Recent offers for fruit from the current year’s vintage at discounted prices for processing into bulk wine (but with the promise of upside if the bulk wine can be sold above minimum price parameters), coming on top of data showing the average price per litre of exports falling, has put the spotlight back on New Zealand’s practices around the export of surplus wine.
It is no secret that a large volume of New Zealand wine has been leaving our shores in bulk shipping containers. It is therefore also no secret – in fact it has been recorded in the published statistics – that the average export price for New Zealand wine has fallen – as it must do since the lower productions costs in the absence of packaging and labelling mean that any seller would be expecting a lower price, regardless of whether the wine is qualitatively inferior or not.
Of course given the lower cost of production of bulk wine shipped in plastic bladders, let alone the fact that such wine is not carrying branding or other value added components, it is logical to expect a decline in value per litre of exports – but then again this is hardly comparing apples with apples against past prices for exports of bottled wine.
However, on looking more closely at the data, the fact that the decline has not been greater actually suggests that overall pricing has held up far better than expected.
- Over a long period the average price has been maintained as high as it has given the overall level of growth; and
- Even in the short-term analysis, the rate of decline of the average export price/litre has been far less than might have been expected given the anecdotal evidence of the volume of wine exported in plastic bladders.
Now 2010 was supposed to be the vintage when voluntary yield cuts pulled production levels down, closer to balance with demand. So what has happened to render fruit discounting still necessary?
Let me explain using the data.
|Year to 30 June||2000||2001||2002||2003||2004||2005||2006||2007||2008||2009|
|Total Production (mil litres)||60.2||53.3||89.0||55.0||119.2||102.0||133.2||147.6||205.2||205.2|
|Domestic Sales of NZ Wine (mil litres)||41.3||36.2||32.6||35.3||35.5||45.0||50.0||51.0||46.5||59.7|
|Export Volume (mil litres)||19.2||19.2||23.0||27.1||31.1||51.4||57.8||76.0||88.6||112.6|
|Total Sales Volume (mil litres)||60.5||55.4||55.6||62.4||66.6||96.4||107.8||127.0||135.1||172.3|
|Sales/Production prior vintage||0.920||1.043||0.701||1.211||0.809||1.057||0.953||0.915||0.840|
|Aggregate incremental stocks over 1999 levels (mil litres)*||-0.3||-2.4||31||23.6||76.2||81.8||107.2||127.8||197.9||230.8|
|Incremental stocks/Export volume||0.0||-0.1||1.3||0.9||2.5||1.6||1.9||1.7||2.2||2.0|
*does not take account of volumes lost/ullage/dumped/samples etc)
This table shows the history of production and sales for the last 10 years according to statistics published by NZ Winegrowers. It is interesting that the ratio of sales to production has been far worse earlier in the decade than in the last 2-3 years, although obviously that was not in a global market quite like that of the present. (I have presented the ratio both in terms of same year sales and also year ahead sales – when, of course, much of a given year’s wine will actually be sold, for sauvignon blanc at least).
However, while I recall reading some extremely sceptical opinions regarding the difficulty of selling the excess stock levels early in the decade (2003/2004), those levels pale in comparison to current levels -especially when the proportion of bulk sales is built into the equation.
|Year to 30 June||2000||2001||2002||2003||2004||2005||2006||2007||2008||2009|
|Export Value (millions of NZ$ FOB)||168.6||198.1||246.4||281.9||302.6||434.9||512.4||698.3||797.8||991.7|
|Export Value/litre NZ$||8.78||10.32||10.71||10.40||9.73||8.46||8.87||9.19||9.00||8.81|
|in US dollars||4.42||4.38||4.62||5.43||6.11||5.89||5.93||6.31||6.92||5.34|
|in UK pounds||2.78||3.02||3.20||3.42||3.51||3.17||3.34||3.26||3.45||3.31|
|Increase/decrease % NZ dollars||17.5%||3.8%||-2.9%||-6.5%||-13.0%||4.8%||3.6%||-2.0%||-2.2%|
|in US dollars||-0.9%||5.4%||17.5%||12.7%||-3.7%||0.7%||6.4%||9.7%||-22.8%|
|in UK pounds||8.8%||6.0%||6.8%||2.8%||-9.8%||5.3%||-2.3%||6.0%||-4.1%|
Despite the not insignificant volumes of bulk wine sales before June 2009, it must be acknowledged that the proportionate rate has increased and so average pricing fallen in the period since.
