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Elliott Morss | October 1, 2014

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The Global Economics of Wine: Past, Present, and Future

© Elliott R. Morss, Ph.D.

Introduction

This is the first in a two part series on the wine industry. It will cover the economics of the industry: production, costs, demand and price. The second part will focus on international marketing strategies for the coming years.

Vineyards

 Wine production starts with vineyards for grape growing. Countries with the greatest vineyard areas are shown in the following table. It is notable that China is fourth in vineyard area and ahead of the United States. It is also notable that there is now more vineyard area outside of the European Community (EU) than within it.

Table 1 – Vineyard Areas of Leading Wine Producers (in mil. hectares)

 Country 2008
Spain 1,165
France 852
Italy 840
China 500
USA 411
Portugal 250
Argentina 225
Romania 201
Chile 198
Australia 173
South Africa 132
Greece 116
Germany 102
Brazil 100
Bulgaria 95
Russia 75
Hungary 72
Austria 51
New Zealand 35
Switzerland 15
EU – 27 3,818
All Other 4,043
Total 7,861

Source:  http://www.oiv.int/

The changes that have occurred in vineyard areas over the last 15 years are quite striking. As can be seen in Table 2, vineyard areas in Europe have declined while growing rapidly elsewhere. Vineyard growth in New Zealand and China are particularly noticeable.

Table 2 – Vineyard Areas in Europe and Elsewhere

 Area 1996-00 Average 2008 1996/00 – 2008% Change
Europe 4,128 3,818 -7.5%
China 218 500 129.5%
USA 377 411 9.1%
Argentina 208 225 8.1%
Chile 147 198 34.7%
Australia 107 173 62.4%
South Africa 112 132 18.1%
Brazil 59 100 69.1%
Russia 76 75 -1.0%
New Zealand 11 35 232.4%
Switzerland 15 15 0.1%
Non-Europe 2,882 4,043 40.3%
Total 7,009 7,861 12.2%

Sources: http://www.oiv.int/ and http://www.export.gov/tradedata/index.asp

Producers

Data on the leading wine producers are presented in Table 3. The data echo the vineyard data. And even though wine production in the leading European countries has fallen, Italy, France, and Spain remain the largest producers. The overall share of the European countries listed is falling gradually, from 69.5% in 2004 to 65.6% in 2008.

As can be seen by the final column, there is significant variation in wine production per hectare. Some of this variation is explained by the fact that not all grape production goes into wine. But the variation is the result of differences in production efficiencies, climate, and soil.

Table 3 – Wine Production by Country and per Hectare

Wine Production Production Wine Production
Milhectliters 2004-08 per hectare
Country 2004 2005 2006 2007 2008 % Change 2008
Italy 49,935 50,566 52,036 46,600 46,900 -6.1% 56
France 57,386 52,105 52,127 45,800 42,950 -25.2% 50
Spain 42,988 37,808 38,137 34,331 34,850 -18.9% 30
USA 20,110 22,890 19,440 20,100 20,550 2.2% 50
Argentina 15,460 15,220 15,400 15,050 14,680 -5.0% 65
China 11,108 11,536 11,963 12,390 13,005 17.1% 26
Australia 14,680 14,300 14,260 9,610 11,700 -20.3% 68
Germany 10,007 9,153 8,916 10,161 10,400 3.9% 102
South Africa 9,280 8,410 9,410 9,840 9,890 6.6% 75
Chile 6,300 7,890 8,450 8,280 7,860 24.8% 40
Romania 6,166 2,602 5,014 5,289 6,300 2.2% 31
Portugal 7,481 7,266 7,543 6,049 5,400 -27.8% 22
Greece 4,248 4,027 3,938 3,511 3,750 -11.7% 32
Brazil 3,930 3,200 2,370 3,500 3,500 -10.9% 35
Hungary 4,340 3,103 3,271 3,168 3,400 -21.7% 47
Austria 2,735 2,264 2,256 2,628 2,400 -12.2% 47
Bulgaria 1,949 1,708 1,757 1,796 1,800 -7.6% 19
New Zealand 1,190 1,020 1,330 1,480 1,700 42.9% 49

Sources: http://www.oiv.int/ and http://www.export.gov/tradedata/index.asp

Exporters

The leading wine exporters are shown in Table 4. Most wine is produced for domestic consumption. Of the leading wine producing countries, only Chile, Australia, and Portugal export more than 50% of production. However, for all of these countries, the export sector is large enough to be of great importance to their economies.

