01 June 2017
Is it time to stockpile wine?
Brexit could make wine drinking an expensive pursuit.
by Frank O’Nomics
I may have found my dream job. With the current trend in longevity, poor pensions and technologically driven obsolescence of many professions, many of us will need to consider second or even third careers. It was not surprising then that my attention was grabbed by a piece of research written by Kym Anderson of the Wine Economics Research Centre at the University of Adelaide. Quite apart from giving food for thought about the post-Brexit outlook for wine prices, it set me wondering as to whether Mr Anderson needs an assistant. However, given that that is not an option (for now), I should perhaps focus on the research content and the rather alarming price forecasts that Mr Anderson and Glyn Witter have produced for the UK Trade Policy Observatory. If their main scenario, of prices in 2025 being 22% higher in local terms than they would otherwise have been without Brexit, then it may be time to start filling the cellar.
Two factors are cited as causing this disturbing price escalation. The biggest factor in driving the rise in prices is expected to be the depreciation of sterling. Just this week the fund managers BlueBay announced that they had gone short on the UK currency due to expectations of a hard Brexit. Sterling is already 12% lower against the Euro over the last 12 months and many expect tough negotiations and uncertainty to extend this fall. The other key element in their analysis is the obvious one of tariff changes. The impact of leaving a customs union is that, without other agreements coming into place, tariffs are likely to begin to apply. In the case of wine the natural move might be to shift to buying from countries outside of the EU, but the problem here is that we benefit from tariff free wine from the likes of Chile and South Africa because of free trade agreements that they currently have with the EU – agreements that we will no longer be a party to. The authors of the study assume that we will adopt the EU tariff schedules agreed to at the World Trade Organisation, with preferential agreements outside of this taking a long time to set up.
There are issues with this analysis. Not least in the central assumption that sterling will depreciate. Such a view has prevailed since the Brexit vote but the performance of sterling has been notably strong in recent weeks (until this week’s opinion poll) and cannot be regarded as a one-way bet. The strength and resilience of the UK economy has surprised many and, if sustained, this will not only be supportive for sterling, but will also help counter the risks of declining UK incomes having an impact on the consumption of wine. When one breaks down the report’s analysis, the currency factor accounts for most of the relative price rise – having 5 times the impact of the expected tariff imposition. Take away the currency impact and we have little to worry about.
However, there are other factors that may make the author’s forecasts right if possibly for the wrong reasons. A series of late frosts (the worst for 26 years) has had a serious impact in the Bordeaux region, to the extent that output could be as much as 240 million litres (some 40%) below average. This is expected to put considerable pressure on prices, at least in the near-term.
Whatever the reason for higher prices, is there anything that we can do to mitigate the potential impact? The first might be to develop an affinity for English wines. There are now over 500 vineyards in England with an additional 64 starting trading in the last year alone, and the quality, particularly of sparkling wine, has been getting better – just last year an English wine beat Champagne on a blind tasting and Taittinger are looking to use grapes from Kent in a new product. However, the production of English wine, at just 5 million bottles a year, is dwarfed by that of other nations (Bordeaux alone produces 100 times more) and could never begin to match the nation’s thirst. The other solution is to find some storage space and buy lots of wine before prices rise. Great care is needed here, given that most wines are made to be drunk within a year or two of production and there is no point stockpiling something that will be best sprinkled on some chips in a few years time. The other problem is that the wines that one can buy to keep for longer periods tend to be very expensive – this year’s en primeur claret is very highly rated and comes with a price to match. Historically, investing in wine has been highly lucrative, and there may be a case for buying more than you need, holding it in bond (to avoid paying duty and VAT) and then selling the surplus at a later date, using the profit to subsidise your consumption. A nice idea, but possibly a little risky for most.
There is, it seems, no easy solution, and the likely outcome is a reduction in consumption as people find wine drinking a more expensive pursuit. Anderson and Witter’s main scenario, which also incorporates slower UK income growth as a result of Brexit, sees a reduction in the volume of wine consumed in the UK of 28% – a grim prospect for retailers, restaurants and pubs. We can of course hope that the economic interests of the wine producing nations will hold sway. For seven key wine producing nations the UK accounts for 1/6th of their volume of wine exports and they will not want to see this eroded. In the meantime, there is still that second career to consider.
Now – let me see if I can find my CV and Mr Anderson’s email details…
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