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Global Surplus - part I

The European wine surplus has long been the biggest single problem facing the industry. And the problem has now gone global. The European Union continues to slip subsidies to its growers. New plantings in the New World are starting to gush onto the market. Consumption is falling behind production. Prices are slipping. Alarmists even fret about a trade war. Now for the bad news: it may be even worse than feared. Some experts estimate that the surplus is even larger than the latest alarming statistics suggest - and these already paint a picture of a world awash with wine. A look at the nitty-gritty details of worldwide production and consumption, as well as at developments under way in both the Old and New World, suggests that the problem will get worse before it gets better. Indeed, figuring out how to navigate this ever-expanding wine lake presents the global wine industry with perhaps its single largest challenge for the coming decade. How producers, shippers, wholesalers, retailers and regulators react will define many other key trends - an ever-more competitive market, downward pressure on grape and wine prices, development of global brands, expansion of retailer own-brands, and the growing threat of extinction for many smaller producers.

Problem since 1890s

Of course, a European wine surplus has been an occasional problem at least since post-phylloxera plantings came on stream in the 1890s/1900s. But it became far more deeply entrenched following the Common Market Organisation (CMO) for Wine introduced under the Common Agricultural Policy (CAP) from 1962. Against a background of falling consumption in most producer states (per capita consumption halved in France between 1960 and 1990), the CMO attempted to protect producers through market stabilisers and price supports. But the acquisition and distillation of excess wine at a guaranteed minimum price effectively encouraged surpluses, which rose sharply in the late 1970s and early 1980s. From 1976, the abandonment of vineyards and "grubbing up" of vines was encouraged by the payment of premiums, and new plantings were restricted. These measures were eventually successful in reducing the area under vine, from 4.5 million ha in 1976 to 3.4 million ha in 1996. Production also fell, from over 200 million hl in the early 1980s to 160 million hl in the early 1990s. But since the mid-1990s the area under vine has again been creeping up, as the ban on new plantings has been flouted and more producers have refused to uproot. More efficient vineyard management techniques and higher yields have also caused production to rise. In the New World, producers have aggressively exploited natural advantages, less restrictive regulations, new technologies and new export opportunities. Grape shortages in the 1980s and 90s encouraged extensive new plantings, especially in Australia and California. In Australia the area under vine doubled between 1988 and 1998. As astonishing, the Strategy 2025 new plantings target of 40,000ha, which the Australian Wine Foundation set in 1996, has already been exceeded after only four years, according to the Australian Wine and Brandy Corporation (AWBC). In California, the reported area under vine rose from 135,520ha in 1989 to 190,270ha in 1999 (up 40%), while adding the unreported area may take the 1999 total to 224,200ha, suggests the California Agricultural Statistics Service (CASS).

Surplus rising

Assessing the present size of the global wine lake is a major problem in itself, hindering the industry's ability to come to terms with it. The absence of accurate and accessible information has meant that growers in one corner of the global vineyard have often not known what those in another corner were doing. The most authoritative and comprehensive figures come from the Office International de la Vigne et du Vin (OIV) and the Food and Agriculture Organisation of the United Nations (FAO). According to the latest OIV data (published in 2000 but confirmed only up to 1997), the estimated gap between production and consumption suggests a global surplus of anything between 46.1 million hl and 64.5 million hl for 1999/2000. These low and high estimates represent a rise of 31% and 85% respectively on the 35.1 million hl for 1998/1999. Expressed another way, the estimates for 1999/2000 are roughly equivalent to a quarter and a third of EU production that year (176.3 million hl), while the higher estimate exceeds the production of the world's largest producer France (59.2 million hl). In New World terms, the global market might have been in balance - only if the USA, Argentina, Chile, Uruguay, Australia, New Zealand and South Africa had not crushed a single grape. Yet even this alarmingly high estimate of the global surplus may not reflect its real scale. For a start, the data are still unconfirmed, and may be revised upwards (as the figure for 1997 was). Moreover, basic definitional issues and hidden subsidies disguise the extent of the EU surplus. Data presented by the European Commission Directorate-General for Agriculture show the quantities of wine distilled as "potable alcohol" under the CMO for wine. This "potable alcohol" appears to be part of normal demand - supposedly for fortification of liqueur wines such as Port and Sherry - but disguises as much as 10-12 million hl or more of surplus wine every year. Accordingly, a document on CAP reform published by the Directorate-General for Agriculture in 1999 (referring to statistics for 1998), states: "Global wine production stands at some 250 million hl and consumption at around 217 million; the world surplus is therefore in the region of 30 million hl, of which 25% [7.5 million hl] comes from the European Union." Adding 10 million hl disguised as "potable alcohol" would have made for a more realistic total of more than 15 million hl - roughly 10% of production and twice the rate suggested by the document. Likewise, approximately 25% of EU wine exports (3.25 million hl out of 13 million hl in 1999/2000) still receive export subsidies (normally amounting to the difference in price between domestic and export markets). Without them (and there is New World pressure to abolish them through the World Trade Organization) the surplus would be higher. Another distortion is the compulsory distillation of grape marc, designed to guard against "overpressing" (Council Regulations 822/87 art.35 and 1493/1999 art.27). It may be argued that this amounts to bribing and forcing producers to improve the quality of their products, and that without the provision the surplus would again be higher. Dr Pierre Spahni, author of The International Wine Trade and a commentator on EU wine policy for many years, agrees that "the figures need to be taken with a large pinch of salt", and that: "Subsidized EU exports - mostly unmarketable wines dumped on the Russian and other markets - are also part of the EU's surplus." Spahni suggests that the quantities distilled as "potable alcohol" - almost 20 million hl in 1999/2000, according to official European Commission statistics - afford the best guide to the EU surplus. Arend Heijbroek, senior industry analyst, Food and Agribusiness Research, at Rabobank, which specialises in the wine industry, places the EU surplus higher still - at 25 million hl.

