Rabobank: Argentina wine exports boosted by reforms

The report says that while Argentine wine's competitiveness has gone up 50% overnight, investing there is still not for the faint of heart.

Rabobank’s wine report for the first quarter of 2016 has highlighted the burgeoning potential for Argentina’s wine industry following newly elected president Mauricio Macri’s immediate removal of his country’s 5 percent export tax and restrictions on access to foreign currency.

Artificially high inflation kept prices high and made the country’s bulk wine exports particularly uncompetitive, which also bloated domestic inventories, one of the report’s authors told Agri Investor.

“Argentina does have a robust domestic market,” Stephen Rannekleiv said. “It’s in between the old world and new world wine markets and producers, and like Europe went from a producer to becoming export-focused in the last few decades.”

The report also looks at increasing demand for wine from China, which is boosting exports for Argentina’s competitors in Chile, Australia and New Zealand, and steady growth in sparkling wines. Turning to production, the quarterly points to harvests in the US, South Africa and Australia which have or are set to be affected by droughts.

Citing consulting firm Economia y Regiones’ estimate that Argentina’s wine competitiveness “has increased by 50 [percent] virtually overnight”, Rabobank’s report says Argentine prices are becoming more competitive and the industry more profitable for exporters. However, it also warns that while the country will see a “period of solid growth … the Argentine economy has historically been prone to cycles of dramatic decline, followed by rapid recovery.

“…We would note that, the past, foreign investors have often been attracted to the dramatic growth that is often seen during the recovery periods, only to become unnerved by the inevitable declines. Investing in the Argentine wine market can be profitable, but it is not for the faint of heart.”

The Rabobank Wine Quarterly adds that Argentine exporters must be careful about likely price reductions, which already fell between 2014 and 2015, and “avoid undermining the long term premium of the brand and overall category.

“Currency moves are volatile, but pricing moves are often more permanent,” it says.

The report also looks at markets around the world, both in terms of premium wines bottled at the source, and bulk wines Rannekleiv says act more like commodies:

“Premium wine is aspirational. US premium imports have gone up with salaries. There was some growth in Nigeria and Angola that was really interesing, but oil prices have meant that a lot of it has really hit the brakes really hard,” he said.

Imports in 2015, with rising demand in China and a decline in production in the US, have been favouring European and New Zealand premium suppliers, according to the bank.

While demand in China has seen a big rise in demand particularly in the bulk market, this is compensated by the US, which has seen a decline in bulk imports. “China will not move the needle in terms of overall exports,” Rannekleiv said. Exports to China rose 77 percent by volume and 61 percent by value including bulk and premium wines. Trade deals between China and Chile, Australia and New Zealand have contributed to a boost in trade there. China and Hong Kong combined now represent Australia’s largest export market by value, according to the report.

Describing the bulk wine market, he said: “[it] is more volatile and you can source it much more widely.” In Russia in particular, sanctions have prompted a dramatic rise in bulk and a downturn in premium imports, he pointed out.

Meanwhile, sparkling wines, including cocktail ingredient vermouth, have seen some of the strongest growth in price and production. “This is not a fad but a steady trend,” said Rannekleiv.

“The main driver has been prosecco, and its acceptance in the UK and US markets – the biggest markets being these and Germany – where you see champagne imports going up around Christmas still, this is much less the case with prosecco, where people are drinking it all year, particularly millennials.”

In terms of production, the estimate for total wine production having increased by 2 percent last year is likely to revised downwards, due to declines in US and Spanish harvests, just some of the countries affected by drought this year.

Allied Grape Growers has said that Californian wine grape harvests fell by 2 percent, with some double-digit declines in the North Coast and Central Coast. The result, says Rabo, is the firming-up of prices for bulk wine in the domestic market and an increase in imports.

Crops in Italy and France on the other hand increased, with the Languedoc region showing productivity improvements as Bordeaux wine volumes fell 5.8 percent. Chinese imports of French wines grew by 25 percent but while prices also went up in other markets, prices in the Asian giant fell by 2.7 percent. Chile was another wine industry sustained by Chinese demand, where wine production grew by 28 percent compared to 2014.