The U.S. Wine Market in 2030 and Export/Import Market Dynamics

James Lapsley, Ph.D. Researcher, Agricultural Issues Center

Adjunct Associate Professor, Viticulture and Enology, UC Davis

Topics to Cover

Demand for wine in 2030 Population growth and possible per capita

consumption changes Where will the grape supply come from? Planting dynamics in District 13 Understanding the effect of “Drawback” History and effect on bulk wine shipments Can Winegrapes Compete with Almonds?

U.S. Population Projections Millions of People

2010 2020 2030 Increase

“White” 231 255.3 267.6 36.6

Black 42 44.8 49.2 7.2

Asian 17.3 18.8 22.8 5.5

Other/Mixed 18.4 15 18.9 .5

Total Population 308.7 333.9 358.5 49.8

“Hispanic” 50.4 63 78.6 28.2

Over 20 years 224.6 249.3 269.5 44.9

Source: U.S. Census Projections

Two Straight Line Projections Total U.S. population is expected to grow from

308.7 million in 2010 to 358.5 million in 2030—a 16% increase. Table wine sales in 2010 were 278 million cases. A 16% increase would mean 322 million cases in 2030

Total adult population is expected to grow from 222 million to 269 million—a 20% increase. That projects to 333 million cases in 2030

Adults and Per Capita Consumption, 1970-2012

134

147 154 164 173

182 194

211 222 228

1.05

1.78

2.58 2.29

1.98 2.13

2.48 2.81

2.98 3.08

1

2

3

4

5

50

100

150

200

25019

70

1975

1980

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2012

Per C

apita

Con

sum

ptio

n (g

allo

ns)

Adul

ts (m

illio

ns)

AdultsPer Capita Consumption

2010 Wine Market Council Study

Abstainer 40%

Core 21%

Marginal 14%

Beer/Spirits 25%

Percent Adult Population

Marginal consumers drink less than 1 glass a week, although they say they enjoy wine . They drank the other 9%

Core Consumers enjoy at least one glass of wine a week or more. At 21% of the adult population in 2010 they numbered about 47 million and they consumed 91% of all table wine—averaging 70 liters per person

Source: Wine Market Council

Percent Adult Abstainers by Country, 2004

0

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40G

erm

any

Fran

ce

U.K

.

Japa

n

Arge

ntin

a

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da U.S

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% A

dult

Abst

aine

rs

Source: WHO Global Status Report on Alcohol 2004

Hispanics account for 58% of the increase in population

In 2010, Core Hispanic consumers were 3% of their ethnic group.

A 2005 study showed 23% of Hispanics drank some wine, lower than the general market

But Hispanics under 40 years old drank one more glass a month than did the general market.

Acculturated Hispanics drank more wine than their cohort

Hispanics have lower levels of abstaining than the general population

Source: Wine Market Council Private Study

What if by 2030???

Hispanics adopt wine as they acculturate? Abstention decreases from 40% to 25% of adult

population? Wine consumption increases from 35% to 50%

of adults and Core Consumers grow from 21% to 30% of adults??

Core Consumers increase from 44 million to 81 million and continue at 70 liters?

Adults and Per Capita Consumption, 1970-2030

134 147 154

164 173

182 194

211 222

239 249

260 270

1.05

1.78

2.58 2.29

1.98 2.13 2.48

2.81 2.98

3.56 3.8

4 4.2

1

2

3

4

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6

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100

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30019

70

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Per C

apita

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n (g

allo

ns)

Adul

ts (m

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ns)

AdultsPer Capita Consumption

Well, if that happens. . .

Table wine consumption would increase by 50% to about 430 million cases

We would need about 360 million gallons of wine more than in 2010

Which at 170 gallons/ton comes to 2.1 million tons of grapes

Where will the wine come from? Imports or Domestic production? Both?

Percent Winegrapes Crushed 2012

District 11 19%

District 12 9%

District 13 30% District 14

8%

All Other Districts

34%

The San Joaquin Valley is VERY important in supplying wine grapes

Central Valley Supply

Let’s assume that California maintains its current 61% share of U.S. Market. 360 million gallons x .61 = 220 million gallons

Let’s further assume that 40% will retail under $6 a bottle and will come from the lower Central Valley. 220 x.4 = 88 million gallons

This requires about 515,000 tons, which at 15 tons/acre requires 34,333 acres

Since 2001, District 13 acreage has declined by 21,000 acres.

District 13 Bearing Acres Have Declined by 21% in 12 Years

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20

40

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10020

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Bear

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Acre

s (th

ousa

nds)

But yields have grown from 10-12 tons/acre to 14-15 tons/acre

Wineries have met demand by importing inexpensive bulk wine

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Bulk Wine Imports and Price per Liter

Bulk ImportsPrice per Liter

Volume of U.S bulk wine imports by origin, 2009-2012

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Argentina Australia Chile France &Italy

World

Lite

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2009 2010 2011 2012

Much Exported Wine is Shipped in Bulk

Argentina 45

Australia 53 Chile 37 France 20 Italy 31 Spain 51 U.S. 43

Flexitank in Shipping Container

Percent 2012 Wine Shipped in Bulk

Source: OIV 2013

Bulk Wine Percentage of All U.S. Wine Imports, 2000-2012

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3520

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Win

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of T

otal

Win

e

Annual unit value of U.S. bulk wine imports and exports, 2007-2012

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Imports Exports

Bulk Shipments Are Not Inexpensive

A container can handle about 5500 gallons (weight issues on roads)

$400-450 for the bag Freight Chile to Oakland? About $1800 Freight Adelaide to Oakland? Maybe $2200 Between $0.40-$0.50 a gallon plus hauling from

the port for wine valued at less than $4 gallon

So what is a “Drawback”?

