Chinese Whispers and Australian Wine

by Dudley Brown

1 May 2023

The tariffs imposed on Australian wine by the Chinese government in late 2021 in retaliation for some regrettable remarks by our former PM about COVID have wreaked havoc in the Australian wine industry since. The media and spokespeople for the industry have since simply characterised our ensuing oversupply problems as “China’s fault.” The only problem with this story is is not that simple and, worse, just not so.

In international markets, commodities always find a way around problems like tariffs. For example, Russian oil that used to be supplied to Europe is now sold to India and China since the invasion of Ukraine. Middle Eastern oil that used to go to India and China now goes to Europe. 

Wine is not totally different to oil except that it isn’t as relatively an undifferentiated commodity as oil. But, over time, it will always get mopped up for similar reasons in similar ways at some price provided that there isn’t a global oversupply.

A month or two ago I watched an interview with a big bulk wine merchant in the USA complaining that Australian wine is being offered for 25 cents per liter delivered and wrecking their bulk market. Buyers complaining wine is too cheap? This makes no sense. The USA produces more than twice as much wine as Australia but only supplies about half of its own consumption. They actually need to import bulk wine from us and are complaining that it is too cheap! I pondered this seeming paradox during vintage and guessed that there was more to the story.  Now that I am off the forklift, I spent an hour or two on the WineAustralia website trying to understand this more fully.

It turns out that the principal reason is that if the USA buyers buy our nearly free Australian bulk wine then blend and repackage it, they still can’t sell it. The reason behind this that you may have not heard is principally explained in the following graph:

Chinese consumption of wine has fallen so sharply since 2017 that even if we went back into the Chinese market without any difficulty, we would likely still have a huge and growing oversupply rather than a shrinking one. That is how bad the underlying problem is in the world of wine. The world is awash in wine because the Chinese have reduced annual consumption by an amount almost equal in volume to the annual output of the entire Australian wine industry. Yet, even at our peak, we only sold them 13% of our wine. This gives an indication of how much wine other countries are no longer exporting to China even without tariffs.

Between its peak in 2017 and the end of 2022, Chinese consumption of all wine has dropped 54% or 1.04 BILLION litres per year. As a matter of perspective, the total production of Australian wine in 2020 was 1.1 billion litres (WineAustralia). Chinese domestic demand dropped 16% – or 169 million litres – just in calendar year 2022. This puts their wine consumption back to the level of 1996 or 1997 when they were a far poorer country.

The fall in demand has been so steep that there is now a world-wide oversupply of wine, particularly red wine (the Chinese imported mostly red wine). It isn’t just an Australian problem and it isn’t because of the Chinese government or even COVID. It’s that the Chinese are drinking significantly less wine and have been doing so for six years. Were it otherwise, Americans would happily buy our bulk wine, blend and re-sell it to the Chinese. This is the story no one is talking about and it is unclear why this is so as it is totally out of our control.

The curious point here is that this collapse was largely foreseeable to Australian winemakers and peak bodies. In total in 2018, the Chinese bought 171 million litres from Australia for $932 million. Then in 2019, they bought 146 million litres for $997 million. In 2020, they bought 129 million litres for $1.15 billion. In a shortened 2021, they bought 78 million litres for $868 million (WineAustralia). In the three years before tariffs, the volume of Australian wine exported dropped by 93 million litres per year while the average price paid per litre increased 87%. This juxtaposition made me curious and curioser.

Going back to the data again, the near 50% decrease in export volume and near doubling in price between 2018 and 2021 indicates that there was another huge shift occurring in the Chinese market. While the near 50% 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 serious hold at the higher end of the market while our cheaper exports couldn’t find buyers. Given the average price of $10.38 per litre or about $8 per 750ml at wholesale indicates an average bottle price of at least $20-30 per bottle. This is an outlier result in the history of Australian wine exports. What makes this so significant is that this price increase occurred while the overall Chinese wine market collapsed.

The “no label claim” section of Australian wine exports (meaning no state or region is claimed on the bottle) decreased from half of total Australian sales volume to just 17% (a 66% decrease) in just three years. In value terms, the “no label claim” segment also fell by 64%. In the bulk segment, volumes dropped by $45 million or 75% between 2018 and 2021 while value dropped by just 40% to $47 million. 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 105 million litres while post-tariff, they only decreased by 17 million litres in 2022. The point is, the inventory build-up of bulk wine in Australia as a result of changes in Chinese consumption patterns was already at least 85% done before the tariffs were imposed in 2021. They either remained in inventory or were sold elsewhere.

