Changing exchange rate costs wine industry millions

Feb 15, 2012

 The wine industry is losing $80 million a year in exchange rate fluctuations, prompting an industry spokesman to call for "sensible monetary policy".

A strategic review of the $1.1 billion wine industry by PriceWaterhouseCoopers said exchange rate changes since 2007 were robbing the sector of tens of millions of dollars annually.

New Zealand Winegrowers chair Stuart Smith said exporters had watched as relatively high interest rates here pushed up the value of the Kiwi dollar.

He was not advocating currency intervention, but "what the Reserve Bank could and should do is to discourage offshore borrowing. And they could do that by lowering the base OCR rate, because it's not effective. Or if they believe it is effective, they could leave it where it is and put a tariff on offshore deposits".

Such a strategy would help the currency to settle at its true worth, "not this artificial level, which it is at the moment".

While the wine industry can do little to address the exchange rate, growers say all the signs are pointing to a shortage of wine, which could well increase returns.

Export volumes of 2011 sauvignon blanc to December are 45 per cent ahead of the previous year, even though it was a bigger than usual vintage, and stocks may well run out. At the same time, the coldest December in Marlborough for five years has delayed flowering for this year's harvest.

Smith said while that would not affect the 2012 yield greatly, the following harvest could be a different story.

"The heat at this time of the year ... determines the productivity of the shoots for next vintage. Given that we've had cool weather through this period, I think it doesn't augur that well for the next vintage."

A shortage could also curb the growing "bulk wine" sector, which relies on cheap grapes.

A surplus in 2008 saw bulk wine volumes jump from 5 per cent to nearly a third of all wine exports.

Many winegrowers blamed the cheaper wine for dragging down the price of top New Zealand brands overseas. However, the PWC report dispelled that theory, showing that while bulk prices had fallen, exports of top wine had grown strongly.

Premium wine exports grew 53 per cent by volume and almost 43 per cent by value between 2007 and 2011, and after exchange rate adjustments, the price per litre remained relatively consistent.

"More NZ Wine Inc participants would have suffered greater financial distress sooner had bulk not acted as a safety valve to clear the industry's inherent agribusiness risk," the authors added.

Smith said the report had shown bulk wine was a legitimate segment of the industry and could easily disappear again in a shortage.