The Australian wine industry could grapple with years of oversupply, even if China’s anti-dumping tariffs are removed early, according to Rabobank’s Wine Quarterly Q3 2023 report.
Despite improving trade relations and the recent removal of China’s tariffs on Australian barley, Rabobank says even in a “best case scenario”, the wine industry may require at least two years to address its surplus.
The Rabobank report said that Chinese anti-dumping tariffs on Australian wine have disrupted the wine industry, with exports decreasing 33 per cent over the past two years.
With the tariffs coinciding with substantial growth in production and logistics bottlenecks from Covid, the Australian wine industry is now dealing with inventory surplus and low price levels – particularly for commercial red varieties, said RaboResearch associate analyst Pia Piggott.
“So large is the current oversupply has the equivalent of 859 Olympic swimming pools worth of wine in storage,” explains Piggott.
“That’s over two billion litres of wine or over 2.8 million bottles,” she said.
Crushed circumstances
In the late 2010s, the beginning of China’s piqued interest in red wine contributed to the Australian wine industry’s success, Piggott elaborated.
“Driven by sustained economic growth, rising incomes, as well as the social status of wine drinking and gifting, global wine imports to China grew at an impressive 18 per cent compound annual growth rate (CAGR) in the decade up to 2017 – when they peaked at 750 million litres – elevating China to be a top five wine importing nation globally,” she continued.
Following the China-Australia Free Trade Agreement in 2015, the wine tariff was reduced from 14 per cent to zero, which helped double China’s market share from 12 per cent to 24.
This event resulted in China becoming one of Australia’s strongest value markets for red wine varietals, making up 18 per cent of export volume and 40 per cent of export value at its peak.
However, Piggott explained that several anti-dumping tariffs and “soft bans” affected various products exported by Australia between 2020 and 2021, with the wine sector taking the most hit, losing one-third of export value from its peak in 2019.
“Unluckily, the tariff coincided with an exceptional growing season and Australia’s largest crush on record,” she added.
“Wine production for the ’21 vintage increased 36 per cent year on year, which would have, in any case, caused an oversupply.”
In addition, China’s wine market has been declining in recent years, Piggott continued, with consumption more than halved from its peak in 2017 to just 880 million litres last year.
“Chinese consumers began transitioning away from wine as part of a broader decline in alcohol consumption per capita. However, declines were greater for wine than beer and spirits,” she said.
Balance and profits
According to Rabobank, the Australian wine market will stay at a surplus for a “considerable amount of time”.
It also suggests that winery acreage needs to be reduced to rationalise assets throughout the supply chain over the next five years, which can return the industry’s balance and profitability.
“For wineries, particularly those selling commercial wine, stocks will remain high for some time as businesses slowly work through selling inventory,” said Piggott.
“While some brands have increased bulk shipments and been able to discount stock heavily, this will need to continue for some time to rebalance the market.”
For large retailers/investors with diverse income streams, she added that the current market provides ample buying opportunities as distressed vineyard/winery assets come up for sale.
“Through this, we can expect increased consolidation of vineyards and wineries as businesses invest in expanding their distribution,” Piggott concluded.
Rabobank Australia & New Zealand Group is a part of the international Rabobank Group, one of the world’s leading specialists in food and agribusiness banking.
