Australia’s Wine Supply and Demand Shrinks, Prices Decrease

Published 2020년 3월 20일

Australia was severely hit by several natural disasters in 2019, and growers are now evaluating the impacts to the grape vineyards as harvest season started in February. When production begins, Australian wine will have to face another hurdle as the onset of the coronavirus has limited access to China, its biggest export market.

The overall global wine trade has been slow, as supplies could not be cleared due to low demand. But Australian wine prices have been fairly stable as oversupply in 2018 vintages were compensated by low production in 2019 vintages. Prices for Australian wine will drop in 2020 if the demand doesn’t recover, which is highly likely as poor economic conditions are restricting consumers from purchasing import wines.

2019/2020 Wine Production Impacted by Natural Disasters

Australia relies heavily on the wine industry, in which the wine industry alone is valued at USD 3.5 billion. However, climate change has negatively impacted grape production, as Australia is experiencing droughts more frequently throughout the past few years, each one more severe than the last. In 2019, the total wine grape crush was 1.9 million tons, which was down by 3% compared to the previous year. Similarly, 1.2 billion liters of wine were produced in 2019, 6% less than in 2018. The harvest window has also been shortened, as red grapes have started to ripen earlier, overlapping with harvest seasons for white ones due to climate change.

To add fuel to the fire, Australia experienced rampant bushfires, which destroyed grape vineyards in three out of 65 wine regions. Although most of the wine regions were unscathed, the bigger issue lies in the smoke taint, from which further damage is expected. Smoke taint creates a burnt, ashy taste in the grapes and the wine. Wine production is expected to still decrease this year as well, as hard-hit producers will not be able to create 2020 vintages.

While production and export volumes have been down for 2018/2019 due to the drought, the export value has gone up by 4% from the 2017/2018 season. This indicates consumer trends towards premium, more expensive wines, where there was a 22% growth for wine exports priced at more than USD 5.66 per liter FOB. The Australian export market for high-priced wines has been consistently increasing for the past 6 years, reaching an all-time high of USD 623 million in value in 2019.

Global Demand for Australian Wine Plummets Due to Coronavirus, Competition Increases

In 2019, Australia’s wine sector greatly benefited from exporting to China where it faces no import tariffs, as the value of Chinese exports has increased to USD 625 million, up by 7% from 2018. The coronavirus, COVID-19, will have a dramatic impact on 2020 sales to China, as exports to China have tanked by 90% within the first two months of 2020. China has been in quarantine as a preventive measure against COVID-19, which means large social events that are often accompanied by drinking were canceled and bars and restaurants have been closed, causing a drop in on-premise sales.

These on-premise sales take up one-third of the Australian wine trade, so Australia is hoping to minimize the damage by shifting toward selling to customers directly through e-commerce. This, however, has its downsides as French wine had already been leading in online sales before the virus outbreak. Chile is also a strong contender in the Chinese market. Even after consumption rises again in China when the restrictions placed due to the coronavirus are loosened up, Australia will have difficulty keeping its prices high due to increased competition.

Demand within the US has dropped as well, by 0.9% in 2019, according to the International Wine and Spirits Registry (ISWR). Consumers, particularly millennials, prefer non-alcoholic or low alcohol drinks more due to an increased awareness of health and wellbeing. In addition, the US already has large inventories of 2018 vintages in the US, causing lower prices for Australian wine in the US market. This season will most likely not be easier for Australian wines not just from low demand, but because of higher transaction costs, as well as massive consolidation of supply chains within the US.

Australia’s Solution to the Continuous Crisis

Diversification of products will be the key for Australia to tackle the continued crisis, as growers are moving toward expanding their product line to include varieties from Spain and Italy, which are more resistant to dry conditions. With grapes affected by the smoke taint, producers are moving to produce alternative products, such as creating brandy from the grapes. Australian wine exporters will look for other markets to fill in the gap left by China, but the recent spread of COVID-19 to the US and the UK will mean Australia will also allocate more of their wines to the domestic market.