Wine Production: Worst Harvest in 50 Years Means Price Leap, Doesn’t it?

Global wine production fell to the lowest level since 1961. The reason is bad weather in the world’s main wine producing regions - Italy, France and Spain. Should we expect sharp increase in retail prices?

WHAT WE THINK
In 2017 the winemaking heart of the world - France, Italy and Spain - experienced a severe blow. Bad weather, both hot and cold, brought wine production to the lowest level since 1961.

The International Organization of Vine and Wine estimates that global wine production dropped 8% to 247 million hectolitres, the worst result in 50 years. One hectolitre is equal to 133 standard bottles of wine which means a loss equivalent to almost 3 billion bottles.

The regions that produce inexpensive wines suffered the most.

The Bordeaux Wine Council announced a 40% drop in production while vineyards in Saint-Émilion are worst affected by severe frost. In some chateaux up to 90% of the harvest was ruined. Although some wineries did not suffer at all, the more flat lying, higher volume production land has been hit severely.

Now that the wine from the 2017 harvest is beginning to enter the supermarkets, buyers should see a noticeable price increase. Some experts believe that the price increase for affordable wines such as Pinot grigio, Prosecco and generic Spanish red wines can go up as much as 30%.

The big picture, however, is more complicated.

In the price of an average bottle of wine the cost of wine constitutes only about ten percent. The excise duty and VAT are responsible for around 50% of the price while logistics, the bottle and the retail margin make up the rest. The market forces directly associated with the decline in wine production are limited.

Potentially even more significant are factors such as the fall of the British pound, because of Brexit, and the shrinking of the Russian market, because of sanctions and the decline in oil prices.

The UK is the largest buyer of European wine. Last year, the British bought 81.7 million bottles of Pinot grigio and 85 million of Prosecco with the total import of wine around four billion euro.

According to a study conducted by the research firm Nielsen, the devaluation of pound led to the increase in retail price by 4% while the price tag for French wines increased by 5.5%.

“The UK wine industry is facing a range of pressures that has seen the average priced bottle of wine reach an all-time high,” says Miles Beale, chief executive of the Wine and Spirit Trade Association (WSTA). “This includes fall in the value of the pound – compounded by rising inflation and the uncertainty of Brexit.”

The Russian market of imported wine is about 700 million euro, however, the fluctuations in this market cannot be compared with the situation in the UK. In 2015, imports fell by 30% but since 2016 they have been growing dynamically and in 2017 almost returned to the level of 2014.

At the same time, Russian lawmakers are discussing protectionist measures aimed at reducing imports and increasing domestic production.

In addition, the outcome of the trade war between the US and China is not yet clear. China has included American wine in the list of goods which are subject to Beijing's protectionist measures: the import of American wine is now subject to a 15% duty.

This means that the retail price in Europe will be determined - as strange as it sounds - not so much by the poorest harvest in 50 years but by other factors, very tenuously related to winemaking.