This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
News
Chile – Bottling It
d=”standfirst”>With bulk wine prices tumbling, and the price of grapes firming, the future for the Chilean wine industry would appear to be bottled, says Chris Losh
The first few years of the third millennium have been tough for Chile, the air thick with the sound of condors coming home to roost. Its problem is one that is familiar to wine growers from Bordeaux to the Barossa – too much wine and not enough market to soak it up.
The Chilean problem started, as did the Australian one, in the mid 1990s. With exports on a roll and grape prices high, wine seemed to be a licence to print money and there was a rush to plant. The Chilean vineyard area doubled from 1996 to 2000, from 56,000 hectares to 104,000ha. These vines are now all bearing fruit, giving Chile record harvest after record harvest.
In itself, it would be challenge enough for a young industry to find consumers for the 200-300m extra litres of wine. But the situation has been exacerbated by the simultaneous overproduction in places like Australia, California, South Africa and Bordeaux.
If Chile had “gone long” on white varietals eight years ago, it might not be facing quite the problems it does. There is, after all, something of a shortage in Chile of Chardonnay and Sauvignon Blanc. But the vast majority of new plantings have been of red grapes – and the majority of these Cabernet Sauvignon, to the extent that over one-third of all of Chile’s vineyard area is now dedicated to the grape.
Consumers may, indeed, want Cabernet, but there’s only so much of it they can take, and with California and Australia having majored in the same thing, and Bordeaux also desperate to divest itself of years of unsold stock, the world is hardly short of the stuff. The result has not been hard to figure out. As supply exceeded demand, the markets were quick to scent an opportunity for some hard bargaining and prices collapsed. While the average FOB price per litre peaked at US$2.24 in 1999, by 2002 it had fallen to just US$1.71, its lowest since 1996.
This, in fact, has been the problem for Chile’s exporters. While volume growth has been consistently in double digits, value figures for the years around the millennium have come nowhere close – typically under 5%. At the heart of this less than good news has been the overproduction, which has driven both deep discounting and, perhaps more worryingly, a significant rise in the bulk market.
No one can pretend that a buoyant bulk market is a sign of a healthy wine economy, and in Chile’s case it has been driven by a need to soak up the extra 100m, plus, litres of wine that the country is producing every year. Chief beneficiaries (if that’s the right word) have been Germany and China, both of which have doubled their imports of Chilean bulk in the last two years. Germany’s figure of 33m litres is three times more than in 2000 and, at just US$0.35 a litre, is desperately low. Lower, even than China’s, whose US$0.43 looks positively generous by comparison. “The bulk influence in Germany is crazy,” says Patricio Valdes, European export manager for Santa Carolina. “How can you raise the image of a country when you have wines retailing at €1.99?”
Chile’s per-litre bulk price has tumbled in the last few years. Now at US$0.50, it is half what it was in 1999. And since one export manager told me that bulk needs to fetch around US$0.70 a litre in order to be profitable, this is obviously less a reasoned business strategy and more a case of dumping stock. For sure, some wineries and growers must be hurting.
And yet, having said all this, this article would certainly have been more critical if it had been written a year ago. 2002 represented something of an annus horribilisfor Chile, with thousands of litres of juice from the giant 2000 vintage seeing prices at their lowest for several years and value growth all but stalled. And, though 2003 hasn’t seen a return to the giddy days of the late 1990s, there is a definite feeling that the downward curve of the last few years has bottomed out and is starting to climb in the right direction once more.
Prices per litre in most markets are up, and, for the first time in many years, last year saw export value growth in double digits. The reasons for this are a combination of increased exports (growing at around 50m litres a year) helping to relieve some of the panic of a burgeoning supply, and also a couple of short harvests. 2002 wasn’t much to write home about in terms of quality, but the rain which robbed it of much of its trademark Chilean opulence, also wrecked much of the crop in the big-volume heartlands of Curico? and the Maule Valleys.
And while 2003 was, at 620m litres, Chile’s second biggest ever vintage, it was some way down on where it could have been had the weather behaved itself properly. Nature has also come to the rescue in 2004, where a combination of spring frosts, extreme heat and rain around harvest time have seen yields drop by around 20%.
With the recovery still fragile, the country could hardly have asked for a better result. Winemakers are generally happy with the increased concentration, and the reduced volumes have been a shot in the arm for flaccid grape prices. “Prices have definitely firmed up,” says Brett Jackson, winemaker at Valdivieso. “The spot market is around 50% more expensive than last year, and there will be a flow-over effect into the grape prices for the coming harvest.”
The upswing in prices of raw material is likely to signal the end for the more brutal bulk deals and, quite possibly, mean less heavy discounting in the bottled arena as well, all of which is healthy for the industry. If markets want Chilean wine, they will have to start paying for it and some producers are already starting to talk about how higher prices could mean they will struggle to hit their current price points.
The difficulty over the next few years, in fact, is not so much finding ways of shifting thousands of litres of surplus wine, but of convincing markets to stick with the country once prices start to rise again. It’s a challenge, but it’s a better one than Chile has faced for the last four years.