Deeply ingrained problem

Peeking behind the curtain of the OIV's headline figures in this way shows how deeply ingrained in the fabric of the global wine industry the surplus has become. To be sure, global production can vary as much as 25% in either direction from year to year due only to the vagaries of the weather. But even El Nio and La Nia cannot mask the structural surplus, as measured by the global industry's capacity for production. The basic measurement of production potential is the area under vine (although many other factors such as climate, soil type, grape variety and vineyard management techniques are also relevant). Both in the Old World, where new plantings are restricted, and in the New World, where they are not, the area under vine has been expanding over the last three years (1997-1999). The EU area fell slightly from 3.538 million ha in 1997 to 3.534 million ha in 1998 (down 0.1%) before rising to 3.546 million ha in 1999 (up 0.3%). The non-EU area rose steadily from 4.228 million ha in 1997 to 4.259 million ha in 1998 (up 0.7%) to 4.296 million ha in 1999 (up 0.9%). At least partly because of this expansion, actual wine production, not surprisingly, has also been rising in both the Old and New World. By comparison with 1997, the greater area under vine in 1998 did not compensate for the generally unfavourable weather. But production resumed its strong upward trend in 1999. In the EU production rose 14.363 million hl from 161.946 million hl in 1998 to 176.309 million hl in 1999 (up 9%). In major non-EU countries it was up from 56.473 million hl to 61.750 million hl (also up 9%) over the same two years. Yet even as capacity and production have leapt, consumption has at best only crept up in the last few years: from 220 million hl in 1997 to 223.3 million hl in 1998 (up 1.5%) to 228 million hl (high estimate) in 1999 (up 2%).