This is visible already by updating the 12 month change data to the last 2 years to September, rather than June:
|Year to 30 June||2008||2009|
|Export Value (millions of NZ$ FOB)||837.6||1004.5|
|in US dollars||6.91||4.99|
|in UK pounds||3.51||3.21|
|Increase/decrease % NZ dollars||-8.0%|
|in US dollars||-27.9%|
|in UK pounds||-8.4%|
Of course the 12 months of data hides much steeper declines per litre (26%, 42%, 26% respectively) for the September quarter on the same period a year earlier.
A quick glance at the December export data shows that the rate of annual volume growth is approaching 30% over June 2009 levels, although total values are only up 10% in NZ$ terms.
However, taking a step back and assuming for the sake of analysis that the anecdotally reported amount of bulk wine is 25% of total sales volumes, then if it is assumed that bulk wine sells for the equivalent of US$2/litre (as reported for some volume sales in Asia) it implies that the per litre value of bottled wine has actually risen over 10% in NZ$ terms, but fallen slightly (9%) in US$. Switching this analysis the other way around, if NZ bottled wine leaves the shores at the same price as it did 12 months before it means that the 25% bulk wine is averaging prices closer to US$3.70/litre or NZ$6.15.
Is this too good to be true? Or are the assumptions wrong?
I suspect that the answer is a combination of three factors: (1) the prices of NZ bottled wine have held up relatively well, assisted by an improved quality mix (including more pinot noir and higher value red wine, for example); (2) some of the bulk container product has actually been higher quality product being shipped for bottling and labelling elsewhere to reduce carbon footprint; so that (3) the actual “bulk” wine exports are smaller than reported.
This is not as bad an outcome as might be otherwise interpreted simply on the face of the data, and I am not ignoring the fact that the backward looking stats will get worse before they get better – such is the “lag” built into rolling period numbers.
In fact, if current sales volumes are maintained, New Zealand will sell more wine (approx 206 mil litres) than it produces in the year to June 2010 (estimating total production between 180 to 200 mil litres), the first time since 2003; the level of stocks as a ratio to export volumes will also drop to its lowest level since 2003.
This raises the question whether bulk sales should actually be a more permanent feature of the marketplace. All of the other major wine producing nations export bulk wine. There has long been an active market for surplus wine between wineries within New Zealand.
Of course it will be argued, with some justification, that New Zealand is a small wine producer and cannot achieve the economies of scale that many other countries possess. While this is true of most NZ wine production, I do not agree with regards to sauvignon blanc. Our production is larger than than so called efficient competitors such as Chile and South Africa (and our yields are often higher), our vineyard management costs much closer (partly owing to much higher mechanisation, offsetting cheaper labour) to the supposedly cheap competitors, and our processing costs not so much greater as to completely overwhelm the other factors.
The real question is whether we want to compete, even if it means marketing our bulk wine as being a cut above other countries’ bulk wine.
Since getting true supply/demand balance “right” is next to impossible, maybe New Zealand should consider that there is a place for developing markets for bulk wine into areas where the product is not carrying the NZ Brand message (with risk of consequent damage). This at least may help keep our industry-wide production scale more competitive and help to cushion the risk of margin squeeze on bottled wine exports in future.
So should fruit discounting still be such a dominant trend? More than anything it probably reflects:
b) The fact that, even if the surplus is now shrinking in proportion to sales , the fact that sales growth has slowed somewhat – at least at higher prices – puts more financial pressure on moving stocks quickly; and
c) The clout of the bigger companies as the dominant buyers
I suspect that all three of these factors will diminish over the next couple of years. If yields stay down, prices will start to rise. If yields rise too fast, all bets will be off.