NZ Winegrowers Half Year Statistical Update

2003/04 Half Year Statistical Update

6 months to 31 December 2003

This Update summarises some major statistical indicators for the New Zealand grape and wine industry for the period 1 July 2003 to 31 December 2003, but includes more recent data where they are available. Data presented are:

- vintage expectation

- number and production of licensed wineries

- vineyard area, including implications for future production

- sales, including domestic market, imports and export

- and we look forward

The Update is compiled to provide the information available on "the state of the industry', and is designed to compliment the Winegrower's 2003 Annual Report, and the New Zealand Grape and Wine Industry Statistical Annual 2003. The information is intended to assist decision making and planning for industry participants, and those associated with the New Zealand grape and wine industry.

Data sources are:

- Vineyard Survey 2003

- Vintage Survey 2003, and previous years

- Grape and Wine Industry Statistical Annual 2003

- Various Sales and Production Surveys

- Annual Reports of New Zealand Winegrowers and the Wine Institute

- New Zealand Customs Service Monthly Excise Data

- Statistics New Zealand Monthly External Trade Data

NB: Rounding may affect some of the data.

Where years are specified, data is for June year end unless otherwise noted.

2004 Vintage Expectation

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Vintage 2004 is from a producing area of 18,100 hectares , a record vineyard area for the industry, around 2,300 hectares larger than 2003. This expansion reflects the continuing investment in vineyards in recent years. The current producing area is double that of 1999, and nearly three times the 1995 area.

In line with the record producing area we expect Vintage 2004 will produce the largest ever harvest of New Zealand grapes. Reports from most areas indicate average or above crop levels, with many vineyards and wineries crop thinning in varieties such as Pinot Noir to preserve quality.

On the basis of reports received we anticipate a vintage of 150,000 - 170,000 tonnes, although there is the possibility of even higher levels. A 160,000 tonne vintage (mid point in this range) would be 35% above the previous record vintage of 118,700 tonnes achieved in 2002, and 109% above the severely frost affected vintage of last year. On a varietal basis, larger tonnages of Sauvignon Blanc, Chardonnay, Merlot and Pinot Noir will be the principal driver of the increased harvest. While we expect the vintage will be a record in total terms, yields (at this stage) seem likely to be similar to other recent non-frost years, eg 2002.

In terms of quality it is far too early to make any pronouncements as there is still at least two months to the conclusion of vintage. Currently, however, reports indicate the grapes are in good condition, and are benefiting from the generally good March weather.

Vintage commenced on 19 February in Gisborne, and is now underway in Hawkes Bay and Marlborough. In some areas harvest appears to be about two weeks later than average. Vintage will conclude by late May.

New Zealand Winegrowers will issue a Vintage Update in early April. Final details of the vintage should be available in mid-June.

Wineries

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Following the trend of the past decade the number of wineries in New Zealand continues to grow. As of mid-March 2004 there are 460 wineries (of whom 422 are small , 34 are medium and 4 are large), double the number operating in 1996.

While the increase in the number of wineries slowed slightly in recent years, the later half of 2003 has seen an acceleration in new winery developments. The resurgent growth has continued into the first three months of 2004. At current time new wineries are appearing at a rate of one every 7 days.

With the rapid growth in the number of wineries some industry commentators have speculated on the opportunities for industry rationalisation. We have yet to see evidence for this occurring at this stage.

Most of the new wineries are small, although there has also been a steady growth in the number of medium sized wineries in the past decade. In this period the number of small wineries has grown from 160 to 422, while the number of medium sized wineries has grown from 12 to 34.

While small wineries are dominant in terms of the number of wineries, wine production is dominated by the large wineries. However, large wineries' share of production has declined rapidly in recent years, and for the first time in the modern New Zealand wine industry dropped below 50% in vintage 2003.

Sales

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NB:

1. In the following, imports of packaged wine are regarded as "sales'. This assumption takes no account of any build-up or reduction in stocks held by importers so actual sales into the market may differ substantially from the imports discussed below.

2. In respect of bulk wine imports, data has been derived by subtracting the estimate of New Zealand wine sales in the domestic market, from data supplied by the New Zealand Customs Service on excise payments by New Zealand wineries, which includes imported bulk wine packaged and sold by New Zealand wineries. This formula should produce a reasonably accurate assessment of the volume of imported bulk wine sold into the market. This can vary substantially from the amount of bulk wine imported.

- Sales of New Zealand Wine in New Zealand

Estimated sales of New Zealand wine in the New Zealand market for the six months to 31 December 2003 are 19.2 million litres, down 1.0 million litres or 5% below the same period in 2002. The decrease in sales appears to reflect the reduced availability of wines following the smaller than expected 2003 vintage.

However given that the vintage was well below expectations , domestic New Zealand wine sales appear to have performed well in the past six months. This suggests that sales are being supported by wineries drawing down on stocks. Whether or not the current trend will continue for the 2nd half of 2003/04 is not known. It may be that as stocks fall to lower levels sales may decline more steeply than in the 1st half of the year.

