Divining the future: vineyard investment

Leading viticulturalist Dr Richard Smart offers this assessment of the vineyard investment potential in Tasmania and China, both hotly tipped by the drinks business as places set to play increasingly important role in the future of wine production.

Dr Richard Smart (left) receives his award from Charles Metcalfe

His views, originally published in the drinks business September 2012 issue, come as Smart was awarded the International Lifetime Achievement Award at this year’s International Wine Challenge.

Presenting the prize at the annual IWC ceremony in London last week, the competition’s co-chairman Charles Metcalfe highlighted Smart’s achievements, saying: “he has four degrees including a PhD and a Doctor of Agricultural Science, but he is very far from an ivory-tower academic… he is a practical man at heart, happiest out in a vineyard. In fact, it could well be our winner who coined the phrase, ‘wine is made in the vineyard’ before it was the ubiquitous maxim it is today. Some refer to him as ‘The Flying Vine Doctor’.”

Read on for Smart’s consideration of the key factors which will affect China, Tasmania and indeed any other region’s potential for success as a wine production area and investment.

Divining the future

With burgeoning new wine markets and previously overlooked regions starting to gain more attention, it has perhaps never been a more exciting time to explore new frontiers for investment in wine production. But perhaps it has also never been more complicated. And this is in an already complex industry that spans three types of business.

Firstly, the viticultural decisions of where and what to plant have pivotal effects on wine style and quality. Growing grapes is essentially an agricultural pursuit, despite the perceived glamour. So it is subject to the vagaries of the weather, which can affect the cost of production, yield and wine quality. Of course there can be dramatic differences from year to year.

Second is the manufacturing or winemaking phase, seen to be the most romantic, but typically quite technological and requiring stringent quality assurance procedures.

Finally, and arguably most crucially, is marketing the wine. It is important to establish appropriate market segments for the wines, and to develop and maintain brand strength. An investor may already have a region, and grape varieties or wine styles in mind. That would be a case for investing in established regions, which already have a reputation.

But some investors may have different ideas, and having decided upon a wine style or varieties, may want to choose a region which is yet to make its reputation, where land and prime vineyard sites can be bought much more cheaply. So the classic risk-reward principles of investment are just as applicable to wine.

A cool investment?

In April the drinks business published a list of top 10 vineyard investments – a roll call of up and coming regions around the world predicted to make a splash in the next decade or so.

China topped the list, followed by Australia’s rising star, Tasmania. So if one was looking to invest in a region tipped for growth, what criteria should be used to objectively assess its potential?

Let’s have a closer look at the Apple Isle, Tasmania, as an example. Currently it has 1,300 hectares of vineyard, less than 1% of Australia’s total. It is establishing a reputation as the country’s premium quality cool climate region based on sparkling wine, Pinot Noir and aromatic white varieties.

A region’s terroir is the first thing that needs to be considered, and climate is the most important part of this – it is the key to a wine’s style and quality. In turn, temperature is the most important aspect of climate to be assessed. Analysing temperature data is much easier these days thanks to the internet. It would make sense to compare the temperature conditions in Tasmania with other places in the world.

The climate of its agricultural areas very closely resemble those of New Zealand. This is not surprising, since the islands are of comparable size and at an almost identical latitude. From a vineyard investment point of view, this initial evaluation is very encouraging. New Zealand has an impressive export-driven wine sector.

In fact, within Tasmania, we can identify places of similar temperature (homoclimes) to some of New Zealand’s most famous wine regions, such as Marlborough, lauded for its Pinot Noir and Sauvignon Blanc, and Central Otago also for Pinot Noir. So the homoclimes in Tasmania have the potential to produce similar wines to their illustrious New Zealand counterparts.

In a similar fashion, rainfall, sunshine, humidity and evaporation can be analysed, and so refining the homoclimes to make them quite precise. Rainfall patterns need not be matched exactly, since any rain deficit can be made up by irrigation. But excessive rainfall does need to be avoided, as this may stimulate excessive growth and can cause fungal diseases.

Having found the ideal location for the wine style and variety being contemplated, what else needs to be borne in mind? Suitable land availability and price are important issues. For Tasmania, with its relatively small area of vineyards, there are limited opportunities to buy existing vines, but many opportunities to buy farmland to establish vineyards.

