21 March 2013

Wine growers bonanza postponed?

The other day, the Lex column in the Financial Times (£) speculated about the consequences of China cutting the import duty it currently imposes on wine (48% by value):
Presumably the Chinese, who currently drink about a bottle per head per year, would not suddenly become Vatican-level topers, who lead the world table at 73 bottles annually, according to data from California’s Wine Institute. Even British (29 bottles) or American (13 bottles) habits would seem a stretch. The Japanese, after all, consume fewer than three bottles a head. Still, even if China started drinking at that rate the country would suck in another 3bn bottles from the international market, or about a sixth of the world’s current production excluding China’s own output, from the 3 per cent it drinks now. And what if mainland China suddenly took to wine like Hong Kong, at nine bottles a head? In that scenario more than a third of the world’s wine supply would be needed.
This argument seems to ignore the fact that the GDP per head in Japan is rather higher than in China at present – according to the IMF US$ 45,870 and US$ 5417 respectively in 2011 according to the IMF. Without getting into the technicalities of this particular statistic and the pitfalls of purchasing power parities etc, it seems reasonable to assume that the majority of adults in Japan who want to drink wine probably can do so, whereas in China many people at present earning about a US$ a day could not afford to open a bottle of wine, even if it were widely available.

In The Times (£) recently, David Miliband, currently exercised about fish stocks and as a former Foreign Secretary having such things at his fingertips, said “there are 300 million people in the middle class in China”. So it seems fairly likely that it is these people, about 25% of the population, who are consuming most of the wine, and at a rate of between four and five bottles a year per middle class head, which is closer to that of their kin in Hong Kong, where they are keener on the stuff than the Japanese.

To explore this argument further I downloaded the data which seems to have underpinned the Lex article, in the form of wine consumption and production statistics for 2010 from the Wine Institute (WI) of California. As far as wine consumption per head is concerned for the countries mentioned by Lex, these figures have been extracted from WI’s Table 7 (adjusting their “Liters” to the equivalent 75cl bottles) and are shown below together with Lex’s interpretation:

However, Lex’s figures regarding China’s consumption under different scenarios (labelled A to C here) are more difficult to reconcile. WI’s Table 3 states that China’s population is 1,338,612,968 and that in 2010 China produced 425 million litres of wine out of a world total of 26,384.872 million litres. On that basis the tables below can be constructed. For both Japan and Hong Kong the WI actual litres consumption figure (B1 and C1) and Lex’s bottles consumption as a rounded figure (B2 and C2) are shown.


Taking Lex’s assertions in turn:

"the 3 per cent it drinks now"
China drinks 3.5% of world production but its imports represent less than 2% (A)

“if China started drinking at [the Japanese] rate the country would suck in another 3bn bottles from the international market, or about a sixth of the world’s current production excluding China’s own output”
At a rounded three (B2 rather than the actual 2.51 at B1) bottles per head China would need to import an extra 2.8 bn bottles (actual 2.1 bn) which would be 10% (actual 8%) of world production excluding China’s own.

“China … like Hong Kong, at nine bottles a head … more than a third of the world’s wine supply”
At the actual 8.63 Hong Kong level (C1) or the rounded nine bottle per head level (C2), China would be consuming close to but less than a third of world production excluding China’s own. Only at the rounded nine bottle per head level (C2) and measured as a percentage of global production including China’s own would the figure exceed 33.3%.

Returning to the point above, if current wine drinking in China is assumed to be confined to the 300 million “middle class”, their per head consumption must be just over three litres per head (D1). If these people moved to actual Hong Kong levels of consumption (D2) just over 8% of external global wine production would be required. If the middle class doubled in size to 600 million and drank wine at the Hong Kong rate (D3), just over a sixth of global wine production would have to be imported.  So the Lex bonanza for wine producers may be a little way off as yet.

As always, there are other factors to be considered. Firstly, Chinese domestic wine production is on an upward trend, growing by over 10 million litres a year between 2007 and 2010 according to the WI. Secondly, however, Chinese wine is being exported and is now available at a price from Berry Brothers and Rudd in London (much in half-bottles!). Thirdly, Chinese investors have been buying out producers in France, (and no doubt elsewhere), as Nick Stephens has been monitoring in his Bordeaux Undiscovered blog.

Chateaux Latour-Laguens purchased by Longhai International in 2008

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