The collapse of bulk wine exports to China before tariffs over three years between 2018-2021 is equivalent to about 8% of our average 1.25 billion litre annual production while the sales of bulk wine lost in 2022 (17 million litres) is just 1.2% of annual total production. For practical purposes, the former portion of the Australian oversupply problem isn’t due to the Chinese tariffs at all. It is due to collapsing demand for inexpensive Australian wine, red in particular and winemakers’ failure to adjust to a rapidly changing market from 2019 to 2021.

However, if you were a bulk winemaker in 2021 and still thinking that the Chinese bulk market would get back to 2018 levels, you would have overproduced an aggregate of 150 million litres of oversupply. 

The other side of the coin is the more expensive end of the bottled market where a label claim is made. It lost 55 million litres of volume in aggregate sales to China from 2018-2021 or about 4% of the annual crush. This is not insignificant but still far better than the rate of overall decrease in consumption in China during this period. In fact, it apparently outperformed the rest of the suppliers to the Chinese market with aggregate income increasing by $268 million during the same period. 

Added together, an aggregate of 160 million litres of decreased demand in China between 2018 and 2021 was either added to our storage or sold elsewhere, 2/3’s of it from the inland regions. In value terms, the lower end declines were worth a total about $110 million while the higher end declines were worth about $500 million. 

This data clearly indicates that across the price spectrum, Chinese consumers were aggressively buying “up” even “way up” over time and rejecting lower priced offerings made from bulk wine or that were perceived to be of lower value (no label claim) and that Australian winemakers completely missed the market shift and kept the presses running flat out in the hope that their boomerang might come back.

The happy news in all this data is how well higher end Australian winemakers did in the Chinese market against fierce headwinds. This is a success story that needs telling. 

The sad part of this is that all this data is available for free and winemakers ignored the warning signs long before the tariffs were imposed. 

This official and and freely available data presents an opportunity for a different understanding than what Chair John Hart OAM, of peak industry body Australia Grape & Wine implied in writing to the federal government in the AGW Pre-Budget Submission to Parliament in January of this year: 

“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 was 570 million more litres in stock than at the same time in 2020.” 2, 3 (italics mine)

Source – AGW’s pre-budget submission to the Federal Government for 2023-24

What doesn’t Chairman John Hart mention is what else had been reported by Wine Australia on 30 March 2021 about the state of the Australian wine market in June 2020. Their report notes that 2020 had been the smallest crush since 2007, that sales volumes had decreased by 6% and was 60 million litres more than production, that sales exceeded production in 2019-20 for the third consecutive year contributing to a lower stock to sales ratio with inventory at 1.7bn litres, a 4% decline from 2018-19. What this says is that the AGW has selected the lowest possible inventory level in recent memory to imply that China’s tariffs are responsible for an increase of 570 million litres in Australian wine inventory.

Why they would over simplify in this way leaves one wondering why. 

To be generous to Hart – let’s take his 2020 year reference as a benchmark of 129 million litres sold (it was the last full year of sales to China) then improbably accept that this level of sales would have continued (despite overall Chinese wine demand dropping a further 33% between 2020 and 2022 and Australian volumes having already declined 25% between 2018 and 2020) and that we sell zero to China now (we still sell a bit). In doing so, the inference is that the maximum impact that that the Chinese tariffs could have had on Australian inventories through the end of fiscal year 2022 is 107 million litres (10.75 million litres per month for 10 months).

In short, the AGW conflates partially related causes to effects seemingly to blame the Chinese Government for our woes. Why the AGW would want to potentially further antagonise the Chinese Government after a year and a half of these punishing tariffs is any anyone’s guess.

The reality is, an increase of 463 million litres of un-sold wine produced by Australian winemakers since June 2020 unrelated to the Chinese tariffs is what is filling (at least) 81% of Australian wine tanks at 30 June 2022, while wine not sold to China as a result of tariffs accounts for perhaps 19%.

How did the 463 million litre increase pile up so quickly if not because of China? Why aren’t the AGW more clear about what has really happened and why? I will noodle on these in further posts.

And, if you are like me and didn’t have this understanding of the state of our industry and wish to make a difference, send a copy of this to your Member of Parliament. Budget day looms.

End of Part 1