(Source: New Zealand Winegrowers Estimate)

- Sales of Imported Bulk Wine by New Zealand Wineries

Sales of imported bulk wine by New Zealand wineries for the six months to 31 December 2003 are estimated to have been 10.5 million litres, up by just 0.4 million litres on the previous year.

(Source: New Zealand Winegrowers Estimate)

- Imports of Packaged Wine

Imports of packaged wine for the review period were 12.9 million litres, up just 0.2 million litres, or 2% above the corresponding period in 2002.

This growth (albeit slow) continues the trend of the past decade which has seen imported packaged wine grow from 8.6 million litres for the year end 30 June 1994 to the current level for the 2003 calendar year of 20.7 million litres. However, after the steep rise in imports in June 2003 year (+18.7%), the 2003 calendar year has seen growth of just 1.1%.

The small rise in packaged imports for the review period masks substantial changes in the mix of imports during this time. Although packaged red wines dominate import volumes, imports of these wines fell in the six months to December 2003 (perhaps reflecting increased supplies of New Zealand red wine from the 2002 vintage), while sparkling wine imports grew by more than half. Fortified wine imports collapsed, presumably as a result of the steep rise in excise duty imposed by government in May 2003.

Australia remains the major foreign supplier of wine to the New Zealand market, representing 82.3% of imported packaged wine in the review period, down slightly on 85.7% the previous year. No other country is the source of more than 5% of foreign wine.

- Wine Market in New Zealand

Combining NZ domestic wine sales, imported packaged products and bulk imports produces an estimate of the New Zealand wine market. On this basis we estimate wines sales in New Zealand for six months to December 31 2003 declined slightly (-0.8%) on the previous year, driven by lower sales of New Zealand wine.

This slight decline follows strong growth in the June year end 2003, when the market grew 9% above the previous year. The next six months will illustrate whether the slight decline in the review period is anything other than a pause in the growth, which has seen the market for wine in New Zealand increase strongly over the past decade.

Based on the above estimates, New Zealand wine's domestic market share was 45.1% in the six months to the end of December 2003. This compares with 47.0% for the same period in 2002. The decline probably reflects the product shortages consequent upon the small 2003 vintage.

- Wine Exports

As expected, with reduced availability of wines following vintage 2003, export growth slowed dramatically in the 2nd half of 2003. Shipments were 16.2 million litres for the review period, just 0.1 million litres (+ 0.7%) ahead of the corresponding months in 2002. This contrasts strongly with the June 2003 year when exports (in volume terms) lifted 18.4%, and the past decade's compound growth rate of 16% per annum.

In terms of individual exports markets, USA market once again performed strongly in the review period, whereas sales in the UK and Australia were effectively static. The proportion of exports destined for these three major markets rose to 86.8% by volume, up from 82.8% in the comparable period in 2002, and 79.7% in 2001, suggesting an increasing focus on these markets as the core destinations for New Zealand wine.

In terms of styles, sparkling wine exports performed very strongly growing by over 90% in the review period. White wine exports fell on the back of reduced volumes available from vintage 2003. Despite this white wines still dominated international shipments accounting for 79.7% of exports by volume in the first half of the 2003/04 year.

Data from the Wine Export Certification Service confirms exports are continuing to hold up well for the first quarter of 2004, despite the small 2003 vintage. Exports for the eight months to the end of February 2004 are now 1.2 million litres (6.2%) ahead of the same period in 2003, while March shipments to date (at 19 March) indicate continued growth in exports. There is some uncertainty as to the level of exports likely to be recorded for the June year end 2004, as a number of companies have commented that low inventories will reduce volumes available for export over the final quarter.

Average export selling price in the review period was just $9.98 per litre, compared with $10.68 the previous year. This fall reverses the steady rise in New Zealand wine export values over the past decade and reflects the markedly higher value of the New Zealand dollar in recent months. To an extent, however, the average export values will have been supported by the forward currency protection of major industry participants; as such a further reduction in export values can be expected as the forward cover expires.

On a Moving Annual Total (MAT) basis, average export values were just $9.97 per litre for the 2003 calendar year. This is the first time average export values have fallen below the $10.00 per litre since 2001. Given continuing strength in the New Zealand dollar we expect that the average value of exports will decline further over coming months. Obviously, the reduction in average export values is significantly affecting the profitability of wine exporting at the current time.

The combination of reduced volume growth and lower per litre returns has stalled growth in the value of wine exports in the review period. Export returns for the six months to 31 December 2003 were $161.5 million, down $10.5 million or 6.1% on 2002.

- Total Sales of New Zealand Wine

Total sales of New Zealand wine (domestic plus export) for the six months to 31 December 2003 are estimated to have been 35.4 million litres, slightly down on the corresponding period in 2002. As we have commented sales have performed well considering the small 2003 vintage; this would appear to reflect the benefit of wineries being able to draw down on stocks held from the large 2002 vintage.

