China: Wine customer or competitor?
Issue Date: January 25, 2006
Opportunities will develop over time for California wine sales in China.
By Shirley Kirkpatrick
San Joaquin Valley winegrape growers will continue to operate with a number of challenges in the future, including sales, profitability and product differentiation.
But competition from China is not one of those challenges, according to Daniel Sumner, director of the Agricultural Issues Center at University of California, Davis, and his colleague Scott Rozelle, who have been researching the Chinese agricultural situation for the last 10 years. Sumner said he sees more promise that China will become a customer of California wines rather than an exporter.
Sumner and other experts discussed China, export markets and Central California's future at a grape symposium in Fresno last month under the theme topic: "SJV Potential: The Global Market." More than 150 people took part in the event, presented by the Central California Winegrowers, the California Association of Winegrape Growers and the Wine Industry Symposium Group.
Sumner and Joe Rollo, director of the International Department of the California Wine Institute, agreed that it will take a long time to woo the Chinese to become consumers.
Sumner said the country is still locked into the "food security" mindset of the Han Dynasty in 110 B.C. when its leaders put the concept into words: "when the granaries are full the emperor can rest."
He explained, "The country cannot produce all its own food and the government is focusing on a new grain subsidy program larger than those in Europe, France and India. If it succeeds, it will slow down horticultural production, the preferred crops of many small-scale farmers.
"Chinese wine is not very good," Sumner admitted, "but only half the stores carry foreign wines. California wine is only about 8 percent of the 21 percent of foreign wines in stores that have it all."
Rollo said 85 percent of wines being consumed around the world are sold at about $7 per bottle. The French, he said, are bemoaning reduced consumption figures due to changing lifestyles in that country. Gone are the days of drinking wine with all meals and taking a nap after the large midday repast. Younger people are working in cities, he said. They exercise, drink water with lunch and are not afraid to drink imported wines, looking for new experiences.
These trends, along with the weakened U.S. dollar, have helped American wine exports, said Rollo. The Wine Institute's consumer surveys in foreign countries show increased awareness of California wines 88 percent of respondents knowing that California produces wine, which is a 3 percent increase over last year.
In the same survey, 84 percent said they had tried California wine, compared to 75 percent when the research started eight years ago. The survey is conducted by telephone with 300 to 400 people per country in the United Kingdom, Germany, France, Canada and Japan.
"While France and Italy still set the gold standard, Australia is coming up quickly with an 85 percent awareness ranking," Rollo added. "They're impressing the world with value, price and recommendations by experts."
In his outlook for the future of San Joaquin Valley wines, Tony Correia, principal in the rural appraisal firm of Correia-Xavier with offices in Fresno and Sonoma counties, said, "Wine sales are continuing at a healthy pace, but there is a huge oversupply worldwide."
He said the Australian "critter market is taking more and more market share," referring to labels, such as Yellow Tail, that are in the below-$10 price range. The marketing of these wines features kangaroos, wallabies, koalas and other pouched animals in their graphics.
As to land values, Correia said the real estate market is beginning to stumble. Fresno County vineyard prices were $2,500 to $5,000 per acre in 1994. This year there were several transactions in the $10,000 to $11,000 per acre range, mostly sold to people seeking 20-acre home sites.
Tracing the history of winemaking in California, Ken McCorkle, senior vice president and manager of the Agricultural Industries Group for Wells Fargo Bank, said Napa Valley and the North Coast have defined the wine industry as a whole by geographic region and varietals.
"San Joaquin Valley was relegated to the low quality producer of coolers and blending wines," he said. "It faces a steep uphill battle for product differentiation."
But he said there are opportunities. Like Rollo, McCorkle said, "The Millenium Generation kids are less intimidated (by wine snobbery) and more willing to experiment."
McCorkle suggested the Valley might adopt the French model of blends by regions. Or wineries might adopt the Beaujolais model with process to differentiate, such as their carbonic maceration that produces drinkable wine two months after crush.
Still, McCorkle doesn't hold much hope for change in Central California. "The wineries are too entrenched as the low-cost producers and entry barriers are too high for new products," he said.
With prospects almost certain, the San Joaquin Valley will remain the low-cost producer where growers face great vulnerability. McCorkle suggests their best strategy is to fit winegrapes into a diversified farming operation and not plant more acreage without a firm contract.
Greg Magill is a broker who buys and sells fruit concentrates, bulk wines and specialty products for the Joseph W. Ciatti Company. He said China, with its large production of apple juice concentrate, lost a lot of credibility this year when it committed to sales of 2.6 million metric tons at $5.65 a gallon, but was only able to deliver 1.4 million metric tons.
"That helps us," he said. "Argentina, with its large crop and large carryover, will go after the Chinese shortage and will not dump its excess into the U.S."
Still, he added, "We have to watch China on the world market with its pear juice concentrate. They've doubled their production of pears."
Magill said we're on the borderline of being competitive with world pricing at prices to the producers of $150 per ton. "We have about a 25-cent per gallon premium that customers are willing to pay because we can ship in a few days, and can guarantee food safety."
Long term, Magill said many of the Central Valley's low-producing vineyards--an estimated 25,000 to 30,000 acres--will be pushed out. He speculates that growers, especially those on the Valley's Westside, will plant the high producing varieties such as Fiesta, which will yield 15 to 20 tons per acre. At those yields and with trellising techniques for mechanical harvesting, Magill feels growers can make money with a $150 per ton contract.
Magill agreed with others that young people between 21 and 35 years of age are setting the pace, especially in Europe and the United Kingdom, toward the easy drinking wines. He characterized these as "fruit forward value wines" with sharp, crisp taste with less tannins and less oak flavor.
Correia and Nat DiBuduo, president of Allied Grape Growers, said the Central Valley's large grape harvest this fall--up 15 to 25 percent--was an aberration that they don't expect in the future.
DiBuduo predicts a continued reduction in vineyard acreage in reaction to the extreme grape gluts and low prices of the mid-1990s. He estimates 50,000 acres of raisin and table grapes have been removed so far and an additional 55,000 acres of winegrapes have been bulldozed.
Future acreage growth, he said, should be minimal and will be managed through planting contracts rather than speculation.
"The raisin market continues to positively adjust in accordance with supply and demand," he said. "Raisin variety growers should plan on stable winery prices as well, as long as they are prepared and willing to make raisins."
On the downside, said DiBuduo, "There has been little to no growth in the $7 and under value wines. This is a concern as imports continue to challenge the San Joaquin Valley."
Bottom-line, DiBuduo concluded, "The value of SJ Valley wines, combined with a lower acreage base, should provide stability to the industry in the future."
(Shirley Kirkpatrick is a reporter in Exeter. She may be contacted at joshkirk@lightspeed.net.)
Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item. Top