Global Market Report. September Volume 8, Issue No. 9. Ciatti Global Wine & Grape Brokers

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1 Global Market Report September 2017 Volume 8, Issue No. 9 Ciatti Global Wine & Grape Brokers 1101 Fifth Avenue #170 San Rafael, CA Phone (415) Photo: Ciatti.com Photo: Photo: Ciatti.com Ciatti.com

2 September 2017 Volume 8, Issue No. 9 3 California 5 Argentina 6 Chile 8 France 10 Spain 11 Italy 13 South Africa 14 Australia 15 New Zealand 16 Craft Beer Update 17 John Fearless 18 USD Pricing 20 Contacts Reading online? Use the links above to jump through this document. The 2017 harvests are ongoing in California and Europe and it now looks certain that the respective crops have been to varying extents reduced in size by intense and in some cases unprecedented heat spells. California is well fortified with good water levels following a wet winter and likely still on course for an average-sized crop, at around the 4 million ton mark. France, Spain and Italy, however, have had to cope with the heat amid prolonged drought: the Languedoc could see a harvest 8% smaller than 2016 s, La Mancha anywhere from 11-25% smaller, and Italy as much as 26% smaller. These restricted harvests would follow a 2017 Argentine harvest 25% down on the five-year average, two successive below-average Chilean crops (which, combined, equate to a supply shortfall of 600 million litres), and an averagesized 2017 crop in South Africa. It is hard to see where a meaningful alleviation of the growing pressure on supply will come: 2016 varietal bulk in Spain is running low (and/or at the same price levels as French equivalents); South Africa s supply of 2017 varietals, generic red and rosé is now very tight; Chile s 2017 wines, meanwhile, are close to being sold, and 2018 grapes are already in very strong demand. The international market is thus currently characterised by rising prices. The current Northern Hemisphere harvests would need to be considerable in order for there to be any dampening effects on Chile s prices, for example, especially as Chilean inventory is very low. This month s Chile page probably serves as a salutary tale for bulk wine buyers the world over, currently. Many buyers out of Chile were slow to adjust to the new realities of the market situation both there and internationally, and now must pay prices for wine much higher than they ever comprehended that s if they can first locate the wine in the quantities they need. In short: it can no longer be assumed that buying campaigns will follow the same pattern as those of recent years, in which prices soften through the course of the campaign or at least do not rise meaningfully. The reality of the situation now is that the global market is in supply-demand balance and there is little if any incentive for suppliers not to let prices creep up. Finally, an issue likely to be heard more and more as the Southern Hemisphere s 2018 harvests come round is South Africa s drought. As of 4 September, after the passing of what should have been some of the rainiest weeks of the year in the Western Cape, water levels in Cape Town s catchment dams stood at an aggregate level of 35.1%. For context, the level at the No part of this publication may be reproduced or transmitted in any form by any means without the written permission of Ciatti Company. equivalent stage of 2016 was 60.6%, 73.8% in 2015, and 102.4% in Robert Selby 2