A return of paid duties and taxes (“drawback”) when an imported good is exported

Dates back to 1789 in the U.S. Allows for “substitution” of “commercially

interchangeable goods” i.e. the exporter need not export the originally imported goods on which duty and tax was paid IF the government determines the goods are “commercially interchangeable”

What does this have to do with wine?

In 2001 a California winery received a “predetermination letter” from Customs and Border Protection defining table wines of the same color and within 50% of value to be “commercially interchangeable”

Similar letters were issued to other major wineries and drawbacks on duties paid on imported wine were claimed when wine was exported

Defined in 2008 Farm Bill

In 2007 CBP moved to withdraw the letters of predetermination

In May of 2008, wine interchangeablity was written into the Farm Bill

“wine of the same color having a price variation not to exceed 50 percent between the

imported wine and the exported wine shall be deemed to be commercially

Interchangeable”

Why is this important?

It encourages trade by reducing costs Duties and excise tax come to about $0.3457/L

for bottled wine and $0.4227/L for bulk wine In 2010 firms received $23 million in drawback

for bottled wine and $47 million for bulk wine As a percent of value, drawback is much more

important for inexpensive bulk wine and may equal 40-50% of the value

Excise tax and import duty rates in 2011

Two liters or less

(bottled)

Over two liters but not over

four liters

Over four liters, MFN

(bulk)

Over four liters, Chile or Australia

(bulk) ($/liter)

Import duty rate 0.063 0.084 0.14 0.037

Excise tax 0.2827 0.2827 0.2827 0.2827

Total 0.3457 0.3667 0.4227 0.3197

U.S. bulk wine imports and exports, 2000-2012

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Import Export

Drawback encourages both imports AND exports

10

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35

40

2000 2002 2004 2006 2008 2010 2012

Percent Imports by Volume U.S. Sales California Exports as Percent of Production

% Imports % Exports

Friendly Competition?

District 13 Bearing Acres

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0102030405060708090

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Bear

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Bearing Acres$/Ton

World map weighted by GDP in 1960

World map weighted by estimated GDP in 2015

Average Gross Revenue Per Acre District 13 Winegrapes vs. Fresno Almonds

1,000

2,000

3,000

4,000

5,000

6,00020

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Dolla

rs p

er A

cre

WinegrapesAlmonds

Source: County Ag Commissioner Reports and Crush Reports

Real Gross Domestic Product (GDP), with projections

$0

$10

$20

$30

$40

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$70

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$10019

80

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$ tril

lions

World

Developed economies less USA

United States

Developing economies

The World Matters for Both Almonds and Wine

Almonds Wine

% World Production 80 7

% California Production Exported 70 17

% of World Shipments 90 4

California seems to have a natural advantage with almonds over other growing regions: Better (more reliable) weather at bloom, dry summers, and generally available water.

Increasing incomes in developing worlds have led to increased consumption of “portable protein”

No religious prohibitions against almond consumption.

Total California Shipments (Domestic and Export)

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500

1,000

1,500

2,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Gal

lons

or P

ound

s (m

illio

ns)

Almonds Wine

The future of Winegrapes in districts 13 and 14?

With average yields of 14-15 tons/acre, the region is very productive but is in competition with other bulk wine producing regions of the world.

Of the 105,000 acres currently planted in districts 13 and 14, 90,000 are over 10 years old and will probably be pulled by 2030.

Will those acres be replanted and another 35,000 added to meet my projected increased demand—or will wineries meet demand by importing bulk wine?

Replanting is probable only if major wineries commit to long-term contracts and if California winegrapes can compete with other perennial crops.

Growers have alternative crops Sale Pistachio Almond Wine Grapes Walnuts

Production 3,500 3,500 12 6,000Price $1.97 $1.82 $400.00 $1.15Total Income $6,895 $6,370 $4,880 $6,900

Cultural Costs $1,680 $2,140 $1,132 $1,186Overhead Costs $504 $330 $410 $325Harvest Costs $389 $500 $483 $864Total Expenses $2,573 $2,970 $2,025 $2,375

Planted Acres 112.85 56.71 125 77Income per Acre $6,895 $6,370 $4,880 $6,900Expenses per Acre $2,573 $2,970 $2,025 $2,375Net Income per Acre $4,322 $3,400 $2,855 $4,525Sale Price per Acre $32,742 $24,000 $22,558 $35,396Capitalization Rate 13.20% 14.17% 12.66% 12.78%

Source: Correia-Xavier, inc.

Fresno County Harvested Acres

60

80

100

120

140

160

2001 2003 2005 2007 2009 2011

Harv

este

d Ac

res (

thou

sand

s)

Winegrapes

Almonds

Source: Fresno County Ag. Commissioner Reports

Conclusion?

San Joaquin winegrape growers are excellent farmers.

They probably can out compete foreign producers in the long run

But can winegrapes compete with other crops? It seems likely that U.S. wine consumption will

increase by 50% and that by 2030 much of the wine consumed will be foreign.