Table 4 – Wine Exports  of Leading Producers

     
    Exports
Country 2008 % Prod.
Italy 20.1 43.0%
France 14.1 32.8%
Spain 14.0 40.3%
Australia 6.4 55.1%
Chile 5.3 68.0%
USA 4.5 21.9%
Argentina 4.2 28.6%
South Africa 3.7 37.4%
Germany 3.6 35.1%
Portugal 2.8 51.2%
New Zealand 0.1 43.2%

Source: http://www.oiv.int/

Costs – Can Europe and the US Compete?

It takes 4-5 years to get grapes to a full harvest status. That means money must be tied up for that amount of time with little income. There are large, primarily unused land areas in Argentina, Australia, and parts of Africa that are suitable for wine growing. Can the Western countries compete? Right now, land suitable for wine in the US and Europe starts at $50,000 per hectare, with established vineyards costing up to $750,000 per hectare. In Argentina, land suitable for wine is available at $10,000 per hectare, with established vineyards costing as little as $35,000 (see USDA GAIN Report Number AR9007).

The straight economic answer is that the West should not be able to compete on price or quality. But branding and marketing go a long way (more on this in Part Two of this report).

Consumption

 Consider first per capita consumption. The top 20 wine consuming nations per capita are presented in Table 5 below. While they include six of the largest wine producers, it is notable that New Zealand (20.53 per capita), Chile (17.31 per capita), US  (9.43 per capita), and South Africa (8.90 per capita) are not in the top 20.

Table 5 – Leading Per Capita Wine Consuming Nations, 2008

.75 Liter
Country Bottle
 Croatia 55.84
 France 44.56
 Georgia 44.09
 Italy 42.56
 Slovenia 38.30
 Switzerland 36.91
 Portugal 35.28
 Austria 32.00
 Argentina 30.10
 Germany 29.37
 Denmark 29.20
 Hungary 27.70
 Belgium-Luxembourg 26.60
 Slovak Republic 25.33
 Uruguay 24.64
 Netherlands 23.64
 Greece 23.57
 Spain 23.53
 Belarus 23.41
 Australia 22.57

Source: http://www.iwsr.co.uk/

Table 6 presents information on the largest national markets for wine. It is notable that China, with average per capita consumption of only 2.35 bottles per year, consumes more wine than any other country.

Table 6 – Leading Countries, Total Wine Consumption, 2008

  in million
Country hectoliters
China 40.84
 US 37.21
 France 36.17
 Italy 33.26
 Germany 32.30
 United Kingdom 17.02
 Argentina 15.55
 Spain 13.62
 Russian Federation 12.87
 Japan 11.72

Source: http://www.iwsr.co.uk/

It is likely that over the next two decades, per capita and total wine consumption in Europe will fall as their populations age.

Prices

The global recession has affected wine prices. But as Table 7 indicates, the effects have been far greater for the “high end” wines. Note the movement the Fine Wine 100 index in comparison to the more basic Australia 20 index.

Table 7 – Selected Wine Indexes

Wine Index Jan 05 April 08 June 09
Fine Wine 100 100 219 170
Fine Wine 250 100 202 155
California 100 100 138 108
Rhone 50 100 155 123
Burgundy 50 100 228 177
Italy 25 100 128 114
Australia 20 100 114 102

Source: WinePrices.com

Conclusion

This piece has provided basic information on the global wine industry. The second piece on this subject will discuss alternative marketing strategies for the coming years. And yes, wine is a growth industry.

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