by | Mar 1, 2012 | Markets

Are EU CMO reforms shrinking world’s wine lake?

A report from Datamyne’s team in South America

They say that clinking glasses together in a toast lets us enjoy wine with the fifth sense, hearing … since the other four senses are already a part of the tasting.

This Bacchanalian liquid has long been admired. There are records of wine drinking going back to 5400 BC. Grapes are harvested around the world, with some 71% of global vineyard crops used for wine production, 27% for fresh grape consumption, and 2% for raisins.

Wine has been a cornerstone of world trade since the beginning of history. Even so, the grape has surprised us as one of the most important commodities of the past two centuries. The vats of wine labeled as Italian Chianti or Spanish Cava have been joined by new varieties from around the world. The US, South Africa, Chile, Argentina, New Zealand and, most recently, China have created a much more hard-fought-for market.

It is also a market whose equilibrium is at higher risk. As new suppliers entered the market, growth in demand – especially in the leading consumer countries of France and Italy – slowed. In 2004, there was a 60-million-hectoliter surplus in supply. While the new world producers adapted, the old world moved more slowly.

In 2008, the European Union’s Common Market Organization (CMO) for wine reorganized to ensure EU wine production better matched demand and to redirect spending to promote European wines in the global market.

Three years later and the jury is still out on whether the reforms have been effective in reducing surpluses and enabling the sector to bring itself up to date vis-à-vis international competition.

There are now 60 wine-producing countries around the world. Some 40% of wines today are consumed outside of the country in which they are produced. With the entrance of so many new merchants offering wines that enjoy an excellent quality-to-price ratio, a global marketing strategy that bets on the old world cachet of European vintners doesn’t seem like a sure thing.

Another strategy of the CMO for wine has been to have Europe pull up its rootstalks in exchange for subsidies. Spain, France, and Italy have considerably reduced their cultivated areas. Meanwhile Argentina, Chile, and USA held the amount of cultivated land steady, while Brazil, China, and New Zealand expanded their vineyards, partially offsetting the EU cutbacks.

But, as the area devoted to vineyards was reduced in 2010, wine consumption remained flat, and commerce in wine rose. Some 90 million hectoliters of wine were bought and sold in 2010, 6.7% more than in the previous year. While Italy was the biggest exporter, accounting for 22% of the total, the global market has welcomed a diversity of sources.

Again in 2011, European vineyards have seen further decrease. As the grape harvests have been limited as compared to demand for wine, prices for grapes, at least, have increased. At the start of the 2011 season, prices per kilo of grapes were almost double those for the comparable period a year ago, fluctuating by 30 [euro] cents.

The OIV [Organisation Internationale de la Vigne et du Vin – or the International Organization of Vine and Wine] confirms that the amount of land devoted to wine worldwide has indeed continued to shrink, possibly by as much as 60 million hectares last year. However, that shrinkage has not yet had an effect on production, which remained relatively stable, with estimates ranging from 264 to 275 million hectoliters.

The latest forecast (November 2011) from OIV calls for EU production to rise modestly, despite the cutback in vineyards, while production falls in the US, and reaches a record increase of over 15% in Chile. OIV gives two estimates of the 2011 surplus: a low of 12.8 million hectoliters and a high of 39.5 million hectoliters.

A mixed picture, with little clarity yet on how the CMO policies will play out for European producers.

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