Winemakers warned on returns during global glut

By LIAM DANN

The wine industry is in danger of over-production, a National Bank report warns.

The report says New Zealand production could treble by 2010.

World markets are already struggling to cope with excess supply, and with little chance that the extra production can be soaked up domestically, returns within the industry are likely to fall.

The world market already has an oversupply equivalent to 20 per cent of global sales.

That is expected to get worse with production in South Africa, Chile and Argentina rising rapidly.

The biggest challenge for New Zealand wine makers will be to maintain a place in the higher priced segments of the market in the face of dropping prices.

New Zealand wine is uncompetitive when sold below US$10 - the price point below which most of the world supply trades.

The need to export larger volumes of wine will also make the industry more sensitive to currency fluctuations.

The threat is greatest to those players without established brands and distribution networks, the report says.

The oversupply has coincided with escalating production costs in New Zealand caused by rising land prices.

Established vineyard blocks are selling in Marlborough for about $200,000ha, the report says.

A drop in returns could eventually cause a drop in land value.

But it is not all doom and gloom.

The report notes that some optimists believe New Zealand is not producing enough of some varieties to maintain and build a market presence.

Varieties such as pinot may offer a substantial upside, it says.

The report says: "The extent to which returns in the industry are eroded ultimately depends on the quality of the product and whether New Zealand's offshore brand can be maintained."