A global macroeconomic perspective on the Australian wine industry

Australia's wine industry is coming out of the bottom of its latest cycle – its 5th since 1850. A key question is; how, and how soon, might producers be able to earn sustainable profits again? This paper briefly examines the anatomy of the latest cycle, which began in the late 1980s. It points to differences as well as similarities with previous cycles. A key feature is the strong export focus of the latest expansion – at a time of rapid globalization of many industries – and then its emulation by other New World wine-producing countries. For nearly two decades the stars were favourably aligned for Australian producers. However, they suddenly became badly misaligned. One major element of the boom and then the crisis was the pattern of movements in real exchange rates. It helps explain the differing phases of the industry's competitiveness in Australia vis-a-vis competitor countries. A model of the world's wine markets is used to show empirically the strength of this influence over recent years. The model also explores prospects for the next five years, focusing in particular on the roles not only of further changes in bilateral exchange rates but also of a return by consumers to higher-quality wine purchases and of continuing rapid growth in wine demand in emerging economies, especially China. The model results reveal how much the recent devaluation of the AUD, if sustained, could benefit Australian winemakers and hence grapegrowers by 2018, and how quickly China could become a major destination for Australian wine exports. Both could boost substantially the profitability of those in the industry that adapt most successfully to those prospective market developments.