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From Special Report: Investing in Wine - December 2013

Wine world’s bid to boost production

Growing demand from emerging markets and recent poor harvests places wine industry under pressure.

By Nyree Stewart | Published Dec 09, 2013 | comments

Reports of a global wine shortage in the near future caused by demand outstripping supply provoked outcry earlier this year, even though numerous wine organisations subsequently dismissed the idea.

The growing demand from emerging markets such as China and India, combined with recent poor harvests, has reinforced the impression that the wine industry is under pressure.

However, the latest state of conditions report from the International Organisation of Vine and Wine (OIV) states that wine production has already increased significantly in 2013, primarily driven by production in Romania, Chile and New Zealand, in addition to a stabilisation in world consumption.

Presenting the findings of the report Federico Castellucci, director-general of the OIV, explains: “In 2013, there has been a significant global harvest, also thanks to the development in the productivity of vineyards. With a loss of 300,000 hectares of vines compared with the year 2006, the 2013 harvest has been fairly significant, thanks to a productivity which continues to increase in spite of the abrupt stop caused by adverse climate conditions in 2012.”

Forecasts from the OIV suggest the world should produce roughly 281m hectolitres (Mhl) of wine in 2013, up from an estimate of 258Mhl in 2012, bringing production back to levels last seen in 2006.

This is in spite of the world’s vineyards continuing to decline in size, albeit at a slower pace than previously forecast.

The increased production from a smaller area is helping to improve the supply and demand characteristics of wine, although there are other factors helping to boost wine production.

New markets are appearing on the world stage, with the Union des Grands Crus – the promotional body for the top Bordeaux châteaux – holding its first ever tasting in Poland, suggesting developing economies tend to discover fine wines first, before expanding into other varieties.

Andrew della Casa, founder director of The Wine Investment Fund, says: “New demand from developing countries augments the traditional demand for these wines. This continuous replenishment of demand – when seen in the context of the fixed supply of these wines diminishing over time through consumption – remains one of the enduring, fundamental characteristics of fine wine and accounts for the longevity of interest in this asset class by the serious investor.”

In addition Mr della Casa notes that assuming internationalisation persists, more countries and regions will continue to enter the wine market.

He adds: “India is currently the largest leading candidate, with discussions underway to reduce import tariffs imminently, which could lead to it opening up over the next one to five years. The Indian market is of a significant potential size and the leading Bordeaux châteaux are already promoting their wines and brands there, but they have also started doing the same in other, smaller new markets – Poland, for example.”

Meanwhile Europe, which already accounts for approximately 65 per cent of world wine production, is looking to implement some regulatory changes that could help further improve wine production.

Following recommendations made by the EU High Level Group on Wine in December 2012, the European Commission has agreed, as part of the reforms to the Common Agriculture Policy, that restrictions on vine planting would be replaced with a new system of ‘authorisations’.

The current restrictions expire at the end of 2015, but it has been agreed that from 2016 a system of authorisations for new vine planting will be introduced, with growth limited to 1 per cent per year. This will be managed by the Member States.

Meanwhile, outside the EU there are initiatives underway to enhance the wine business in areas such as the Asia-Pacific rim.

In November the Wine Institute – a body representing California’s wine industry – reported that wine regulators from 21 governments gathered to look at ways to expand Pacific Rim wine trade by streamlining regulatory requirements.

The Asia-Pacific Economic Cooperation (Apec) Wine Regulatory Forum’s 2013 Technical Workshop included discussions on good practices in wine certification, analysis and winemaking in the region. Taking part were participants from countries such as Argentina, Brazil, China, Georgia, India, Hong Kong, Japan, the Philippines, Thailand and Uruguay.

According to the Wine Institute, wine consumption in the 21 Apec countries more than doubled between 1990 and 2012, while the value of Apec wine trade more than tripled, increasing from $7bn in 2000 to $23bn in 2012.

Robert P Koch, president and chief executive of the Wine Institute, notes: “The focus on eliminating burdensome and duplicative regulations will significantly help reduce the costs of cross-border wine trade, stimulate demand, and increase US wine exports to this important region.”

It is clear that in spite of traditional preconceptions, wine production and the future of the industry is not based solely on the fate of ‘Old World’ countries or even the ‘New World’ nations, but is instead – like other investment markets – partly reliant on the fortunes of emerging markets.

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