3 California Time on target HARVEST WATCH: Crop impacted by intense heat but average tonnage still expected Some intense and prolonged heat spells in August and early September have served to quicken California s 2017 harvest, bringing the timing of its start into line with previous years and compacting the picking window. Harvest in some areas of the North Coast moved into immediate high gear well ahead of Labor Day on September 4 normally it commences after. The North Coast is approximately 20% through its harvest, the Central Coast 15%, and the Central Valley halfway through. It is expected that the heat including record triple-digit temperatures in northern California over the Labor Day weekend thanks to a high pressure system flowing across from Nevada will impact on California s overall harvest size, though it s unclear to what extent. Very high temperatures have made a lot of grapes ripen quicker and a lot of varieties have been coming into the wineries all at once, potentially placing a strain on logistics and resource allocation. Availability of labor, already a pre-existing issue, has become more problematic because of the compacted schedule. Tank space availability may also become hard to come by, though this could be negated somewhat if the harvest size is reduced. Mildew far less of a problem than the heat levels has been in evidence in the Central Valley and there have been some rejections. Overall, the picture remains mixed and unclear as to percentage reductions on yields in individual areas and on individual varietals: Chardonnay, Pinot Noir and Zinfandel will likely be down in size from last year to varying percentages; Cabernet, more heat-resistant and with a lot of younger vines, is holding up. Ciatti is still of a view that, with new acres coming on line to offset some of the heat s impact, California s 2017 harvest will likely be average-sized, at around 4 million tons. This is perhaps at the lower end of expectations from a few weeks ago, but still in the same ballpark. Up in Washington State, the 2017 crop will be down in size on last year s record, and there have been some disease problems with Riesling. Oregon s crop is looking average-sized. As per usual, the market in California is quieter at this time of year as all eyes turn to the harvest California s but also those in Europe. Ciatti has seen little if any reaction on the Californian wine market to the news that the state s 2017 crop will be slightly smaller than originally expected. Some extra grapes have come onto the market in recent weeks but there has been little buying activity, with some wineries backing off from the need for more fruit, suggesting a balanced supplydemand situation right now. The market may simply be waiting for someone to jump in first, or it may be a manifestation of what some analyst commentary has been recently saying about a slowing of the US wine retail market. For instance, wine banker Rob McMillan, writing for Silicon Valley Bank s wine blog, has written that the growth rate in premium wine sales on the US consumer market has been decelerating since late 2015 and if the trend continues would disappear altogether by mid-2018 or early He notes this dovetails with other stories out there of slowing growth in craft beer sales and a reported slump in restaurant sales for small wineries. At the same time, Ciatti has heard about tougher sales figures experienced by some payers in the first half of the year, understands there has been a decrease in California s case good sales in that time, and is aware that California s bulk export sales are sluggish, hindered by the strong dollar and Brexit. The strong dollar has See next page for more on California. 3

4 in turn made the importing of wine more attractive, as shown by the growth in imports of, for example, Italian sparkling and New Zealand Sauvignon Blanc. So, it may be the case that although less fruit is harvested this year than initially expected, less may be needed anyway, with a few less tons in the Valley less of a concern considering the slowdown in export sales. That said, there remain good news stories out there, and new brands launched in the past year or two are still gaining share, perhaps at the expense of established brands in the same price category. It s a mixed picture at the moment: the supply-demand dynamic will be something to keep an eye on in the coming weeks and months. Key Takeaways Unprecedented heat means harvest 2017 is a race to the finish, placing a strain on logistics and resource allocation. The crop size still looks average, with varietals heat-impacted to varying extents. The market is quiet, as per normal this time of the year. Ciatti Contacts Import/Export CEO Greg Livengood Steve Dorfman T E. greg@ciatti.com E. steve@ciatti.com Domestic T John Ciatti john@ciatti.com Glenn Proctor glenn@ciatti.com John White johnw@ciatti.com Chris Welch chris@ciatti.com California: Current Market Pricing (USD per liter) 2016 Generic White Generic Red Chardonnay /15 Cabernet Sauvignon Pinot Grigio Merlot Muscat Pinot Noir White Zinfandel Syrah Colombard /15 Zinfandel

