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

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

3. I
Macro economy

4. 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.

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

6. Rising inequality in the U.S.

7. 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

8. 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

9. II
Supply and demand

10. Estimates of changes in global wine inventories

11. 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

12. US wine imports follow premiumization trends

13. 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

14. III
EU Dynamics

15. 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

16. Brexit is critical for the global wine industry, especially in the EU
UK share of total EU wine exports,
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 13% of all global wine exports
For the EU, the UK 20-25% of all exports
Source: OIV, 2016

17. 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

18. 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

19. IV
Chile & Australia

20. Production trends for Chile and Australia
Production trends (MHL) for Chile and Australia,
Source: OIV, 2016

21. 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

22. Chile moving to oversupply
Chilean vineyard area (hectares),
Chilean wine inventories (Mn Lt) available,
Source: ODEPA, 2016

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

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

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

26. “The financial link in the global food chain”™
Contact Details
Rabobank N.A.
Vernon Crowder
Rabobank, Emeritus
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