Accounting for Growth in the Australian Wine Industry, 1987 to 2003

A computable general equilibrium model of the Australian economy is used to account for the dramatic growth in Australia’s wine industry between 1987 and 1999, and to project grape and wine volumes and prices to 2003. Export demand growth has made a major contribution to total output growth in premium wines, and accounts for most of the increase in the producer price of premium red wine. Domestic consumer preferences have shifted, mainly towards premium red wine, but there is also some evidence of growing demand for premium white wine since the mid 1990s. From the perspective of producers, productivity growth, while being less important than growth in domestic demand, appears to have more than offset the negative effects on suppliers of wine consumer tax increases. From the domestic consumers’ perspective, however, tax hikes have raised retail prices much more than productivity gains have lowered them. The high and sustained levels of profitability resulting from export demand growth have led to a massive supply response in Australia. Even so, by 2003 Australian wine output will still be less than 5 per cent of global production.