This year's Vintage Report includes some positive signs for the industry. Along with shifts in the macro-economic climate - including favorable shifts in exchange rates, the signing of key Free Trade Agreements and strengthening consumer demand in some key market segments - the outlook for the industry has improved from last year.
However, the Report also indicates an industry under sustained profit pressure and the persistence of a structural mismatch between the supply and demand for our wine at profitable price points.
The 2015 Vintage of 1.67 million tonnes which is marginally lower than "average" and while average grape prices have strengthened, this is off a low base.
Favorable changes in seasonal market conditions and the macroeconomic environment will not be enough to restore the Australian wine sector's lost share and margin. We need to take pro-active steps with the support of government to boost demand and our resourcing of promotional activities. On the supply side, better informed decision making is required with the aid of improved data, analysis and price signaling. This Report is part of that data set.
There was no change in the composition of the Top 10 varieties from last year, except for Pinot Gris/Pinot Grigio which is now ranked 8th while Colombard dropped to 9th place.
2015 winegrape crush
The 2015 Australian grape crush is 1.67 million tonnes - just a 0.4% increase from last year's Levies Finance 2014 recorded crush of 1.66 million tonnes. This figure is just below the 8-year average of 1.70 million tonnes and around 7,000 tonnes higher than last year's crush. The slight increase in overall crush is attributable to Riverina's increase in yields, offset by lower yields in Murray Darling and most cooler temperate regions.
Crush by industry structure suggests that the largest 22 respondents accounted for around 85% of the total crush. In terms of crush by state/ regions, Murray Darling-Swan Hill accounted for 382,000 tonnes or 25% of the total crush, New South Wales (excluding Murray Darling-Swan Hill) at 332,000 tonnes or 22%, Victoria (excluding Murray Darling-Swan Hill) at 60,000 or 4%, South Australia at 717,000 tonnes or 47%, Western Australia at 30,000 or 2% of total crush.
The 2012 Expert Review analysis on production profitability has been further expanded to include 2015 data. Increasing 2012 cost of production by 1.5%, profitable production across 15 representative regions decreased from 7% in 2014 to 6% this reporting period. Low profitability and breakeven during this time were unchanged, while unprofitable production increased to 85%.
This year the WFA Vintage Survey was combined with the Wine Australia Price Dispersion Survey, the South Australian Grape Crush Survey and the Murray-Darling / Swan Hill Wine Grape Crush Report into a single collection process known as the Australian Wine Sector Survey 2015.
The Wine Australia Price Dispersion Survey shows that, overall, the national average winegrape purchase price in 2015 was $463 per tonne - up 5% from the 2014 average of $441 per tonne.
The 2016 vintage will continue to present challenges to the industry since we have not seen significant structural shifts. The potential benefits from recent Free Trade Agreements and favorable currency movements should be seized by the industry. The Federation's submissions to government recommend an increase in funding to assist industry reap the benefits of these economic opportunities and to recapture share and margin in our global markets. Unlocking trade opportunities and addressing the challenges requires a coordinated effort, including from the industry, groups of stakeholders, and individual companies.
Winemakers' Federation 2016 Vintage Outlook
The below is adapted from the Winemakers' Federation of Australia 2016 vintage outlook as reported in its 2015 Vintage Report.
There are positive indicators for the Australian wine industry with a 5% increase in average winegrape price and an increase in volume and value of wine exports reported for 2014-15. This is despite the winegrape crush remaining relatively unchanged this vintage, a modest 1% increase in overall unprofitable production and yet-to-be realised structural shifts that could see further sustained upside potential across numerous indicators.
Looking at Wine Australia's export approvals data, there are some signs that Australia’s export performance has strengthened, with growth in volume and value in 2014-15 - the first time we’ve seen an increase in total value since 2006-07. The majority of exporters recorded growth and the number of products (SKUs) exported hit a record 17,562. Growth is strongest at the highest price points and contributed to the average value of bottled exports hitting its highest level since 2004.
WFA continues to work towards securing additional funding to help Wine Australia unlock the longer-term structural opportunities presented by favorable economic developments. These include the weaker Australian dollar, the Free Trade Agreements with Japan, South Korea and China, a rebound from austerity measures in China, improved economic conditions in the UK and the US, favourable response to Wine Australia promotional activities such as ProWein and the Vancouver International Wine Festival, and the growing positivity towards Australian wine around the world.
The WFA continues to advocate for an additional $25 million over four years from government to help boost the international promotion and marketing of our wine in key markets. This initiative, along with a number of other recommended industry actions can be found at www.wfa.org.au.
The US remains a substantial but largely unrealised opportunity for Australian premium wine. The US is the largest premium wine market in the world and it continues to grow. Australia is seeing some recovery at the premium end of the market but has a significant way to go. Our image as a low-cost value producer continues, which is understandable given 95% of Australian exports to the US are below A$5 per litre.
To change perceptions and unlock the opportunity in the US requires a substantial increase in marketing investment. However, Australia faces enormous challenges from France, Italy and other European producers targeting the US who have access to substantial promotional funds through the European Commission's National Support Programmes (NSP).
The export market (outside of the EU) promotion spend through the NSPs is to double from C= 522 million in 2009-13 to C= 1.156 billion (A$1.7 billion) over 2014-18.
Asia is the stand-out growth region for Australian wine exports. China is our major Asian market and volumes are on the rise after austerity measures caused a slowdown in the imported wine market in the previous 18 months. China remains the number one destination for Australian exports priced at over A$7.50 per litre.
Opportunities do exist across the broader Asian market outside China, with different levels of maturity and accessibility across our focus markets of Japan, Hong Kong, Singapore, South Korea and Taiwan.
These countries display relatively high wine consumption for Asia and this translates into a greater expertise in wine and potential for genuine appreciation of Australia’s wine offer. The average value per litre across these markets is considerably higher than the average value for Australian exports to all destinations, with Hong Kong and Singapore being number one and number three respectively in dollars per litre. In some of these markets, the market position of Australian wine is high (for example, number 2 in Hong Kong and Singapore) and will need defending.
United Kingdom and Europe
The United Kingdom is our biggest export market. For year ended March 2015, exports to the UK grew by 2% to 251 million litres valued at A$371 million. The strongest growth to the UK is coming at above A$10 per litre. The UK can be regarded as a “defend” market for Australia as we have been the number one category in the UK offtrade market for over a decade.
Europe accounts for more than half the volume of Australian wine exports and growth to the region has been solid - exports to Europe (excluding UK) grew 10% from 111 million litres in 2013-14 to 123 million litres in 2014-15. Wine Australia's strategy in Europe is to target key markets where it can deliver an educational message in addition to trade and consumer tastings.
While exports are vital to the future of the Australian wine sector, the domestic market remains the largest for Australian wine, accounting for 40% of sales. However, the volume of Australian sales in the domestic market has been relatively flat over the past four years.
The Australian category has faced increasing pressure from imports, particularly from New Zealand but also from France, Italy and Spain.
An increase in export performance will help relieve some of the competitive pressure on the domestic market and the lower exchange rate may see a decline in imports.