A few days after the earthquake, Vinos de Chile (VDC) – Chile’s wine producers’ association representing over 90% of the country’s wineries – stated that damages were kept to a ‘minimum’ and estimated wine losses were at 125m litres, equivalent to $250m.
A further assessment of the industry’s infrastructure increased expected losses to $430m. Damage is uneven across the wineries, but VDC believes that nearly 90% of the industry may overcome the earthquake relatively well.
The Chilean wine industry is mainly focused on export markets, and after the earthquake its capacity to comply with commercial commitments was called into question. Yet, according to wineries, export commitments will not be affected nor interrupted.
Although some of the winemaking infrastructure had been damaged, this year’s harvest is relatively light, and there are enough large wineries with idle capacity that will likely be able to fill the gaps.
In 2009, Chilean wine production reached its highest output in 10 years with 986m litres, up 14% from 2008. The 125m litres of wine lost due to the earthquake in February left Chilean production approximately equal to the previous year, but this is an over-simplified view.
The earthquake’s impact was felt seriously in the 500-kilometre Central Valley, where the country’s wine production takes place. Within this valley, the Maule Valley – which accounts for almost half of all Chilean wine production — was the most affected due to its closeness to the epicentre and the number of warehouses and cellars in this region that are over 100 years old.
The ageing wineries, adobe houses and general infrastructure experienced widespread damage, which accounts for most of the industry’s $430m in losses. Taking into account that the industry exports around $1.4bn a year, the $430m figure is significant, particularly if these losses are concentrated in a relatively small area.
No material losses were recorded in terms of this year’s wine grape production as a result of the earthquake, but it is acknowledged that there is damage to the irrigation systems in the most affected regions. This raises questions about how much additional investment in irrigation will be needed for the next harvest.
In terms of commercialisation, expectations are that export targets will be met. Even though Chile is among the world’s five largest wine exporters, the volume it exports isn’t significant enough to materially impact global prices. However, this year’s lighter harvest could take some pressure off the global wine supply in 2010 and 2011. But for an assessment of the true market impact of the earthquake, more specifics on wine losses are needed.
The harvest in Chile usually takes place between March and early May depending on the location and the varietal. A 15% decrease in wine production is forecast for 2010, compared to the particularly large 2009 crop. However, this decline was driven by weather conditions (spring freezes and a cooler summer), not the earthquake.
In general, the decline in production for this vintage will bring about high-quality wines as well as higher grape prices. There are two earthquake effects that could adversely impact this year’s wine grape production, bringing extra costs to vine growers: irrigation problems and labour availability.
It has been reported that irrigation systems are undergoing troubles in some of the country’s agricultural sectors due to collapsed canals and damaged irrigation systems at the vineyard level. Accordingly, some vineyards may have experienced irrigation troubles in the days prior to harvest, particularly for white wine grapes, which starts weeks ahead of red wine grapes.
Lack of water can alter the grapes’ characteristics. Different agricultural sources have concern over the lack of day labourers, an evident consequence of the earthquake. Men are tied up in the reconstruction effort, while women that usually work during grape harvest season have to take care of children as school buildings have collapsed. This situation can exert additional cost pressures to the harvest.
The greatest damage to the industry was the loss of 125m litres of wine stocks valued at $250m. Considering that last year the industry exported almost 695m litres valued at $1.4bn, the numbers represent 18% of last year’s total exports.
For a clear insight into what these losses mean for the industry, further information on the wine lost, eg the breakdown between bulk, bottled or ready-to-bottle wines, as well as ageing wine for premium products is necessary, but hasn’t been disclosed. Infrastructure – cellars, tanks, stainless steel vats and oak barrels – also suffered material damage from the earthquake.
The industry estimates infrastructure losses at $160m, plus an additional $20m in oak barrels. Although there are some winemakers that don’t have earthquake insurance, it’s estimated that insurance will cover nearly 90% of the industry losses.
The industry is optimistic about the likelihood that the 2010 harvest will be adequately received, processed and stored by the wineries. While the production capacity of many wineries was severely impaired, there are enough wineries with idled capacity to fill the gap.
No particular disruptions or troubles have been reported in the distribution process. However, the damage to the road infrastructure presents some increases in transport costs, largely due to the increased distances and/or longer time required to cover most of the routes.
A general view of the Chilean wine industry indicates that, in addition to the preliminary estimates of $430m in losses, the industry could undergo some deterioration of competitiveness resulting from increased costs. Additionally, capital expenditures will be required to get the industry completely back on its feet and the willingness of winery owners to put in additional resources will soon be tested.
Yet, the industry as a whole seems optimistic and firm in its decision to continue on the road to strengthening its presence in world markets.
Source: Rabobank
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