TABLE OF CONTENTS Supply and demand in the global wine market and the impact of the 2012 vintage in Europe Section Page Table of Contents 1 Introduction 2 Factors Contributing to Production/Consumption Balance 2 Decreasing Production 2 Increasing Consumption 4 The 2012 Vintage in Europe 6 Vintage Report: France 6 Vintage Report: Spain 7 Vintage Report: Italy 7 Conclusion 8 Declared Word Count 9 Bibliography 9 Appendix 1: Production/Consumption Balance 10 Appendix 2: World Surface Area Under Vine 10 Appendix 3: “Big Three” Surface Area Under Vine 11 Appendix 4: Worldwide Yield 11 Appendix 5: Changing Consumption Patterns 12 Appendix 6: Changing Populations 12 Appendix 7: Per Capita Consumption 13 1 Candidate # 10007560 INTRODUCTION From time to time, temporary situations can persist for such a protracted length of time that they can come to be perceived as permanent. Such is the case with bulk wine surpluses. There is no natural law in the world that there shall always be more bulk wine produced than there is consumed, and yet that has been the situation for so long (more than a generation), that it has become difficult to imagine the opposite case. In fact, an entire industry has come to depend on a consistent surplus of bulk wine. The International Organisation of Vine and Wine (OIV) estimates that, in any given year, producers of brandies, vermouths, vinegars, and other distilled products require 30Mhl of bulk wine.1 Careful followers of trends in bulk wine production and consumption in recent years could not ignore the data they were seeing: that the annual bulk wine surplus has been below the “red line” of 30Mhl in every individual year since 20062, culminating with the 2012 vintage, which yielded the smallest surplus in at least twenty years, at just 9Mhl, far below the needs of the distilled-products industry. Appendix 1, which tracks global production, consumption, and surplus since 2000, shows a clear narrowing of the gap between supply and demand. To wit: production declined from 280Mhl in 2000 to 252Mhl in 2012 (a drop of 10.0%), while consumption grew from 226Mhl in 2000 to 243Mhl in 2012 (an increase of 7.5%). The effect on surplus is as expected: while the average surplus in the years 2000-2006 was a healthy 39.6Mhl, that average has dropped precipitously from 2007-2012, to 19.0Mhl. FACTORS CONTRIBUTING TO PRODUCTION/CONSUMPTION BALANCE Decreasing Production It is clear from the statistics gathered by OIV that world wine production has declined in recent years.3 But why? To answer that, we need to examine the factors that influence overall production. Wine production is actually explained through a simple function: production equals the amount of the earth’s surface area covered by vines, multiplied by the average yield of those vines. Therefore, we shall examine factors influencing trends in both yields and surface areas. Average Yield In the premium wine segment, average yield typically falls under the control of growers and winemakers, via techniques such as winter pruning and green harvesting. In contrast, the bulk wine segment generally pursues yields that are as high as possible. In the bulk wine segment, yield becomes very much a function of weather. We will explore weather-related yield issues in greater depth during our examination of the 2012 vintage in Europe below, but for now, suffice it to say that an examination of average worldwide yields from 2000 to 20124 shows a trend-line that looks mostly flat. 1 OIV, State of the Vitiviniculture World Market, March 2013 2 Appendix 1 3 Appendix 1; OIV, Statistical Report on World Vitiviniculture, 2013 2 Candidate # 10007560 Surface Area Under Vine According to the OIV, overall world surface area under vine has declined steadily since 2000.5 To understand why, we need to drill down further, to understand where surface area is expanding and where it is contracting. Examining OIV’s data, the culprit becomes clear. It’s not Asia, where surface area has increased from 1167mha to 1326mha from 2000 to 2012 (+13.6%).6 And it’s not the “new world” regions (USA, Argentina, Chile, Australia, South Africa, New Zealand), where surface area has increased from 1065mha to 1170mha from 2000 to 2012 (+9.9%).7 The culprit is Europe. The aforementioned gains (159mha in Asia, another 105mha in the “new world”) have been dwarfed by declines in surface area under vine in Europe. Europe is home to more than half the world’s surface area under vine8, and so trends in Europe will have an outsized impact on overall world trends. To look at Europe, we’ll consider the big three – Spain, France, and Italy – which together represent approximately 80% of overall European production.9 Appendix 3 examines total surface area under vine for Spain, France, and Italy, from 2000 to 2012, and it shows an overall decline of 457mha, or 15% (from 3044mha to 2587mha). Each of the three nations contributes to the decline, with Spain dropping 17%, France 12%, and Italy 15%. This decline in European surface area under vine