5 Argentina Time on target HARVEST WATCH: Mendoza s vines are waking up; the frost risk season is underway Argentina is moving into springtime, which officially starts on 21 September. The winter season has progressed normally, with Mendoza currently experiencing a period of cool, sunny days and intermittent hot Sonda winds blowing in from the Andes. The vines are starting to wake up and the frost risk season, now underway, will continue into November. With its high prices, Argentina s bulk wine market is quiet. However, Ciatti is starting to see signs of international business returning to Argentina as the bulk Malbec price gradually softens from its USD2.0/ litre high. The price is trending downward very slowly but surely, and currently stands at around USD1.80/ litre with USD1.70 possible: this is a reduction from USD /litre last month. The trend suggests USD1.50/litre could be possible by the end of 2017, but it depends on how the frost season goes and the impact of any currency devaluation implemented by the government, should one be made. The peso is currently at around to the dollar. Traditionally a non-customer of Chilean bulk wine, Argentina became the second biggest destination behind the US for Chilean bulk in the January-July 2017 period, as the supply Argentina s domestic players secured at the end of 2016/early 2017 began to ship (see the Chile page). Chile s exports to Argentina thus grew 100% in the period to 54.3 million litres, worth USD32.7 million. This knocked China into third place (by both volume and value) as a customer of Chile, showing that proximity can trump trade deals in an emergency. There is increasing evidence that Argentina s economy is moving in the right direction, boosting confidence that the Macri government will come out on top in the country s midterm elections on 22 October. According to Merco Press, Argentina s economy grew a cumulative 1.6% in the first half of 2017 against a 2.2% contraction in Economic activity in June was 4% higher than in the same month of 2016 (powered by construction +13.2%, manufacturing +6.2%, and agriculture +4%), the fourth straight month of year-on-year gains. Confidence in the government and its chances of success in the midterms should serve to strengthen the peso. But the government also needs to make Argentine products more competitive: the country s exporters hope the Macri administration devalues the peso after the midterms if in a position to do so, pushing the exchange rate closer to 20. The country of Argentina s total exports in July reached USD5.2 billion in value, 5.2% up on the same month of Key Takeaways The bulk Malbec price is softening slowly but surely from its USD2/litre high; the price is at USD1.80/litre, with USD1.70/litre a possibility. It is hoped the price will be closer to USD1.50/litre by the end of 2017, depending on the impact of frost from now until the end of November, and any currency devaluation. Ciatti Contact Eduardo Conill T E. eduardo@ciatti.com.ar See next page for more on Argentina. 5

6 Argentina: Current Market Pricing (USD per liter; FCA Winery) 2016 Generic White Generic Red Chardonnay Cabernet Sauvignon Muscat Syrah / Merlot Torrontes Malbec Entry-Level Bonarda Malbec Premium Chile Time on target HARVEST WATCH: Variable winter/early spring weather; frost season underway The market situation in Chile is clear: 2017 wines are high in price, appreciating week-on-week, and close to being sold out; 2018 grapes are in very strong demand and wine prices at the start of the 2018 wine buying campaign will be higher than they were at the start of 2017 s. Buyers who held off and waited are now finding that most 2017 wines in the quantities they need are very difficult to come by, while prices are certainly above what they d like. In general, 2017 varietal bulk Chardonnay, Carmenere and Pinot Noir are sold out, while Malbec is close to being so. This situation is the result of two successive belowaverage harvests in Chile combined with the present, ongoing international situation of high prices and tighter supply. If the average harvest size in Chile is now 1.3 billion litres, 2016 s harvest came in 250 million litres below that level and 2017 s harvest 350 million litres below equating to a Chilean inventory shortfall of 600 million litres. Many buyers, rightly, reacted quickly to this reality but many others did not. Ciatti is receiving requests from all around the world, from Europe, the UK (mainly for Malbec), North America, Australia, China and Asia. Chilean suppliers are often honouring contracts to preserve longstanding relationships when they could be making a hefty profit. The price of 2018 grapes is increasing day-by-day, demand is very strong and there is no chance of the grape price falling. The buying campaign for 2018 wines will definitely commence with prices higher than at the start of the 2017 campaign. What will happen to the prices as the 2018 campaign moves forward is impossible to tell at the moment, as it will depend on the size of Chile s harvest and the harvests elsewhere around the world. The current Northern Hemisphere harvests would need to be considerable in order for there to be any dampening effect on Chilean prices. The Chilean market is further intensified by a very active domestic market, in which some domestic players are seeking to out-compete each other on price and pay whatever it takes to cover their needs, thus attracting bulk suppliers to the domestic market who would otherwise export. Another disincentive for Chilean suppliers to price-drop is the exchange rate, with the copper price having risen rapidly again since June (reaching USD3.11/lb so far in September, its highest price for at least two years), boosting Chile s economy and day-by-day strengthening the peso against the dollar. The peso has stood at an average of 625 to the dollar so far in September, up from 671 in May and at its strongest since May See next page for more on Chile. 6

