Australian wine industry "swimming" in oversupply

In its most recent Wine Quarterly Q3 2023 report, Rabobank found that even early removal of Chinese anti-dumping tariffs would not be enough to prevent Australia’s wine industry facing several years of oversupply.

Improving trade relations between the two countries and recent removal of Chinese tariffs on Australian barley has led to optimism that five-year tariffs placed on Australian wine in March 2021 may be removed early. However, the Rabobank report says, even in a “best case scenario”, with tariffs removed this year and Chinese consumption of Australian wine recovering quickly, this would “not be a panacea” with Australia’s wine industry still facing at least two years to work through its current wine surplus.

According to RaboResearch associate analyst Pia Piggott, this could benefit consumers due to reduced prices, though it isn’t good news for winemakers.

So large is the current oversupply, Piggott said, that Australia has the equivalent of 859 Olympic swimming pools worth of wine in storage.

“That’s over two billion litres of wine, or over 2.8 billion bottles of wine,” she said.

The Rabobank report says Chinese anti-dumping tariffs placed on Australian wine had led to significant disruptions for Australia’s wine industry, with Australia’s value of exports decreasing 33% over the past two years.

China’s red wine market was central to Australia’s wine industry in the late 2010s, driven by sustained economic growth, rising incomes as well as the social status of wine drinking and gifting.

“In the four years following the China-Australia Free Trade Agreement in 2015, the tariff on Australian wine reduced from 14% to 0%, helping to double Australia’s market share in China from 12% to 24%,” Piggott said.

Piggott said over this time, China became a strong value market for Australian red wine varietals — making up 18% of Australia’s export volume and 40% of export value at its peak.

“When a slew of Chinese anti-dumping tariffs and soft bans hit various products exported by Australia in 2020/2021, wine took the most notable hit, losing about one-third of export value from its peak in 2019,” she said.

In China, the wine market has been contracting in recent years, with consumption more than halving from its 2017 peak.

“COVID lockdowns and the economic slowdown curbing discretionary spending have also played a role in declining consumption to levels not seen since the 1990s. Despite only Australia being hit by tariffs, the past five years has seen volume declines in imports from nine of the top 10 supplying countries, as consumers become more price sensitive,” Piggott said.

Rabobank projects that China’s consumption has reached the bottom in 2022, and while there is considerable uncertainty, there is upside potential for growth in imports as on-trade premises reopen and the urban middle class have more disposable income to spend wining and dining.

Some Australian brands have maintained brand awareness and presence on retail shelves in China throughput the tariff period. However, the report said despite competitive pricing, a valuable brand and quality product, it has been difficult for Australia to grow total exports in the absence of the Chinese market over the last few years.

Bulk wine has grown from 55% pre-tariff to over 60% of exports. In the UK, Australian imports have fallen from their peak in 2020, and in the US, bulk wine has grown to represent 25% of imports from Australia.

“In 2023 and onwards we expect the UK and US will remain key export markets for Australian wine; however, some headwinds remain. In the UK, implementation of new alcohol duty rates will increase duties payable on a typical bottle of Australian wine by 20%,” Piggott said.

The Rabobank report said the Australian wine market will remain in oversupply for a considerable length of time. “To return to balance and profitability, acreage needs to be reduced, thus over the next five years we will see rationalisation of assets throughout the supply chain,” it said.

Piggott said for vineyards, margin pressure from both ends will remain high for some time.

“For wineries, particularly those selling commercial wine, stocks will remain high for some time as businesses slowly work through selling inventory. While some brands have increased bulk shipments and been able to heavily discount stock, this will need to continue for some time to rebalance the market,” Piggott said.

The current market provides ample buying opportunities for large retailers/investors with diverse income streams as distressed vineyard/winery assets come up for sale.

“Through this we can expect increased consolidation of vineyards and wineries as businesses invest to expand their distribution.”