Marlborough is the engine room of New Zealand’s wine industry. Although vines were first planted there as recently as 1973, the region now has a healthy 65% share of the national vineyard, with an even larger 76.7% share of wine production in 2014. The main reason for this higher level of productivity is Sauvignon Blanc, or rather the variety’s ability to produce both quantity and quality, sometimes at the same time.
If Marlborough is the engine room then Sauvignon Blanc is the fuel. In the year to June 2014 New Zealand’s wine exports were a little over NZ$1.3bn ($1bn). In that same period, more than 10 bottles out of every 12 exported were Sauvignon Blanc. Marlborough is home to 89% of the country’s Sauvignon Blanc vines, making the region a major contributor to the country’s export revenue.
High international demand for Marlborough Sauvignon Blanc drove a rapid expansion, resulting in the region’s total vineyard area more than trebling during the 10 years to 2008, when a huge increase in production saw supply leap spectacularly ahead of demand for the first time in decades. A record vintage in 2008 resulted in an increase in Sauvignon Blanc production by nearly two-thirds. To make matters worse, a wet vintage produced variable results just as the global financial crisis kicked in and a strengthening New Zealand dollar made life difficult for exporters.
The savalanch
Surplus production resulted in a drop in the average price of Sauvignon Blanc exported, although an increase in bulk wine sales contributed to the price fall. As the grape price fell, so did vineyard profitability and the price of vineyard land. Prior to 2008, a prime Sauvignon Blanc vineyard might fetch as much as NZ$250,000.00 ($193,000) per hectare. Land sales virtually dried up overnight and the price fell to below NZ$100,00.00.
An annual New Zealand wine industry benchmarking survey by Deloitte made the following comments in 2009: “While profitability has declined from the past two surveys and some worrying trends are present in the results, there is certainly no evidence of the ‘mass carnage’ which some commentators were predicting.”
The report went on to say that while oversupply has certainly presented issues to the New Zealand industry, and although this remains an issue, “we are, to date, not seeing the same level of fallout as that which occurred in Australia.
“It is hoped measures were put in place early enough to prevent similar fallout in New Zealand and that, going forward, supply is matched with global demand and that growers are market led to prevent a cheapening of New Zealand wines in international markets. A reduced vintage 2010 harvest should help in this respect.”
The 2010 vintage was 5% lower than the previous year, which helped to restore a more favourable supply/demand balance and at the same time injected a little more confidence into the industry and, more importantly, the industry’s financiers.
Over-production in the 2008 vintage has been something of a game-changer for the New Zealand wine industry. It forced a number of mostly highly geared grape-growers and winemakers out of business, while at the same time providing an opportunity for others to purchase vineyards and winemaking facilities at fire sale prices. It also encouraged all growers and producers to work more efficiently in an effort to restore bottom-line profits.
One popular cost-saving measure is to ship wine in bulk for bottling in distant markets, particularly the UK and Europe. As a consequence, bulk shipments have risen from a few million litres a year prior to 2009 to 52.3m L in 2014. Philip Gregan, CEO of NZ Winegrowers (NZW), estimates that the transfer of bulk wine for bottling offshore now represents around half of current bulk wine shipments.
Effect on land prices
There are encouraging signs of recovery from the dark days between 2008 and 2012. The export bottle price of Sauvignon Blanc appears to have stabilised at around NZ$8.00 after a fall from a high of NZ$10.48 in 2007. Vineyard sales are now quite buoyant after a long period of inactivity. In recent months, five Marlborough vineyards have sold, with two being snapped up by an Australian family with wine interests in Australia’s Goulburn Valley, in Victoria.
The rest went to existing Marlborough producers seeking to expand their wine production.
The Marlborough Express newspaper reported that local property valuer, David Stark, believes the vineyard property market is much more positive now. However, he said that interest was quite specific and was particularly focused on good Sauvignon Blanc vineyards. Sauvignon Blanc vineyards are currently fetching around NZ$150,000.00 a hectare.
Gregan believes that a number of mostly big wine producers can see the limited availability of Marlborough Sauvignon Blanc and are buying vineyards to protect their biggest wine resource. “Marlborough has approximately 24,000 ha of vineyards,” explained Gregan. “When I ask a number of winemakers if Marlborough could expand by another 5,000 ha most would say ‘yes’. If I ask them if Marlborough could grow by 10,000 ha, nobody believes that is possible. It’s my guess that Marlborough could grow by 5,000 to 7,000 ha, although some might be on fairly marginal land with a higher frost risk.” The big question, according to Gregan, is: “what will Marlborough do when there is no more room to move?”
