Napa, Calif.—Though not significant to most small and medium-size wineries, huge growth in the exports of bulk wine from New World countries is having a big impact in their target markets—including the United States.

Driven primarily by currency fluctuations and costs of shipping and importing bottled wines, bulk wine exports have risen from 23% of total wine exports from New World countries in 2001 to 43% in 2010, according to a report just released by Rabobank. Based in the Netherlands, Rabobank is an international leader in agricultural business banking, including in the U.S.

Most of the bulk wine, of course, is moderately priced, targeting the heart of the market. It has grown to address the price pressure in markets in the U.S., and especially in the UK and Germany.

The average grocery retail value of wine in the U.S. in 2010 was $6.36 per 750ml bottle, according to Rabobank and Nielsen; the average is only $4.02 in the UK and $3.32 in Germany. In both of the latter countries, large chains focus on private labels using wine bought directly from suppliers.

According to Stephen Rannekleiv, the wine industry expert from Rabobank’s Food & Agribusiness Research Group, the New World wine supply has grown by 45% over the past 20 years. While European production has declined, consumption there has declined even faster, putting pressure on suppliers.

Meanwhile, wine has become increasingly commoditized: Good quality wine with similar characteristics is now produced in many parts of the world. In addition, improved shipping bladders have made it convenient to transport bulk wine easily.

Market shifts
Rannekleiv estimated that bottling wine in the country of sale rather than in the country of origin has moved almost $1.4 billion in value to the countries of sale. That’s caused by an increase in the value of bulk wine of more than $440 million—and a reduction in value of bottled wine of $1.8 billion.

He added that bulk shipping saves the suppliers $140 million per year, an average of $2.25 per case.

Because the cost of getting bulk wine to its destination is clearly very important, Rabobank looked at the competitiveness of various countries.

Total costs include production, grower gross margin, in-country transportation costs (to get to ports for export), sea freight costs, import tariffs and the current strength relative to markets and competitors.

Rannekleiv said that currency rates have been the biggest factor in shifting competitiveness. This factor has hurt Australia the most: Its currency remains high in value.

Rabobank compared production costs in local currency and U.S. dollars and found that the U.S. was the least competitive at 66 cents per liter using the average 2011 exchange rate. Argentina was 61 cents, Chile 54 cents, Australia 47 cents and South Africa cheapest at 42 cents.

However, transportation costs, duties, etc., change the picture, and the landed price per liter of wine in the UK market from the various exporting countries is relatively close: Import tariffs and excise taxes account for five-sixths of the actual prices. The U.S. remains highest there at about 3.20 pounds ($4.95 U.S.), while Chile is slightly under 3 pounds ($4.64 U.S.), partly due to its success in negotiating favorable tariffs in the UK and elsewhere.

In the fast-growing Chinese market, U.S. wineries are at a significant disadvantage due to highest tariffs and production costs: 7.25 Chinese yuan ($1.15 U.S.) vs. Chile and South Africa, less than 5 yuan ($0.79 U.S.).

Inside the U.S., however, domestic bulk suppliers are most competitive, since they don’t pay import tariffs or overseas transportation costs.

Bulk in the U.S.
In the domestic market, Rabobank calculated a landed price per liter of wine at about 70 cents, compared to more than 90 cents for Argentina, 75 cents for Chile and about the same for Australia. South Africa is the cheapest, but it produces the wrong varieties for most world markets.

Rabobank reported that San Joaquin Valley grower margins have expanded significantly due to the weak U.S. dollar, but that hasn’t been enough for them to significantly expand their vineyards— particularly since nut trees are far more profitable and water shortages loom.

Vernon Crowder, Rabobank’s California-based agricultural economist, added additional insight: While Napa and Sonoma account for only 8% of the state’s winegrape production, they represent 33% of its grape value, and far more in wine value. The interior has 56% of tonnage but only 25% of value.

Crowder cautioned that significantly higher grape prices or appreciation of the U.S. dollar could reduce the competitiveness of U.S. growers.

He said that the Central Valley needs to increase production, which he said will be achieved mostly not by expanded plantings but higher yields from fertilizer and water, not to mention pruning and management practices. His comment that tonnage yields per acre will rise from the “old standard of the mid-teens to the mid-20s” and higher generated gasps from the audience in Napa, where 3.5 tons to the acre is the standard.

He emphasized that the reason grape prices have risen is not shortages, but the rate of exchange that has made California more competitive.

Rannekleiv noted that Napa is largely immune to these pressures, and even bulk Napa wine is treated like a branded product and sold mostly within the county to other Napa companies. However, both he and Crowder warned that imports are increasingly targeting high-value wines, and the decline in local consumption is making France, Spain and Italy more aggressive about exporting to the U.S.