The Australian wine grape industry has entered a “red dawn”, with prices rising from their 2011 lows – particularly for red wine grape varieties in more premium growing regions – and a further appreciation appears likely in the near term, according to Rabobank’s latest Wine Quarterly report.
In its Q4 2016 report, Rabobank says “life has returned to Australian wine grape prices”, with China driving much of the recovery in market conditions.
While markets remain mixed across Australia’s wine grape varieties and regions, with the recovery more marked in red wine grapes from more premium cool/temperate climate regions, there has also been a recent lift in global commodity bulk wine prices, which is expected to stimulate demand for warm inland climate wine grapes.
Rabobank senior analyst Marc Soccio says relatively constrained domestic and global production and the depreciation of the Australian dollar have also been behind the improved fundamentals for Australian wine grape growers.
“Fortunately, most of the market developments that saw wine grape prices bottom out in 2011 are no longer at play, and we are starting to see sentiment in the industry recover from a time when the national average wine grape price more than halved to A$413 per tonne,” he says.
China driving demand
Highlighting the key role of China/Hong Kong in Australia’s wine grape price recovery, the report says “the performance of the China market remains a key barometer of future red wine grape market conditions”.
This was evident in 2015, Mr Soccio says, with the rebound in Chinese wine imports helping to restore the rising trend in wine grape prices. And this trend is expected to continue in 2017, with imports of Australian wine into China increasing by 41 per cent in the six months to June 2016.
“That said, there are signs that the growth in the Chinese market for more premium red wines may be moderating, with some of that demand transitioning to lower price segments in the Chinese market, which may offer more support for commercial red wine grapes than we have seen previously,” he says.
Mr Soccio says the premiumisation trend in other major markets is also a factor, including in Australia’s domestic market, as well as the US and Canada. “Overall this has led to a marked shift in demand for red varietals from premium temperate climate regions such as the Barossa Valley, McLaren Vale and Coonawarra, and premium cool climate regions such as the Mornington Peninsula and Tasmania, over fruit from more commercial warm inland regions,” he says.
“While the question remains as to which segments of the market will lead demand going forward, it appears unlikely that there will be a significant structural shift away from premium price segments unless there is a major economic shock.”
Constrained Australian supply
While the Australian industry will continue to see seasonal fluctuations in its production, demonstrated by the estimated six per cent increase in wine grape production in 2016, Mr Soccio says the limited investment in new vineyard development is expected to constrain supply over the next three to five years.
“We continued to see significant contraction in the national vineyard estate between 2012 and 2015, especially in many lower-value temperate climate regions, while much of the reduction in the warm inland regions had already taken place during the millennium drought,” he says.
“In terms of varietal mix, the decline in vineyard area has been more acute in white wine varieties, pointing to the relatively stronger demand conditions for red – especially more premium red – grapes. This shift is once again leading many wine companies to look at the balance of fruit they source from their own vineyards and third-party vineyards, reviving interest in the vineyard property market.”
On a global level, Mr Soccio says, supply is set to contract in 2016, “with the northern hemisphere harvest expected to fall on the short side – driven predominantly by France, but declines are also expected Spain and Italy.
“The US crop is also not setting any records and will be average at best, while the southern hemisphere harvest earlier this year was particularly light in Chile and Argentina.”
The report also notes the Australian dollar having “a major bearing on the future direction of wine grape prices”, with the expectation for some modest depreciation in the AUD/USD rate over the next 12 months.
“This is good news for Australian wine companies, however they will also be keenly watching key currency crosses which are less favourable, in particular the British pound,” Mr Soccio says.