Balance far off

With that overcapacity effectively embedded in the industry, what lies ahead? The answer is none too likely to tip the balance back any time soon. The new CMO which came into force on 1 August 2000 (1493/1999) acknowledges the need to improve the balance by improving competitiveness and market responsiveness. Many of the distillation measures which exacerbated problems in the 1970s and 80s have been scrapped. But a new "crisis" measure has been introduced to cope with "an exceptional case of market disturbance caused by serious surpluses and/or problems of quality". And as Rabobank's Report on The World Wine Business says: "The fear that the crisis is more structural than incidental remains." European Commission budgets allow for surpluses of about 5 million hl, which the report regards as "a somewhat optimistic estimate". The first two "crisis" distillations (in Germany and Italy) have already been approved within the last four weeks, only four months after the introduction of the new measure. The general ban on new plantings has been extended until 2010. But the European Commission has been forced to accept that illegal plantings prior to publication of the new policy will have to remain. And new plantings will be permitted up to a total of 68,000ha as long as there is believed to be demand for the resulting wine. Overall production potential is supposed to stay the same. But it is difficult to square this with encouragement for more efficient vineyard management and the conversion and restructuring of vineyards. A case in point: La Mancha. Accounting (at almost 600,000ha) for about half the Spanish vineyard, and the largest vineyard in the world, this region shows what the conversion and restructuring of vineyards may mean for the surplus. Now that Airn is giving way to international varieties, and now that irrigation has been permitted by the Spanish Government (since 1996), highly respected viticultural consultant Dr Richard Smart predicts that some yields may more than quadruple from 4 tonnes/ha to 15+ tonnes/ha. He also said: "I find it difficult to think that this might be the only European dry viticultural region which will relax laws restricting irrigation, and I wonder how long it will be before southern France and Italy might follow suit." Outside the EU, there are more new plantings about to come on stream. In Australia in 1998/1999 (the latest year for which figures are available), 22.5% of all vines planted were still not bearing (27,614ha out of 122,915ha). As the gap between non-bearing and bearing is only three years, "a short-term supply hump is forecast," said Lawrie Stanford, head of Information and Analysis at awbc. Assuming a drastic slowdown in planting rates, and assuming considerably lower yields, a "conservative") low estimate of supply for 2000/2001 is 9.03 million hl, an 18% rise on the 7.65 million hl projected for 1999/2000. A (still "conservative") high estimate, assuming average historical yields, is 9.08 million hl, a 19% rise. Looking further ahead, by 2009/2010, supply is projected to reach between 11.5 million hl (low) and 12.3 million hl (high), up 51% to 61% on 1999/2000. In absolute terms, the supply surge in the USA will be larger still. In California in 1999, 20% of vines for wine were still not bearing (38,610ha out of 190,270ha), according to the Wine Institute. Moreover, many more new plantings are planned. As John McLaren, UK director of the Wine Institute, has said: "There will be no more small harvests." (The only threat, of course, hanging quite literally in the air, is the Glassy-Winged Sharpshooter, carrier of devastating Pierce's Disease, which Smart calls "scary - a wild card if ever I saw one.") In South Africa in 1998, more than twice as many vines were planted than were uprooted, so here too there will be more wine coming on stream soon. No country, however, has been planting as many new vines as China recently. Some 22,000ha was newly planted in 1998, taking the total to 149,000 ha (higher than that for Chile). With only 10% of grapes believed to be crushed for wine, and the government actively encouraging wine production, another wave of wine may be washing onto the world market. While global consumption may have been edging up slightly over the last two years, the fall in France, Italy, Spain and the EU generally is unlikely to be reversed significantly. Countries with the greatest overall and per capita growth potential, such as those in the Americas and the Far East, are unlikely to compensate for the continued fall or stagnation in more mature markets and the continued rise in global production. Smart has said: "As I go round the world, I see a hell of a lot more new vineyards than pregnant women" - not surprising for somebody who is "vine doctor" rather than midwife but an accurate enough impression of overall predicted supply and demand trends.

All afloat - survivors?

All of the world's major producing nations are afloat, if not adrift, on the global wine lake, as is clear from their self-sufficiency rates (defined as the ratio of production to consumption). Analysing these for 1997, Pierre Spahni has shown that the USA, Argentina and Romania had become more than self-sufficient by then, with rates of 102%, 109% and 105% respectively. Australia (170%), New Zealand (154%), Chile (180%) and Bulgaria (162%) had also become increasingly dependent on foreign markets in the 1990s. Already in that exposed position were France (160%), Italy (158%), Spain (194%) and South Africa (203%). Bulgaria and three New World exporters (Australia, New Zealand and Chile) thus joined South Africa and the EU's big three in the category of countries relying on export markets for more than a third of their output. The rate for the EU was 124%, that for the world as a whole 116%. According to the latest OIV projections for 1999/2000, self-sufficiency rates have risen higher still: France to 169%, Italy to 187%, USA to 104%, Argentina to 124%. Several major producers now rely on export markets for more than half of their output: Spain (222%), Australia (226%), Chile (211%) and South Africa (234%). The rate for the EU has risen to 138%, that for the world as a whole to 120-130%. It is not only producing countries that are afloat, however: non-producing countries are as well. For the global wine lake is far from tranquil, with cross-currents, ebbs and flows, and waves whipped up by trade winds. Spahni estimates that international trade in still and sparkling wines grew at an annual rate of 7.5% in volume in 1995, 1996 and 1997, and that there were then more than 40 significant international trade flows (of more than a quarter of one per cent of world trade, ie worth more than US$ 28 million or 13 million litres). A closer survey of the global wine lake, its depths and shallows, tides and whirlpools, islands and shores, could suggest who and what may drown, who and what may yet find dry land.

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