The data suggests that New Zealand wines performed better in export markets than domestically in the six months to the end of December 2003. This indicates that on an industry wide basis wineries have supplied export markets as a first priority (although individual companies may have adopted different strategies). As a consequence international sales as a proportion of total New Zealand wine sales rose to 45.8% for the six months to December 2003, compared to 44.3% for corresponding 2002 period, and 42.3% in 2001. This continues the long term trend for international markets to assume an ever greater importance for the New Zealand grape and wine industry.

Looking Forward

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Recent years have demonstrated the difficulty of accurately forecasting industry trends. In particular, pronounced weather-induced yield swings have played havoc with both vintage and sales forecasts, and industry planning.

Nevertheless, the industry must plan and invest for the future. Key issues likely to impact on the industry in the short/medium term include:

- Producing Area

The producing area of vines is predicted to rise to approximately 20,900 hectares by 2006 . With planting expected to continue in the current year (albeit anecdotal reports suggest at a lower rate than in recent years) a producing area of 22,000 hectares in 2007 appears a reasonable expectation at this time.

- Vintages

With continued increase in the producing area, vintages in the range of 150,000 - 200,000 tonnes should be the norm in the years ahead ; in higher yielding years vintages above 200,000 tonnes could eventuate.

In recent years, concern over possible excess production in one year (eg 2002) has been balanced by lower than expected production the following year. The industry should not bet on this trend continuing in the future; indeed it would be folly to plan on the basis of bi-annual natural disasters.

Assuming "average' vintages, it is not unreasonable to expect that in any two year period the industry could harvest around 350,000 tonnes of grapes in the future, and by 2006 and 2007 the two year production total could exceed 400,000 tonnes. Prior to this vintage, the largest two-year crop totaled just 195,100 tonnes . On this basis the industry needs to assume the norm in the future will be for crops to be double their recent average size.

- Sales

-- Domestic

In the past decade in New Zealand domestic sales of our wines have, with two exceptions , been in the range of 30 - 40 million litres. With increased supplies of wine in the future we expect there will be some limited substitution of imported bulk wine by New Zealand-sourced product. Whether or not New Zealand producers can recover a substantial market share from imported bottled wines (and sell consistently above 40 million litres per annum) will largely depend on their competitiveness in the under $12 per bottle market segment. Currently the vast majority of New Zealand producers, given their costs of production, do not compete in this market segment.

- International

The prospects for international wine sales remain positive, although profitability of exports is currently reduced by the high value of the dollar. Importantly, the international image of New Zealand wines, led by Sauvignon Blanc, is positive.

Product shortages in the past year, and in fact in the past decade, have been the major factor limiting export growth. The increased supplies of wine from the 2004 and later vintages will provide an opportunity to aggressively grow sales.

Current projections suggest exports growing to over 70 million litres in 2007. However the ability of the industry to meet this projection (generated pre-vintage 2003) is made more difficult by the small 2003 vintage - it means the industry will have to grow even more quickly in the period ahead, around 38% per annum from 2004 to 2007 , or more than double the growth rate of the past decade.

As we stated in our 2003 Annual Report, and a number of times since, such growth will require a greatly expanded industry marketing effort.

- Stocks

Following the small 2003 vintage, the industry stock to sales ratio fell to 1.9:1 at 30 June 2003, down markedly from the 2002 figure of 2.3:1. Given certain assumptions about the size of the 2004 vintage and sales in the current year, the 30 June 2004 situation may be as follows:

m. litres

Stocks at 30 June 2003 117.0

minus domestic sales June 2004 year 32.0

minus export sales June 2004 year 28.0

plus production 2004 vintage @ 160,000 tonnes 115.0

equals Stocks at 30 June 2004 172.0

equates to stock:sale ratio 2.9:1

This scenario would represent the highest stock:sale ratio recorded by the industry in the past 20 years. As was the case following the 2002 vintage it reflects a particular set of circumstances , but the ratio is another quantum above the 2002 level (2.3:1). As noted above, the increased stocks provide the opportunity to aggressively grow sales, but also compel that such sales must occur if the industry is to maintain a reasonable production/sales balance.

Learning from the 2002 - 2003 experience it is apparent two issues will determine the direction of the industry over the next 18 months - first industry sales performance in the next year, and then perhaps, most importantly, the size of vintage 2005.

If vintage 2005 is average or above in terms of volume, this will be the key factor driving industry performance in 2005/06 (just as the short 2003 vintage has been the key driver of industry performance in the past year.) Prospects of another "normal' or above vintage in 2005 (eg 160,000 tonnes or more) will require New Zealand producers to recover some domestic market share (meaning domestic sales of circa. 40 million litres per annum) and to grow exports at least as quickly as projections made pre-harvest 2003 in order to maintain a reasonable balance in the supply situation during 2005.

ENDS

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