Synopsis – “The Wine Shortage vs. Wine Surplus” Debates

The wine industry’s been abuzz with counter-arguments to last month’s Morgan Stanley report on pending wine shortages.  In summarizing the opposing views for the speech I gave on Friday (Global Wine Supply – Surplus or Shortage?) it seems fair to summarize the arguments as follows:

  1. Morgan Stanley focuses on several long-term trends which indicate a shortage with little near-term relief possible
    • Rapidly expanding demand in China
    • Moderately expanding demand in U.S.
    • Reduced area under vine, globally
    • Depleted stocks, worldwide
  2. Opponents point out the potential bias of the report
    • Morgan Stanley benefits from a rush to purchase, as they have the struggling Treasury Wine Estates on their “buy” list
    • Treasury just wrote off tens of millions of dollars (USD) worth of wine, dumped due to inability to sell it prior to spoilage date
    • Other analyst groups calling for Treasury to sell its primary US holding – Beringer Brothers
    • Were Treasury to sell Beringer, it would benefit from a perceived shortage
    • “We’ve seen this cycle before” – An artificial shortage was predicted in the 1990’s, resulting in a flurry of purchases, an over-supply, and a crash.
    • Most of the reduction in area under vines was in France and Italy, where consumption is decreasing due to EU regulations on alcoholic beverages
    • China’s growth in demand was dealt a blow by recent laws that regulate gifting.  This will impact the higher end.
    • If China is to continue the rising demand for low-end wines, they will have to continue economic growth at the same rate as seen for the past decade.  China’s growth has been slowing as of late, and there are concerns about a real estate bubble.

So it seems Morgan Stanley may have a conflict of interest, and the vocal “anti-shortage” writers have the upper hand.  

WSJ graphic - Wine Consumption by price pointBut the Morgan Stanley report is also based on some valid long-term trends.  For example, I’ve seen no accounting for the impact of rising water prices on vineyards.  And globally, water is becoming a commodity over which battle will be done.  It seems clear that agriculture won’t be getting the same cheap water that justified the cost of many water-intensive crops.  For example, recent press covered growers in California’s Central Valley pulling out substantial vineyard acreage for this very reason, and the Central Valley is one of the state’s primary sources of inexpensive wine grapes destined for wines under $11 (73% of the market – See WSJ graphic from IRI data, right.)

So, over the long term, and perhaps not in time for Treasury to sell Beringer for a premium, it seems the Morgan Stanley report might prove to be wise investment advice.  But as with most things these days, much depends on China.