7 Heading into early spring, the weather in Chile s wine regions has been changeable, with warm and sunny weather one day and rain/snow the next. Frosts have occurred intermittently, but it s still too early for the vines to be affected by this, particularly as the growing areas experienced more cold hours this winter than normal and spring has been slow getting underway. The Chilean wine industry will likely have to crush some grapes earlier, and ship quickly, in order to fill the gap in supply between the 2017 inventory running out and the 2018 wines coming on line. Chile exported million litres of bulk wine in the January-July 2017 period, marginally down 2.5% - on million litres in the first six months of The FOB value of the exports reached USD183 million, some 23.2% up on USD148.5 million in Bulk exports to the leading destination, the US, were down 24.4% in volume to 46.9 million litres, but up 9% in value to USD40.2 million. Argentina, traditionally not a customer for Chilean bulk, became its second biggest buyer in the first seven months of 2017, taking 54.3 million litres out of Chile, worth USD32.7 million. Argentina contracted these big volumes late last year and early this year, and it is now being shipped. The surge in Argentine shipments such as the Chinese (-47% to 28.9 million litres; -2% to USD30.8 million), the UK (+7.4% to 29.1 million litres; +7.7% to USD24.3 Ciatti Contact Marco Adam T or T E. madam@ciattichile.cl million) and Germany (-4.8% to 17.9 million litres; +16.7% to USD14 million). Bulk wine exports to Canada more than halved, meanwhile, from 19.4 million litres (worth USD10.5 million) in January-July 2016, to 7.4 million litres (worth USD4.6 million) this time. Chile s bottled wine exports for the January-July 2017 period reached 31.5 million cases, up 4.4% on 30.1 million cases in the same period of FOB value was up 3.8% from USD836.3 million to USD868.6 million. China s lead widened over the US as the number one destination for Chilean case goods, with Chile s case good volumes to China up 22% to 4.4 million cases from 3.6 million cases last time, while volumes to the US contracted 2.6% to 3.4 million cases. In fact, in the January-July 2017 period Japan overtook the US to become the number two destination for Chilean case goods in terms of volume, taking 3.6 million cases, 4.3% more than in the same period of The US remained in second place in terms of FOB value, however: USD97.7 million to Japan s USD89.5 million. Case good volumes to the UK fell back 15% to 3.1 million cases, with FOB value from case good exports to the UK slashed 20% from USD89.1 million to USD71.2 million. Key Takeaways The remaining 2017 wines are high in price, appreciating week-on-week, and close to being sold out. Chardonnay, Carmenere and Pinot Noir are sold out, while Malbec is close to being so. The 2018 grapes are in very strong demand and wine prices at the start of the 2018 wine buying campaign will be higher than they were at the start of 2017 s. Chilean Export Figures Wine Export Figures Million Liters January - July 2016 January - July 2017 Volume Million US$ FOB Average Price Million Liters Million US$ FOB Average Price Variance % Bottled 271,43 836,34 3,08 283,56 868,63 3,06 4,47 Bulk 231,53 148,57 0,64 225,63 183,07 0,81-2,55 Sparkling Wines 2,10 8,44 4,01 2,43 9,97 4,10 15,56 Packed Wines 18,69 31,74 1,70 15,59 26,82 1,72-16,60 Total 523, ,09 2,36 527, ,49 2,42 0,66 See next page for prices. 7

