one quarter of global consumption) in 2004, reduced to just 1 million unit cases in 2012—largely through an ongoing structural reduction in capacity. After adjusting for non-wine uses, demand for wine exceeded supply by 300 million cases in 2012, the deepest shortfall in over 40 years of records.”

The Morgan Stanley report continued, “Impact of shortage lags—demand for exports is likely to accelerate in the medium term.

“In the short term, inventories will likely be reduced as current consumption continues to be predominantly supplied by previous vintages. As consumption turns to the 2012 vintage, we expect the current production shortfall to culminate in a significant increase in export demand, and higher prices for exports globally. Further growth in consumption in the meantime may exacerbate the shortage when it comes through."

A contrary view
Other observers see a very different picture. Rabobank is one of the world’s leading lenders to the agricultural community. “I understand how they arrived at that conclusion, but I take a bit of a different view from MS (Morgan Stanley),” said Stephen Rannekleiv, executive director of the Food & Agribusiness Research and Advisory sector at Rabobank International in New York. “I don’t see any real tightness in the market, I just think we are moving a little bit closer to balance…and I don’t think we are moving in that direction nearly as fast as it first appeared. It’s worth asking: If the market is so incredibly tight, why are bulk wine prices moving lower in most major regions of the world?”

Rannekleiv added that while global yields did decline to some degree, that’s comparing the current position to where we were during a decade of oversupply. “A little bit of tightening is absolutely a good thing. We may lose a little bit of our volume sales, but that is not necessarily a bad thing when you think about how much of what was being sold a few years ago just really wasn’t profitable (think of Portugal selling nearly 7 million cases of wine to Angola in 2011 for an average price of roughly 1 euro per liter.”

He said that inventories are not nearly as tight as it seemed they were a year ago for a few different reasons. “Both Spanish and Italian producers discovered a few million additional hectoliters of wine that they had overlooked when they gave their production estimates from last year.”

He noted, “But when prices go high enough, additional wine has a way of ‘magically’ appearing (the same thing happened in Chile a few years ago).”

Rannekleiv continued, “While France just had an awful harvest (which is getting lots of attention), Spain’s harvest now sounds like an exceptional bumper crop. I hear speculation that they may become the leading producer in the world this year, overtaking both France and Italy.

“As in California, I’m hearing of increasing challenges in Spain to find adequate tank space to accommodate all the juice. With a big harvest in Spain, French wine exports may not miss a beat since much of what gets sold as ‘French’ wine actually is Spanish; buying Spanish bulk wine and selling it as French bottled wine is a great business model.”

Rannekleiv added, “While everyone is busy focusing on the vineyards that have been pulled from France, Italy and Spain as part of the EU grubbing up scheme, few realize just how much investment has gone into improving productivity in places like Spain. In spite of removing well over 100,000 acres, Spain may actually see a net increase in production. Most of the acreage taken out had extremely low yields and poor quality. In its place, remaining vineyards have seen massive investments in irrigation, etc.”

To account for some wine, he concluded, “We know that production is declining in the EU, but consumption seems to be falling even faster. Much of their excess is increasingly going to China. But I really don’t have answers to: ‘How much is China expanding its wine production?’ That is an enormous piece of this whole puzzle, and I don’t think anyone has a firm handle on that.

“Perhaps another question that is worth asking when it comes to China is just how sustainable their consumption growth will be in the long term. No one really has any visibility on where all the imported wine goes, so just how much of the recent growth has gone to filling channels? Once the supermarkets and restaurants have enough inventories, how much will wine imports continue to grow? It’s a legitimate question that casts some doubt on the expectation of continued double-digit growth rates in Chinese demand for wine.

A global outlook
Rob McMillan, division relationship manager of Silicon Valley Bank’s Wine Division in St. Helena, Calif., watches and reports on wine trends for that bank’s customers. He said, “As you know, West Coast production hit a record last year and will be close again this year. The Southern Hemisphere—and in particular Chile and Argentina—also had good harvests this past year.

He also noted that Europe has been overproducing for years, and it was getting worse with the drop in their per-capita consumption. “In 2006 the EU was paying 131 million euro to convert wine grapes into ethanol. They phased out of the program last year and in intervening years have been removing lesser quality vineyards—all with the intent of reducing EU production.”

McMillan said, “The bottom line is while production in EU has fallen, it’s been on purpose.

“I’ve seen discussion about China absorbing all the world’s wine, but that kind of analysis ignores the fact China itself is the No. 5 producer in the world of wine grapes now and growing.

“Second, the average Chinese can’t afford most of the wines Americans enjoy. As a consequence, while world production is decreasing, it’s not that scary of a problem. We are much better off than we were several years ago, when there was a lake of wine.”

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