Global Economic and Wine Outlook Vernon Crowder Strictly confidential Wine Industry Symposium, March 2017

Table of contents Sections I Macro Economy II General Supply and Demand Trends III EU Dynamics IV Chile & Australia

I Macro economy

Major central banks are still firmly in easing mode RED = negative policy rate YELLOW = policy rate </= 0.75% GREEN = policy rate > 0.75% Although the map might look heavy on green, it is important to note that the majority of countries with policy rates > 0.50% are firmly in easing mode and are CUTTING rates. and now approximately 1/3 of global government debt has a negative yield.

Long-term UST trend still in place…Unless USTs break 3%

Rising inequality in the U.S.

U.S. Economic outlook Year (“in”) Quarterly 2016 2017 2018 Q3/16 Q4/16 GDP 1.6 2.4 2.9 3.5 1.9 1.7 2.7 Consumption 2.6 3.0 2.5 2.1 Business Inv. -0.4 3.9 4.9 1.4 3.7 5.9 Residential Inv. 5.4 7.8 -4.1 10.2 8.0 6.6 Trade -0.1 -0.3 0.9 -1.7 Inventories 0.1 0.5 1.0 CPI 1.3 Unemp. Rate 4.6 4.4

U.S. Rate outlook USD March 2017 +3m +6m +12M Fed Funds 0.75 1.0 1.25 3m $libor 1.10 1.19 1.44 2Y swaps 1.64 1.55 1.50 1.60 5Y swaps 2.11 2.00 1.90 1.75 10Y swaps 2.44 2.45 2.35 2.15 30Y swaps 2.68 2.70 2.60 2.30

II Supply and demand

Estimates of changes in global wine inventories

Wine consumption change 2010 vs. 2015 Consumption decline in traditional wine countries in southern Europe -2.2 France -0.2 Germany -3 Russia -3.7 Italy -0.2 UK USA +3.4 -0.8 Spain +0.9 China Consumption increase driven by rising disposable income and drinking culture shifts mn hl Source: OIV, HM Revenue & Customs, 2016

US wine imports follow premiumization trends

Which supply/demand dynamics matter to California? Volume share of imports by source Combined, Italy, France, Australia and Chile make up 65% of import volumes, and 72% of the value Italy and France skew heavily towards bottled premium wines, while Chile and Australia compete at the lower end of the market Aus compete in commodity chardonnay, and Chile is the supplier for Cab Source: Gomberg-Fredrikson, 2016

III EU Dynamics

Production trends (MHL) for key European countries, 2001-2016 Italy generally declining, but 2016 was a good year for production French production relatively stable since mid 2000’s Spanish production trending up, in spite of massive vineyard removals, because of infrastructure investment This is generic wine, that doesn’t compete in the US and is somewhat irrelevant, but creates some tension in EU Spanish generic is replacing French and Italian generic For what matters to California, EU PRODUCTION trends are fairly stable *2016 data is forecasted Source: OIV, 2016

Brexit is critical for the global wine industry, especially in the EU UK share of total EU wine exports, 2010-2015 UK is the second largest wine importer in the world Given that Germany is a bottling hub, and much is re-exported, UK is really probably #1 The UK imports is the destination for @ 13% of all global wine exports For the EU, the UK represents @ 20-25% of all exports Source: OIV, 2016

Brexit, FX and the impact on California Change in revenue for an EU supplier selling wine for EUR 50/case in the US and in UK in 2014 & 2017, based on current exchange rates Hard to say exactly what the impact of Brexit will be in the long term trade status, but all risks are to the downside In the immediate term, Brexit has a direct impact on trade in terms of FX… especially when now comparing profitability of the UK to the US market If an EU supplier was selling in both the UK and the US in 2014, and was receiving EUR50/ case in both markets, today, based purely on exchange rate shifts, he is now making over EUR63 on the same case of wine in the US, and only EUR46 in the UK.   EUR-USD EUR-GBP Jun-14 1.36 0.799 Jan-17 1.07 0.859

EU wine marketing subsidies increasing EU budget (Mn euros) for wine marketing and promotion subsidies The EU has now increased the sum available for promoting wine over the period 2014 to 2018 by 121 per cent to €1.15bn

IV Chile & Australia

Production trends for Chile and Australia Production trends (MHL) for Chile and Australia, 2001-2016 Source: OIV, 2016

Chile & Australia FTA with China China’s Free Trade Agreement came into effect with Chile in 2006 and with Australia in 2015. China is becoming a solution for Australia, where Aus wines fetch attractive prices Chile is also growing in China, but still has structural oversupply

Chile moving to oversupply Chilean vineyard area (hectares), 2007-2015 Chilean wine inventories (Mn Lt) available, 2010- 2015 Source: ODEPA, 2016

Grape pricing and bulk exports affected by oversupply in Chile Grape price (CLP/Kg) of high quality cabernet sauvignon, 2013-2015 Chilean wine exports (Mn lt) by format, 2012- 2015 Source: ODEPA, 2016

US imports of Chilean bulk rising, Australian declining US imports (‘000 cases) of Chilean and Aus. bulk, 2010-2016* Source: Gomberg-Fredrikson, 2016 * For the period YTD Sept.

Exchange rates could make Chile very competitive in 2017 USD/AUD and USD/CLP, historical and forecast Source: Bloomberg, Rabobank, 2017.

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