Ivan Sutherland, co-owner of the high-end Dog Point label thinks that 5,000 ha is closer to the mark. “There is still around 2,000 ha of very good vineyard land available, particularly in the Awatere Valley and perhaps another 3,000 ha of riskier, less productive sites with inferior soils,” he explained. “Marlborough is a bit like a mini-Champagne insofar as the mix of large commercial producers and smaller, more artisanal makers are concerned. All of the large players apart from Diageo operate in Marlborough.”
In their latest report on the 2013 vintage, Deloitte, stated: “It is pleasing to see that the results of our eighth benchmarking survey continue to support a turnaround within the industry. The positive results, however, are clearly skewed toward the larger end of the market. Continued financial volatility remains at the smaller end of the industry and we question whether the divide between large and small is growing greater.”
Knock-on effects
John Forrest, owner of the mid-sized Marlborough winery, Forrest Estate, reinforces Deloitte’s view that the larger companies are forging ahead while the medium and small producers are suffering.
“I estimate that Marlborough’s vineyard area will expand by 3,000 ha this year,” he said with some passion. “Pretty well all of that vineyard expansion is by larger wine companies who are increasingly putting the squeeze on smaller producers, which is why so many are for sale.” He explained that overproduction in 2008 forced many producers to increase their percentage of second label wines, reducing their average return per litre sold. Many then had to increase cropping levels on ‘second label’ vineyards in an effort to make these wines profitable. “In three years, our production of first label Sauvignon Blanc dropped from 70% to 30% of total production. Cropping levels expanded to meet the NZ$60.00 FOB per case market.”
Forrest believes that the only hope for smaller producers is to make and market superior Sauvignon Blanc. He tried to launch a Marlborough Quality Assurance initiative that would allow Sauvignon Blanc made to higher quality standards to be branded accordingly, but claims the program foundered through lack of support.
“Anyone can pick up a phone, buy bulk Marlborough Sauvignon Blanc, have it bottled and put it to market. My challenge is to differentiate my wine from theirs and explain why the (UK) customer should pay an extra pound for my wine,” added Forrest. “That’s very easy in the 2014 vintage when the difference between our Sauvignon Blanc and most of the more commercial wines is glaringly obvious to anyone.”
In 2014, heavy rain fell after Forrest’s (and many other) lower cropped Sauvignon Blanc vineyards had been harvested, but before the grapes could be picked from many higher-cropped vineyards; 2014 is a vintage of two halves, as a recent tasting of nearly 200 Sauvignon Blanc samples clearly indicated.
Sutherland acknowledges that the larger companies enjoy economies of scale and often a more secure road to market that gives them a competitive edge, but he paints a more optimistic picture of the future for all Marlborough winemakers. “There is a huge air of positivity in the region,” he enthused, “and that’s partly driven by the larger companies who are investing heavily. Overseas investment in Marlborough is, in my view, a vote of confidence for our region. Sauvignon Blanc is in good heart and has the potential for continued growth.”
Sutherland admits he’d like to see lower bulk wine sales, reduced cropping levels and greater focus on quality, but acknowledges that a wine industry as large as Marlborough’s must service all levels of the market.
Profitabilty
The recently released 2014 Viticulture Monitoring Report, prepared by the Ministry for Primary Industries, offers an encouraging study of vineyard profitability during the 2013/14 financial year covering the 2014 vintage. The study used financial data collected from 25 vineyards to construct a model of a 30-ha Marlborough vineyard, with Sauvignon Blanc the dominant variety.
The Marlborough vineyard model reported a vineyard profit before tax of NZ$368,800.00 in 2013/14, up 25% on the NZ$294,000.00 achieved in 2012/13. This significantly increased profit is almost exclusively due to yields increasing 20% over the previous year to 14.6 tonnes per hectare. Price received per tonne was stable, increasing by 1% to NZ$1,730.00 per tonne compared with 2012/13.
While profitability may never return to the halcyon days before the 2008 vintage, worldwide demand for Marlborough Sauvignon Blanc continues and that’s not about to change. Any suggestion that Marlborough Sauvignon is in terminal decline would appear to be greatly exaggerated.
