Monday, July 9, 2012

China's Taste For Wine

Though not traded on a futures exchange, wine is still, literally anyway, a commodity.  Further, it's a commodity that many people invest in, typically in the form of collectible rare/old wine.  At a party when this ever comes up, usually someone says something like: "over time, rare wine is one of the safest investments when compared to blah blah blah".  There's rarely any data to back this up, but that doesn't matter because it seems believable and it's kind of cool.  Someone should look into that.

But rare wine isn't the order of the day.  No, today I'm interested in exported wine.  Specifically, wine exported to China.  A recent article on (which is a publication I had never heard of until two weeks ago) addresses growing wine consumption in China:
Wine bars and boutiques are sprouting across Beijing, and trendy young consumers are flocking to wine-tastings at swish hotels. A dramatic 54 percent rise in wine consumption in China between 2011 and 2015 is predicted, a reflection of the increasing affluence of China’s middle classes, according to a new study by Vinexpo, Asia’s biggest wine exposition.
Let's leave aside for the moment that this study was conducted by a "wine exposition" (whatever that is) and focus on the purported reasoning behind the growth.  Specifically, that the increase in wine consumption is "a reflection of the increasing affluence of China's middle classes."  The article also goes on to say that 40% of Chinese wine imports are from France, specifically.  Plenty of countries make wine; that the increase in imported varietals seems to be focused on French wine implies not just that an increasingly affluent middle class wants to buy wine, rather, that they want to buy good wine.

Curious about how this trend might affect the American wine market, I pulled some numbers from the USDA Website via the FAS USTrade Query system.  First, a look at total wine exports from the US, by country, over the last ten years (note, all volumes reported in Kiloliters):

US Total Wine Exports by Country, 2002 - 2011 (click to enlarge)
The first takeaway?  Whatever amount of American wine the Chinese are importing now or in the next few years is largely insignificant at this point.  We ship so much wine elsewhere that any changes in Chinese demand for US wine are unlikely to be of major concern for the next few years.  That doesn't make it uninteresting, however.  To get a better idea of the changes in China, specifically, let's take a look at the percentage of total US wine exported to four specific countries over that same time frame:

Percent total wine exports to four countries (click to enlarge)
Okay, now we're getting somewhere.  As a percentage of total wines exported, one can see that the amount of wine we ship to China and Hong Kong has been gradually increasing, while that same total for Japan and France hasn't been following any overt pattern.  Now let's compare the raw totals for the three biggest Asian importers of US wine:
Total imports from Japan, China, and Hong Kong (click to enlarge)
Interesting.  The total amount of wine exported to Japan has more or less been hovering around 25,000 kiloliters, while exports to China and Hong Kong have steadily grown.  But remember, the article tells us that the Chinese are developing a taste for French wine, which, accurate or not, has a reputation for being better than most other countries' wines.  The next question, then, is what type of wine is China importing from the US?  When reporting wine export numbers, the USDA breaks out the figures into six categories:
  1. Sparkling Wine
  2. Effervescent Wine
  3. Grape wine of an alcoholic strength not over 14% in containers holding 2L or less.
  4. Grape wine of an alcoholic strength not over 14% in containers holding more than 2L.
  5. Grape wine of an alcoholic strength of over 14% in containers holding 2L or less.
  6. Grape wine of an alcoholic strength of over 14% in containers holding more than 2L.
I don't know, exactly, what the distinction between sparkling wine and effervescent wine is, but types 3 through 6 could generally be thought of as "standard bottled table wine", "standard boxed table wine", "fortified wine" and "holy hell I have a death wish", respectively.

Standard table wine makes up the bulk of exports to all three of these countries, but here's where things get interesting.  Let's look at how export numbers to Japan, China, and Hong Kong compare when caged specifically to standard table wine:

Standard table wine exports to Asia (click to enlarge)
Interestingly, the China and Hong Kong trends for standard bottled table wine follow pretty closely the general trends for ALL wines exported to those countries, while the Japanese trend looks altogether different.  A little stats shows that this is precisely the case.  Who knew the Japanese had such a taste for Night Train? 
  • R_squared value comparing total global wine exports to standard table wine exports by country:
    • Japan: .1567
    • Hong Kong: .9754
    • China: .9671
That means that ~97% of Hong Kong and China's change in wine importation from the US over the last ten years can be explained in terms of their importation of wine at 14% alcohol in containers smaller than 2L.  That is, standard table wine. 

The article mentions that the majority of wine consumed in China is produced domestically.  What the change in export number then means, really, is not that China is drinking more wine, per se, but that more people are drinking better wine.   To that end, the article's thesis is entirely correct, but not just for French wine, for all high quality wine.  Until Chinese vineyards begin rivaling the quality and consistency of the best vineyards in France, the United States, and elsewhere, as China's citizenry gains spending power in the global economy, look for this trend to continue.

If you were hoping to come away with an investment idea here, you may be out of luck; there is no grape futures contract in existence, but even if there were, it's unlikely investing in such an instrument would be worthwhile.  Grapes aren't the key here, it's craftsmanship, tradition, and quality.  To that end, investors in rare wine may actually see a boon from the growth of wine exports to China.  If demand for quality keeps up, that rising tide should, in theory anyway, boost the values of all high quality bottles.

Normally I'd say something like "it's a good time to own a vineyard in Napa or Bordeaux", but really there's no need to state a priori truths.

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