Future of NZ wine: industry report

Media Release October 24, 2008

Maintaining global supply shortfall vital for future of NZ wine: industry report

Maintaining a precious ‘imbalance’ between global supply and demand is vital for maximising the long-term profitability of New Zealand’s wine industry, according to a recently-released industry report.

The Global Focus report New Zealand wine supply – testing new limits, by specialist agribusiness lender Rabobank, says it is important that industry players take a conservative, measured approach to vineyard expansion and wine production over the coming years to ensure supply does not exceed global demand.

“Having demand exceed supply is the strongest position a wine producer can hope to enjoy,” the report says. “Rushing to change this imbalance and match supply with demand will ultimately place downward pressure on prices.” Favourable weather conditions throughout the 2008 growing season have seen New Zealand wine grape production spike, smashing 2007’s record, with the harvest up 39 per cent to 285,000 tonnes. This is the third consecutive year of increased tonnages and is expected to yield an estimated 205 million litres of wine, or 22.8 million cases, with finished wine quality predicted to be excellent.

The 2008 production spike, three or four years in advance of growth predictions – along with additional new vineyard plantings coming into production in the near future – could tip New Zealand wine into a situation of global oversupply if the industry does not exercise caution, the report warns.

As an exporter, the Rabobank report says, New Zealand has continued to outperform competing nations in global wine markets, propelled by the success of its flagship sauvignon blanc offering.

“Strong global demand for New Zealand wine has allowed the nation’s producers to maintain or increase prices in major export markets at a time when competing countries have been forced to discount in the face of fierce international competition,” says report author, Rabobank senior analyst Adam Morris.

“Relatively small volumes, a distinctive product and a long-term premium pricing strategy have positioned New Zealand’s wine exporters ahead of competitors in a global wine market typified by oversupply and downward pressure on prices. This has been the cornerstone of sustained success of New Zealand wines in export markets.”

Economic downturn

While it is not yet clear how the global credit crisis and local recession will fully impact the New Zealand wine industry, Mr Morris says consumer spending on wine has historically been immune from significant economic downturns. “While consumers often reduce their on-premises consumption of food and wine, they choose instead to eat and drink at home. While saving on overall expenditure for the evening, wine drinkers often seize the opportunity to drink a better wine than they normally would as a modest indulgence to compensate for the sacrifice of staying in for a meal," he says.

Production growth targets

Mr Morris says recent success of the New Zealand wine industry in export markets has bred momentum in the industry and with it came the temptation for producers to increase production volumes in an effort to cash in on the strong consumer demand for New Zealand wine.

“As established markets remain firm and lucrative new markets beckon, it is easy to be swept away by the wave of optimism washing over the industry,” he says. However, Mr Morris warns, the New Zealand wine industry needs to exercise caution in responding too enthusiastically to these market signals.

“The road to growth in the wine industry is long and littered with the remains of those who went too hard, too early,” he says. “Those exporting nations, both Old World and New World, which face a situation of oversupply and falling prices, should serve as a clear warning to those who may have begun to take New Zealand’s favourable situation for granted.” Rabobank’s report says that, provided internal growth and return targets are being met,

“it might be suggested that wineries and growers take a measured approach to expansion and stick to a proven, more sustainable strategy based on high quality rather than high volume”.

“Setting conservative growth targets may result in sacrificing some profits in the shortterm, but will position New Zealand’s wine producers and growers for a more sustainable, profitable future,” Mr Morris says.

Export markets

With increased wine production, the importance of growing existing export markets, combined with the vigorous pursuit of emerging global opportunities, is very much in the spotlight for New Zealand wine, the report says.

The United Kingdom, the United States and Australia continue to be the major export markets for New Zealand wine, with each of these markets growing significantly in the past five years. “In 2008, it is evident that the global market has unambiguously rewarded the New Zealand wine industry for its commitment to quality over quantity, with an average bottle price to the major UK market roughly 30 per cent higher than its nearest competitor,” the report says. The popularity and demand for Marlborough Sauvignon Blanc continues unabated and accounts for more than 70 per cent of New Zealand wine exports.

Pinot Gris

While Pinot Noir – often referred to as the ‘second leg’ of the New Zealand wine industry – is still commanding strong prices on international markets, a groundswell of support is emerging for its genetic cousin Pinot Gris, according to the report. Naturally low levels of acidity in the Pinot Gris variety make it well suited to cooler climates such as the growing regions of New Zealand, the report says. Demand for Pinot Gris has surged, with sales volumes spiking more than 100 per cent in some major export markets. Of particular interest is the suitability of Pinot Gris’s clean, light and fresh flavour profile to Chinese food, providing a strong case to lead an export drive into the Chinese market.

Domestic market

While of the 147 million litres of wine produced in New Zealand in 2007, 76 million litres (51 per cent) was exported, the domestic market is still vitally important for the industry. New Zealand’s domestic wine consumption has been increasing at a steady pace, with per capita consumption reaching 12.2 litres per annum in 2007. “This represents a significant improvement in the domestic market following a period of flat or declining consumption earlier this decade,” the report says.

Media Release October 24, 2008

Rabobank New Zealand is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 110 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and has a AAA credit rating from Moody’s and Standard & Poor's. The bank operates in 43 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1600 offices and branches. Rabobank New Zealand is one of the country's leading rural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 29 branches throughout New Zealand.

ENDS

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