The tariffs imposed on Australian wine by the Chinese government in late 2021 in retaliation for regrettable remarks by former Australian PM Morrison about COVID have wreaked havoc in the Australian wine industry since. Australian and international media and spokespeople for the industry have since repeatedly characterised the ensuing massive wine oversupply problems as ‘China’s fault.’ According to data from Wine Australia, this does not appear to be exactly the case.
Chinese tariffs are only responsible for 19% of the Australian oversupply through June 2022.
The data in question suggest that the Chinese tariffs are only responsible for 19% of the Australian oversupply through June 2022, while large harvests in 2020 and 2021 principally account for the other 81% of inventories.
China consumption halves
Contributing to this, Chinese domestic consumption has dropped by almost 50% or 1bn litres per year since 2017 leaving the wine exporting countries of the world awash in red wine. This puts China’s wine consumption back to the level of 1996 or 1997 when it was a far less wealthy country.
China’s wine consumption back to the level of 1996 or 1997 when it was a far less wealthy country.
At its peak, China imported about 13% of all Australian wine. But, Chinese consumption of wine has fallen so sharply since 2017 that even if the tariffs fall and Australian wine is warmly received, Australia would still have a huge and possibly growing oversupply rather than a shrinking one.
The curious point here is that this collapse could and arguably should have been foreseen by Australian winemakers and institutions. In total, in 2018, the Chinese bought 171m litres from Australia for AU$932m ($627.5m). In 2019, they bought 146m litres for AU$997m ($671m). In 2020, the figures were 129m litres and AU$1.15bn ($0.77bn). In a shortened 2021, the numbers had dropped to 78m litres and AU$868m ($584m).
Going back to the data again, the sharp decrease in export volume and near doubling in price between 2018 and 2021 indicates another huge shift occurring in the Chinese market. While the drop in the volume of Australian exports closely mirrors the drop in Chinese total demand in that period, the doubling in price indicates that the Australian offering was taking a serious share of the higher end of the market while cheaper exports couldn’t find buyers.
The average export figure of AU$10.38 per litre ($7) or about AU$8 ($5.40) per 750ml indicates an average retail price in export markets of at least US$13.5-20 per bottle. This is an outlier result in the history of Australian – and almost any other wine producing nation’s exports. And it is particularly significant because it happened at a time when the overall Chinese wine market was collapsing.
No label claim? No thank you!
Between 2018 and 2021, the ‘no label claim’ section of Australian wine exports (meaning no state or region is claimed on the bottle) decreased from half of total sales volume to just 17% (a 66% decrease). In value terms, the ‘no label claim’ segment also fell by 64%. In the bulk segment, volumes dropped by AU$45m ($30.3m) or 75% between 2018 and 2021 while value dropped by just 40% to AU$47m ($31.6m). The vast majority of the ‘no label claim’ and bulk segments can be assumed to be from the inland wine growing regions.
Added together, in just three years, aggregate Australian exports of bulk wine to China decreased by a total of 105m litres while post-tariff, they only decreased by 12m litres in 2022 to five million.
The inventory build-up of bulk wine in Australia as a result of changes in Chinese consumption patterns was already at least 85% complete before the tariffs were imposed in 2021.
In other words, the inventory build-up of bulk wine in Australia as a result of changes in Chinese consumption patterns was already at least 85% complete before the tariffs were imposed in 2021. The wine either remained in inventory or was sold elsewhere.
On the other side of the coin there is the pricier regional, bottled market - the wine with a 'bottle claim'. This segment lost 55m litres of volume in aggregate sales to China from 2018-2021 or about 4% of the annual Australian crush. This is not insignificant, but still far better than China's overall decrease in consumption in China during this period.
In value terms, this volume decline represented about $110m ($74m) in lost sales at the lower end of the market. And, had prices paid been stable, the volume decline would have represented a $500m ($336.5m) decline for high-end producers. However, the Chinese were trading up so quickly that income actually increased by AUD$268m ($180.4m) during this period
This data clearly indicates that while Chinese consumers were aggressively trading up and rejecting lower price offerings, Australian producers of those cheaper wines missed this market shift and kept the presses running flat out.
The curious part is the official position of Australian Grape and Wine, the industry body representing the national wine making and wine growing industry. In a January report to parliament requesting $85 million in funding, Chairman John Hart insisted that:
“China’s imposition of tariffs on Australian wine imports came as a severe economic shock – a shock not of our own making but forced upon businesses without warning or recourse. It removed 120 million litres per annum from Australia’s annual wine sale forecasts and by June 2022 there were 570m more litres in stock than at the same time in 2020.”
Publicly available data published by Wine Australia suggests that AGW is cherry picking data by using the lowest stock levels in recent history in 2017 to inflate the scale of the problem and to unfairly suggest that it is a result of Chinese tariffs.
Mostly no comment
Meininger's contacted a large number of producers, almost none of whom were prepared to talk on the record about the situation. The exception was high-end Barossa Valley producer Elderton Wines’ co-managing director, Cameron Ashmead. He noted that “aggressively attacking China hasn’t served the industry well” and that “It would be good if the large wine companies made less inexpensive wine and focused more on hand-made and sustainable wines that Australia can excel at.”
The general unwillingness in Australia to discuss such a significant industry issue seems to reflect a lack of understanding of the scale of global oversupply. Perhaps the latest Wine Australia export figures which show a drop in sales to key regions like the US, UK and Europe will help to focus a few minds.