Analysis of Australian wine export potentials to Russia.

• Author: Jegasothy, Kandiah

1. INTRODUCTION

   The wine industry is one of the significant players in Australian economy. Wine is the third largest agricultural export earner, after meat and wheat with more than 100 export destinations. Australia is a member of the New World wine producing countries. It is in fact the third largest producer of wine in the group, behind the U.S. and Argentina. In 2008, Australia was the sixth largest wine producer in the world, with 1.3 billion litres which accounts for 5 percent of the world wine production of 27 billion litres.

   In recent years, Australia also experienced noticeable growth in wine exports with the value growth of export exceeding the volume growth. The Australian Wine and Brandy Corporation (AWBC) attribute the rise in value to the increase of the relatively higher-priced bottled wine in export markets. In 2009, Australian wine export volumes reached 764 million litres valued at A$2.3 billion. Whereas the potential of export growth in the short-run is in the mature markets, such as the US and the UK, there are niche market opportunities in emerging markets such as Russia, Eastern Europe and Asia. The objective of this paper is to explore Australian wine export potential to Russia and the factors that are likely to influence the demand for Australian wine in Russia.

   The paper is structured as follows. In Section 2, a review of wine export potential, in general and to Russia is discussed. The specification of the model for Russia's import demand for Australian wine and hypotheses and data are described in Section 3. Section 4 focuses on empirical estimation, econometric procedures and discussion of the results. Section 5 summarises the conclusions and limitations of the study.

2. REVIEW OF WINE EXPORT POTENTIAL TO RUSSIA

   2.1 Australia's Wine Production

   As evident from Chart 1, with a few exceptions, mainly due to unfavourable weather conditions, the wine production in Australia has grown at a significant rate in recent years. The current production is about three times of the volume produced in 1991. Currently, Australia has about 2,300 wineries with around 170 thousand hectares under vine and the total grape crush of just above 1.8 million tonnes (AWBC, 2009).

   Australia is the third largest producer of wine in the group of New World wine producing countries, behind the U.S. and Argentina, followed by South Africa and Chile. After the low harvest in 2007, with a 35 percent increase (341 million litres) in 2008, Australia accounted for over 90 percent of the increase in the wine production for the top five New World countries (AWBC, 2009, p. 45).

   2.1 Wine Exports

   Australian wine industry achieved its high point when it reached export value of $1 billion in 1998-99. The growth continued and in 2007, Australia's wine export reached a record $3 billion mark (Daily Wine News, 8/7/2008). According to the AWBC Annual Report (2008-2009) the leading export destinations by volume are: United Kingdom (UK), where Australia is the market leader, the USA, Canada, Germany and China (see Chart 2). The next three countries with the export volume of around 20 million litres per year are New Zealand, Netherlands and Denmark. The United States is the top export market in terms of value, followed by UK, Canada, China and New Zealand. In 2009, with the value of exports increasing by A$32 million to A$94 million, China climbed three places to become Australia's fourth largest market by value and the fifth market by volume.

   Export value growth exceeded volume growth (See Chart 3). The Australian Wine and Brandy Corporation (AWBC) attribute the rise in value to the increase of the relatively higher-priced bottled wine in export markets. This trend in the wine market was predicted by Anderson et al. (2001) who forecasted a decrease in consumption per capita in traditional wine drinking nations, and the shift by all producing nations away from non-premium wine towards premium wine.

   In 2008, however, exports of Australian produced wine fell 9.2 percent, to 714 million litres (ABS, 2009). This was due to an increase in inventory values by 5 percent.

   The Directions to 2025 (2007) have identified the potential for the Australian wine industry to increase sale in both domestic and export markets. Whereas the potential of export growth in the short-run is in the mature markets, such as the US and the UK, there are niche market opportunities in emerging markets such as Russia, Eastern Europe and Asia.

   Wine Export Potential to Russia

   Prior to 2001, exporting wine to Russia had not been the focus of the industry or government in Australia. Perhaps, Russia was seen as a 'vodka drinking' nation. Exports of all major wine categories to Russia were insignificant in comparison to Australia's major wine export destinations. However, the scope for growth has been declining in developed wine markets such as the UK, Germany and USA, while improving in countries such as Russia, China and South Korea.

   The Russian wine market appears to be one of the most rapidly growing markets in the world. Summary annual data provided by AWBC show that between 1996 and 2006, wine consumption in Russia increased from just above 620 million litres to 1.07 billion litres. According to Austrade (2008) it is forecast to increase to 1.5 billion litres in 2010. Per capita wine consumption rose from 4.2 litres to 7.6 litres. Wine increased its share in the total alcohol consumption from 7.2 percent to 9.7 percent, during that period. With rising disposable income, there has been not only increase in wine consumption but also a shift in wine consumption towards more expensive wines. Andrienko and Nemtsov (2005) pointed out that for a significant segment of the Russian population, increasing incomes allow the substitution of low quality spirits for wine, beer and high quality vodka. Thus, as a producer of...