is hardly accidental. Instead, it is the result of the EU’s attempts at a systematic reorganization of the way the EU wine market is managed10, or more to the point, the EU’s attempts to bring supply more in balance with demand, which has been declining on a per capita basis in Europe for many years.11 These attempts began with vine pull schemes in the 1980s and 1990s, through the EU’s Common Agricultural Policy, continued with crisis distillation in the early 2000s, and by 2008 included subsidies aimed at grubbing up vineyards “through a voluntary withdrawal scheme taking 175000ha out of production via decreasing subsidies over three years.”12 Those grubbing-up subsidies seem to have achieved their goal and then some. Of the 457mha decline in Spain/France/Italy from 2000 to 2012, 260mha of that decline took place from 2008 to 201213 (during the subsidies era), an amount well above the stated goal of 175mha. Relative Importance While weather (and therefore yield) can change dramatically from vintage to vintage, yield would only be a relatively important factor if we believed that weather was becoming structurally worse. This could become a more important factor going forward, with the continuing impacts of a warming planet, but for now, the structural decline in vineyard surface area is the relatively more important factor. 4 Appendix 4 5 Appendix 2 6 OIV, Statistical Report on World Vitiviniculture, 2013 7 OIV, Statistical Report on World Vitiviniculture, 2013 8 Wine & Spirits Education Trust, WSET Level 4 Diploma Unit 1 Study Guide, April 2013 9 OIV, State of the Vitiviniculture World Market, March 2013 10 European Commission, CAP Reform: Final stage of EU wine reform to enter into force on 1st August 11 OIV, Statistical Report on World Vitiviniculture, 2013 12 European Commission Agriculture and Rural Development, Reform of the EU wine market 13 OIV, Statistical Report on World Vitiviniculture, 2013 3 Candidate # 10007560 The most important factor in the production decline in recent years is the purposeful efforts by the EU to reduce European surface area under vine. Another important factor is the growth in surface area under vine in Asia and the “new world” regions. While they didn’t contribute to the decline in production, they counterbalanced the declines in Europe, mitigating the overall production decline. Increasing Consumption World wine consumption is on the uptick. Although consumption in 2012 (243Mhl) is down off the pre- financial crisis 2007 high of 255Mhl, it is still 7.5% higher than the 2000 figure (226Mhl).14 For much of this analysis, we will zoom in on the top ten consuming countries by volume, which represent more than 70% of world consumption. A look at recent consumption figures in those ten countries shows clear trends emerging: large decreases in continental Europe (especially Italy, France, and Spain) and Argentina being counterbalanced by large increases in American, Chinese, and Russian consumption, along with sizeable increases in British and Australian consumption.15 Like production, the formula for world consumption is a simple one: population multiplied by per capita consumption. We will examine both factors. Population An initial look at population growth seems to explain away the growth in consumption. Consumption in the top ten countries grew by 3.2% from 2000 to 201216, and population of the top ten consuming countries grew by 6.4%.17 There are two problems with this analysis. One is that data for the true populations we care about (population of legal drinking age) is difficult to find. The other is revealed by an analysis of the years prior to the financial crisis of 2008. If we look at the same data for 2000-2007, we see consumption growing by 9.1%18 at the same time that population grows by 3.8%.19 When we remove the post-financial crisis years (which have an obscuring effect on our analysis), it becomes clear that, while population growth is a factor in world wine consumption growth, it is not the major factor. Per Capita Consumption An analysis of population is demographics. An analysis of per capita consumption, however, is anthropology, and therefore more compelling. Per capita consumption speaks to how different societies behave with regards to wine, and there are stark differences from country to country. What emerges from an analysis of per capita consumption20 changes are two distinct trends: Trend 1: Declines in continental Europe and Argentina. What Spain, Italy, France, and Argentina have in common is a strong history as wine-producing nations. Because of that history and tradition, a culture of consumption was nurtured in these nations, such that 14 OIV, Statistical Report on World Vitiviniculture, 2013 15 Appendix 5 16 Appendix 5 17 Appendix 6 18 Appendix 5 19 Appendix 6 20 Appendix 7 4 Candidate # 10007560 in France for example, people over the age of 65 generally consume wine daily, with almost every meal.21 However, there are drastic societal changes taking place among younger consumers.