Since the most common land use there is sheep grazing, the land is cheap by international standards; around £1,250 to £6,000 per hectare, depending on location and property size. Unlike much of Europe, farmland in Tasmania is not very subdivided, so larger property purchases are possible.

Access to water is important, and a government irrigation scheme is currently being installed – projected to supply to around 200,000 hectares of the island. But what of the other crucial aspect of terroir – soil?

The usual procedure is to do preliminary soil testing on candidate properties. The type of soil identified won’t necessarily rule out viticulture, as deficiencies can be corrected. However, the ideal soil types are of moderate fertility and depth, well-drained and allowing moderate root zone depth.

The variety show

Tasmania is a special example of a cool climate viticultural region, but is that so desirable? Limited areas of the world’s famous vineyard regions could be called cool, like Champagne, Burgundy and the Loire Valley, or warm like Bordeaux and the Rhône Valley, and the “hot” ones, like the inland irrigated regions of Australia and California, are used more for commercial wine styles.

Here the investor’s business plan is important, depending within which sector of the market they will want to operate. Currently the low value part of the wine market is subject to intense international competition. Thus parts of Australia’s “hot” regions are suffering from a grape surplus – not the case in cooler Tasmania.

Furthermore, the cool climate wines of New Zealand make up the majority of wine imports to Australia, indeed the largest-selling brand in Australia is from its neighbour and rival. This alone might suggest that there are opportunities for market growth in cool climate wine styles in Australia, which are greater than for its warmer climate wine styles.

Another important consideration is varietal suitability for the market. A vineyard site can be selected to optimise the chances of producing a premium quality wine from a nominated variety, but does that variety have market appeal? And varietal wines can fall gradually in and out of fashion, over decade cycles or longer.

But in some ways it’s regrettable that so much of the international wine market hinges on varietal labelling. The market could do with being exposed to more varieties – why restrict efforts to such a small number of so-called “international” ones? There are hundreds of other grape types able to make good quality wine that are being ignored.

Regions that produce wines from relatively unknown varieties often suffer from impeded growth – and investment. This can be seen in the cases of Greece, Sardinia and Georgia. Even the difficulty of pronouncing varietal names outside the native country can limit export opportunities.

China bet

Any discussion of wine investment potential is not complete without an assessment of China – the growth in wine consumption there is too great to ignore. And this is one reason why the Chinese government is planning enormous vineyard expansion, some of it to be centred around Yinchuan in Ningxia Provence, central China.

There are plans to develop 60,000 hectares in the next 10 years, and international investment is being courted. The climate in Yinchuan is suitable – warm to hot in summer, but the winters are so cold that vines must be buried to avoid freeze injury.

There are hurdles to overcome for investors, especially those from overseas unaccustomed to doing business in China.

Land is owned by the government, but can be leased long term. Labour is very cheap but often unskilled and requires training and close supervision. There are major problems with access to suitable planting material, viruses and other diseases are widespread problems, and local nurseries are rudimentary. Importing from overseas nurseries is almost impossible. There is a shortage of skilled managers, and a lack of service infrastructure typical of wine-producing countries.

These factors are not insurmountable – over time and with effort, they can be overcome. But these issues will ultimately impact business plans and must be taken into account.

Future unknowns

Should investors also be eyeing Mexico?

One issue of significance for vineyard investments is the opportunity for market entry. In many countries, projections for the domestic market are important, being more secure than export markets.

From this perspective, China, England and Wales, Tasmania and Mexico arguably stand out. Although it didn’t make it onto db’s original list, Mexico has good vineyard sites, and a growing domestic market dominated by imported wine.

To establish a successful wine business requires significant capital investment, and a long wait for a return. For a smaller enterprise that might become a family business, this is typically a multi-generational undertaking. So the site chosen and type of wine produced should be a decision that will be sound for many years to come.

In this regard, the spectre of climate change looms. Since wine is inextricably linked to vineyard temperature conditions, the wine world will be turned upside down if predicted temperature increases come to pass. The reputations of existing regions will be challenged.

Not all will be equally affected; the northern hemisphere is likely to be worse than the south, and some places, like South Africa, cannot move much to cooler regions. Others, like Chile and Argentina, can move vineyards south or to higher elevations. And Tasmania and New Zealand, being small islands in the Antarctic current, will experience the least temperature increase of all, as the current will retain their temperature.