The Sauvignon revolution

[This post was first published in the Fairfax NZ Sunday Star Times on 15 March 2015, and online at  stuff.co.nz,  both with the (inaccurate) Fairfax-chosen title ‘Analysing wine’s cash harvest’.]

Last week I drew attention to the New Zealand Government goal of doubling agri-food exports between 2012 and 2025. I pointed out that our success over the last fifteen years has been fueled by product price increases, and that we cannot rely on the next decade being so fortunate. So how are we going to make the quantum leap that we need?

In recent days I have been in Marlborough, supporting my colleague Marvin Pangborn as he led a group of Lincoln University Diploma in Farm Management students studying land use and land use change. Inevitably our field tour included a focus on the Marlborough wine industry.

If agri-food is defined widely to include wine, then Marlborough wine has certainly been one of the greatest success stories of the last fifteen years. During that time, there has been a 12 fold increase in production. More than 75 percent of New Zealand’s wine now comes from Marlborough, and 86 percent of that is Sauvignon blanc.

The first commercial planting of grapes in Marlborough occurred in 1973 when Montana’s Frank Yukich convinced his board that Marlborough’s climate, with high sunshine hours, dry summers and cool nights, was the best New Zealand climate for wine grapes.

The early years were fraught with problems. Some of these were technical and they were solved over time, largely by trial and error. Other problems were regulatory, and linked to adjacent land uses that were incompatible. Sheep and crop farmers did not want spray-susceptible grapes anywhere near their farms, as this would restrict their weed and pest control practices. So the safest strategy for sheep and cropping farmers was a district ‘no grapes’ policy. Eventually, the economic returns from grapes became too great to ignore.

Then in the mid 1980s, market development lagged production. In 1985, the Government funded a vine removal programme with substantial cash compensation. Growers took this opportunity to pull out the old vines and replace them with better varieties, which was definitely not what the Government intended. However, it did set the foundations for the modern industry.

The industry also suffered considerable financial pain during and consequent to the 2008 global financial crisis, but in the last two to three years the industry has been returning to strong financial health.

Sauvignon blanc is a relatively easy grape to grow and yields are high at about 14 tonnes per hectare. It is also a quick wine to make. This year’s vintage will be harvested in April and it will be in the wine stores and supermarkets by July. This year’s Marlborough Sauvignon Blanc will earn about $400 million at farm gate and over $1 billion in exports.

Marvin Pangborn and I often talk about the industrialisation of agriculture as a global phenomenon. Marvin commented to me that the Sauvignon blanc wine industry provides perhaps the best New Zealand example of this. Processing and marketing is dominated by a small number of overseas companies selling under multiple and often romantic-sounding brands. Romance is the branding image, but underneath it is all about scale of operation and tightly controlled operating procedures.

The vineyards range from a few hectares to over a thousand hectares. The winemakers own some vineyards themselves and have contract arrangements with other growers, who then grow to specifications determined by the wine company. A few brave growers still sell their grapes on the spot market. This can work well, but it needs a strong appetite for risk and volatility.

The remarkable success of Marlborough Sauvignon Blanc is linked to the unique regional brand which in turn relates to the unique climate-drive characteristics of the wine. Other countries can produce Sauvignon blanc wines but generally it sells for lower prices than Marlborough Sauvignon Blanc. From a New Zealand perspective, long may that be the case.

The industrial nature of Sauvignon blanc production contrasts with New Zealand’s other premium wine, Pinot noir. The Pinot grape is harder to grow, yields less, and the wine can also be more troublesome to make. Hence, Pinot noir remains a craft wine rather than an industrial wine.

There are no simple answers as to why Marlborough Sauvignon Blanc has been such a success but in essence it was the confluence of the right variety in the right place at the right time. Wines varieties come in and out of fashion, but Marlborough Sauvignon Blanc has stayed at the forefront.

Also key to the success of Marlborough Sauvignon Blanc has been the initial role of entrepreneurs, followed more recently by the large international wine companies who have invested in Marlborough. Given that these companies control the total value chain through to international markets, it is not possible to know the real profits from their New Zealand operations. This is because of the complexities and opportunities relating to transfer pricing. However, without the overseas capital, it is unlikely the industry would have developed as fast as it has.

The further expansion of Marlborough Sauvignon Blanc is constrained. Currently there are about 23,000 ha of grapes in Marlborough and the best areas are almost fully planted. More importantly, grape growing in Marlborough requires irrigation and in dry seasons there is no more water available. However, there will be some further production increases, largely from young grapes that are not yet in full production.

These limits to growth mean that Marlborough Sauvignon Blanc is unlikely to be the ‘heavy lifter’ that will lead to that doubling of New Zealand’s agri-food exports by 2025. It will need to be other wines from other districts, or else totally different agri-food products. Next week I will talk about one such product that could be a heavy lifter.

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
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