Positive 2018 vintages look set to put Chile and Argentina back on the front foot
By Richard Siddle
Sorry to do this to you but analysing the vintage and harvest details emerging from Chile and Argentina has left one particular song going round and round my head. You know the one: “I can see clearly now the rain has gone...”
For as we enter mid-April a better picture is finally emerging about what sort of global harvest we are going to have in 2018. There is quite understandably even greater scrutiny than normal by world wine buyers as they anxiously read through every pronouncement from producers across the southern hemisphere in the hope this year’s picture is so much better than last year.
The impact of what is claimed to be the worst global harvest in 2017 since 1961 (OIV) is being very much felt now as buyers struggle to find enough wine, at the right place from key wine producing countries.
Which is why the picture emerging from Chile and Argentina should start to ease minds a little that there is good news ahead.
Both countries are confident their 2018 vintage levels are going to be back to normal after two years of smaller harvests that have impacted not only availability, but much higher than average price points of what traditionally have been attractive markets for bulk wine buyers in particular.
Now whether bigger volumes to buy will necessarily mean a weakening of prices remains to be seen. Clearly there is a level at which the international markets won’t go, but equally the negotiating position of both Chile and Argentina has changed considerably on the back of the two bad vintages.
What do we know so far?
First up Chile and whilst the signs are positive, at least in terms of volume, it is also a very volatile situation with VINEX’s own regional manager for South America, Julian Grubb describing Chile as a “fascinating vintage” with “views on quality and quantity changing almost weekly”.
But the top line, says Grubb, is for an overall harvest of around 1.15bn litres, around the long term average, and what was expected before vintage. White wines are set to be up 25% up on 2017, or approximately 50m additional litres.
The harvest is later than last year, by at least two weeks and is approximately 10 days behind what you can call an average year. So there is still half the crop still to be picked.
As Grubb says: “Ripening has been extremely slow, and larger cellars are harvesting at low brix levels for logistic reasons.”
So there are some questions about the quality and styles of all the wine to be produced this year with a lot of regional differences. As temperatures have been lower this year, producers are struggling to achieve full ripeness with lower alcohol levels expected. That said the overall mood is that quality will be very good.
Some producers have also had to deal with bigger insect problems than in the past with Oidium and Lobesia Botrana (European Grapevine Moth) causing “severe problems in some areas”, confirmed Grrubb. “But it is unclear how much they have affected volumes,” he added.
“Chaptalisation with juice concentrate is necessary across the Central Region, which may push up bulk wine COGS slightly.”
Grubb also reports “malic acid levels are high across the board, so we will see fresh clean whites, and potentially slower MLF in reds, with high levels of acid dropout and late adjustments necessary”.
Price wise Chile is in a much stronger position that Argentina, says Grubb. He believes Chilean grape “prices will stabilise and soften slightly, but not drop drastically”. There is also now a healthy domestic market for Chilean wine which will keep prices robust.
He explains: “The markets cannot accept prices over $1.10 for Central Valley Cabernet. My view is that prices will settle at around $0.95 - $1.00. We are unlikely to see this cycle return to prices around the $0.50 mark, which we saw in 2015, in the near future.”
Grubb says Chilean producers are also now starting to change prices to reflect the fact the US dollar has softened against the Chilean peso by 15% over the last 18 months, “making export dollars less valuable”. “Producers are slow to adjust prices to reflect FX changes, but we are seeing evidence of this now. Currently the USD buys $600 CLP, there are indications that it may drop as low as $550, and the Chilean Central Bank may step in and purchase dollars to prop up the rate, but only if it falls below this level,” adds Grubb.
The change in Chile’s government has also come at a good time and “lifted the mood enormously for business,” says Grubb. “The corporation tax rate escalator has been halted and drastic labour and tax reforms have been put on hold. The copper price, on which the entire Chilean economy depends, has come out of three years of doldrums and is currently at $3.10/lb, after hitting a low of $1.90 in late 2015.”
Argentina on course for “excellent” vintage
The situation in Argentina is a lot more settled - and positive with both quality and quantity expected to be first class.
The headline figure being swapped around puts the 2018 vintage at around 2.3 million tonnes, which is at the higher end of forecasts, but also below any sort of record figures.
It will, though, be large enough for the Argentine wine industry to press a very large re-set button and get back to building on the gains it had been making in key international markets before poor harvests put it on the back foot after what Grubb describes as “two terrible vintages”.
What is particularly encouraging for Argentina is that volumes appear strong at all price levels and there is expected to be good volumes and opportunities for buyers looking for generic reds and whites. Buyers who move first will clearly be better placed to take their pick.
The styles of wine being produced might also suit export markets with lower alcohols due to slow ripening of around 13-14% and producers reporting excellent fruit quality, ripeness and maturity.
The situation in pricing is less clear as Argentina is not used to being able to demand such high prices for its grapes. But Grubb thinks the market conditions will mean “prices will continue to soften” particularly as Argentina’s currency is losing out against the American dollar and currently sits at around $1 to AR$20 (compared to AR$16.5 a year ago). “This is making exports more attractive and opening up opportunities,” he says.
“The AR$ is likely to continue to weaken against the USD, making export prices more attractive. Domestic demand is in long term decline and accelerating due to lack of disposable income for wine. Malbec dropped below $1.50/l in January, and is now trading at $1.20-1.40, although FOB costs and CCT into the EU still make it unattractive compared to Chile.”
Buyers can expect to see better prices for key varieties, particularly Malbec, Syrah and Cabernet.
But we can expect volumes to be high enough for Argentina re-enter the bulk wine market again and is unlikely to re-visit last year’s situation where, says Grubb, it “had to import 80 million litres of generic bulk from Chile to satisfy domestic demand”.
Grubb says the position on the ground is one of realism as well amongst producers. “Spot prices for non contracted grapes have levelled off as wineries realise that prices were unrealistic,” he says.
It is also interesting to note how dismissive Grubb is of the much touted “long-term partnership” agreements that are being built up to guard against bad future harvests. His experience is somewhat different: “Producers and buyers always like to talk about long term partnerships, but the reality is that they don’t exist. Very few long term contracts exist, and the partnerships that are enduring are normally on a handshake basis.”
Looking further ahead Grubb believes prices for 2019 “will almost undoubtedly be significantly softer than 2018, but depend somewhat on vintage conditions in the rest of the world”.
Argentina will also continue to benefit from a more open government and the fact restrictions have been removed on its currency and it can compete more effectively on the international stage. “Draconian import (and export) restrictions have been lifted, and so wineries and other industries are able to trade freely once again,” says Grubb.
All in all a much happier place to be and buy wine from than 12 months ago. We’ll just have to see how much brighter and sunnier, as the song goes (thanks Jimmy Cliff), the final market conditions actually are.