European wines under currency pressure

Currency fluctuations around the world add to the pressures faced by winemakers this year

Vineyard work in the spring sunshine brings hopes for better fortune as eurozone wineries feel the sting of currency fluctuation and inflation

Australian wine has hung on to UK and Irish market share this year, though growth has slowed. Sales of US wine have increased, largely due to huge volume sales of Blossom Hill and Gallo, and South Africa is also seeing steady growth. Australian wines are also holding their own in the USA, with several companies, including Yellow Tail producer Casella, having hedged against American currency changes. Several South American producers, especially Argentina, whose currency has fallen against the US$, are seeing a growth spike.

For European wines things are not so rosy. Global Champagne exports flattened during the first three months of 2008, with US sales dropping by 10%. UK sales held, but there are worries that there has been a slippage since April. Sales of Burgundy are believed to be down by at least 2% while Italian producers are reporting serious pressure at the mid market point.

It’s down to the strength of the euro. For most of its life the euro traded against sterling at around €1.47 to the pound. Now a pound is worth €1.24. Not long ago, the US dollar was virtually equal to the euro; it has now seen trading at below 64 cents, though recent recovery may bring relief.

For EU wine producers, the euro rise has combined with a huge increase in transport costs, while the European Central Bank’s interest rate increase has exacerbated difficulties by pushing up credit costs and encouraging the euro to rise further. That’s all the more frustrating as eurozone inflation has been largely fuelled by rising oil prices rather than the usual reasons for increasing interest rates; an overheating economy and cheap money. Salt has been rubbed in the wound by an increase in the UK excise tax on wine. At €1.90 it’s among the highest in Europe.

The response of the drinks trade in the UK and USA has been to try to hold the price of European wines steady, in the hope of a euro fall. However trade experts are predicting that wine prices in the US could rise by 30% during the latter half of 2008. In the UK, prices have already begun to push up. For example, European wines at the well known Majestic chain have risen by around 10% across the board. This is likely to trigger a fall in sales.

The matter is complicated for the Europeans in that many producers set prices with foreign buyers long before wines are dispatched. This means unexpected losses if sterling and dollar payments result in fewer euros than expected. The hope is that a fall in oil prices will push up the dollar and sterling and that the ECB drops interest rates, allowing the euro to soften.

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