As the door to 2021 slowly swings open, the landscape looks both familiar and transformed at the same time. When the U.S. wine industry entered 2020, for example, the problems seemed to be stagnant demand on one side and excess wine grape supply on the other. Not a good situation for the world’s largest wine market, but not something beyond our ability manage, either.
Those problems are still with us, although they’re a bit lost in the fog. Structural wine production capacity is still too large, but this is disguised a bit by a smaller 2020 harvest in California and widespread smoke damage, which took some grapes off the market.
Overall wine demand is still under-performing, too, but that is hard to gauge exactly because of the way that wine channels have been disrupted by the covid pandemic in general and bar/restaurant restrictions in particular. Consumers are buying much more through retail channels, a good deal more direct-to-consumer and much less in the on-trade. Whatever the net impact, which seems to be negative, the effects on individual wineries in particular sales channels is significant.
The Unified Sine & Grape Symposium‘s “State of the Industry” session is about two weeks away so those of us on the panel are working to put our thoughts about 2021 in order. Here are some of my working notes. The theme here is that, while there is plenty of bad news going into 2021, if you take an international perspective on the U.S. situation, it quickly becomes clear that things could be much worse. If that sounds like a “glass half full” perspective, well it is.
Take the loss of on-premise sales. These lost sales are costly indeed, but producers in Europe had it much worse because they depend much more on bar and restaurant sales. No wonder their industries are hurting to badly and that crisis distillation is back in some E.U. countries.
If people in the U.S. wine industry are looking for something to be thankful for, they might consider how lucky they are not to be Australia. The U.S. industry has been caught in the trade war crossfire to be sure. Importers and distributors have been hit by U.S. tariffs on many European wines, for example, and China has imposed tariffs on the relatively small amount of U.S. wine sold there.
As if matters weren’t bad enough, the U.S. recently imposed 25% tariffs on French and German still wines above 14% abv, which had been spared in earlier rounds of the trade wars. U.S. firms that import, distribute, or sell these wines are collateral damage in the bigger trade fight, which has nothing to do with wine. These are daunting challenges, to be sure, but nothing in comparison to what Australia is experiencing.
The Australian wine industry invested heavily in opening the door to the Chinese market and moving up-market once inside. And they were remarkably successful. As you can see above in data from Wine Australia, China was by far Australia’s largest export market by revenue in 2019, accounting for $1.3 billion of the $2.9 billion of wine exports. China bought almost three times as much as the #2 export market, the United States.
Australian wine is #1 in China, too, measured by value. Australia overtook France in the Chinese sales league table in 2019.
This was good news for Australian producers back with economic relations with China were happy ones, but now a variety of tensions exist and China was imposed up to 212% tariffs on Australian wine. I don’t know if sales will go to zero immediately, but that is a lot of tariff to absorb. Although anti-dumping measures are cited in this case, the real conflict is elsewhere. Economist have long held that anti-dumping tariffs, ostensibly designed to deal with damage from predatory pricing, are often subject to political abuse.
Australian producers hope to be able to divert previously China-bound production to other Asian markets and some of it may end up in the U.S. and U.K., too. But realistically there is just too much wine for these markets to absorb and margins in the pivot markets are unlikely to match those in China.
But things could be even worse. What if Australia was even more dependent on Chinese market? The turn of the political screw would be even more painful then. And that is what happened in the past to Moldova and to Georgia when their biggest wine export market, Russia, decided to use wine as political tool.
The Good News is That the Dollar is in the Dumpster
You can find another good news story by looking at the foreign exchange markets. Typically when there is any kind of crisis around the world there is a rush to the security (and liquidity) of the U.S. dollar. Uncertainty drives the dollar in turbulent times. Or at least that’s what we thought.
A strong dollar translates into cheaper imports, which would not have helped in any way restore domestic balance in the U.S. wine market. A strong dollar isn’t the worst thing for domestic producers, but the negatives outweigh the positives for many firms.
As I noted in a Wine Economist column back in August, this crisis is different and the dollar didn’t soar, it plunged as this graph (above), which shows the dollar versus the euro, indicates. And then, after bouncing around for a while, it plunged again.
Now this is bad news for consumers who want to buy imported wine because a cheap dollar buys less on international markets, so European wines, many already subject to U.S. tariffs, are even more expensive. But it is good news for U.S. wine producers who compete against euro-priced imports. The cheap dollar gives them a cost advantage in the domestic market. There is also a theoretical advantage in export markets, but honestly those markets are pretty congested right now with lots of unsold wine (some of it from Australia) looking for a home.
But foreign exchange news isn’t completely sunny for U.S. wine because the dollar isn’t falling against all currencies. As this graph shows, the Argentina peso is even weaker, so the U.S. dollar steadily increased in relative terms, making wine from Argentina a fierce competitor where price is the key factor, especially bulk wine trade.
Economics is often called the dismal science and these examples of good news have a decidedly glass-half-empty feel. Stay tuned for glass-half-full analysis in coming weeks.
Mike, it is so nice to read a cogent, detailed, analytical piece that offers as much insight as this assessment. Very interesting, clearly stated, and well-written.
Thank you for the very high quality work that you do.
Mike, thanks for the updates
Eloquent description of wine world reality.
I really enjoy reading your articles, Mike. Thank you for all the time and research that you put into sharing your well-written insights with us – this information is invaluable to all of us in the CA wine business.
Many thanks, Anthony. I appreciate your support!