8 Chile: Current Market Pricing (Pricing in bulk; FOB Chilean Port) NV Generic White NV Generic Red Chardonnay (Basic) Cabernet Sauvignon (Basic) Sauvignon Blanc (Basic) Cabernet Sauvignon VDF Sauvignon Blanc VDF Merlot (Basic) Syrah (Basic) Merlot VDF Syrah VDF Malbec (Basic) Malbec VDF France Time on target HARVEST WATCH: Forecast to be 17% below the five-year average; 12% down in the Languedoc On 21 August AGRESTE released a French harvest estimate of 37.2 million hectolitres: this would be 18% down on the 2016 harvest, 17% below the five-year average, and the smallest harvest recorded in France. This is due to the impact of April s severe frost episode (of the big volume areas, this was particularly felt in Bordeaux and Charente) and the summer s heat levels and worsening drought (particularly felt along the Mediterranean coast, in Languedoc, Provence and the Côtes du Rhône). See the table below for a breakdown of the 2017 harvest estimate by area. Late August and the start of September brought no rainfall to slow the ripening process in the Languedoc, only drying winds, so the harvest there is two weeks ahead of schedule: AGRESTE forecasts the Languedoc-Roussillon harvest at 11.4 million hectolitres, down 8% on 2016 and 12% on the five-year average. Harvesting in the Languedoc s coastal and flatland regions is approximately 75-80% complete, with the whites and reds for rosés already in, and harvesting of Carignan, Cabernet and some Shiraz to be completed by approximately mid-september. In the Languedoc s foothills and north, harvesting is 40-50% complete and should draw to a close by the end of this month. Quality looks very good throughout the region, with the hot and dry conditions having kept disease out of the vineyards. On the French market, there are still good deals to be made with quick loading terms on 2016 international varietal bulk wines such as Cabernet, Merlot, Chardonnay and Sauvignon Blanc. However, prices in the past 2-3 weeks have started to climb in light of the 2017 harvest situation (and the balanced global supply-demand picture). Suppliers are becoming increasingly more prepared to hold onto their 2016 wines and withdrawing offers, understanding that it is probable the prices for their wines will be higher later on. The window for excellent value deals is thus closing, and once closed buyers will be quoted the general market price and that s it. Give Ciatti a call. See next page for more on France. 8

9 Although the big negociants and big buyers such as the supermarkets may have their needs covered for the next few months, Ciatti recommends that an eye is kept on the start of the 2017 vintage s buying campaign: while the pricing on 2017 wines remains uncertain, what is certain is there will be a more limited volume of good quality wine to go around and the market could be active with buyers reserving what they need quite early. Pricing on 2017 wines will be clearer once the harvest is completed at the end of September. Key Takeaways There remain good deals to be made on 2016 international varietal bulk wines but the window for these is closing. Ciatti encourages buyers to look at the opportunities on 2016 wines now. The buying campaign for the 2017 vintage could start quickly as due to a harvest expected to be 17% down on the average there will be a more limited quantity of quality wines available. Ciatti Contact Florian Ceschi T E. Florian@ciatti.fr 2017 French Harvest Estimate by Acre (AGRESTE, 21 AUGUST 2017, UNIT : 1,000 HECTOLITRES) REGION 5-YEAR AVERAGE / /AVERAGE Champagne 2,463 2,077 2,242 8% -9% Bourgogne-Beaujolais 2,150 2,066 2,305 12% 7% Alsace 1,088 1, % -17% Savoie % 0% Jura % -1% Val de Loire 2,455 2,113 2,289 8% -7% Charentes 8,321 7,830 5,445-30% -35% Sud-Ouest 3,409 4,064 3,325-18% -2% Bordelais 5,519 6,078 3,261-51% -41% Languedoc-Rousillon 12,900 12,362 11,400-8% -12% Corse % -5% Sud-Est 5,448 5,799 4,988-14% -8% France: Current Market Pricing (EUR per liter; Ex-Winery) 2016 Generic White Varietal Rosé IGP Chardonnay IGP Generic Red Chardonnay VDF Cabernet Sauvignon IGP Sauvignon Blanc IGP Cabernet Sauvignon VDF Sauvignon Blanc VDF Merlot IGP Generic Rosé IGP Merlot VDF Generic Rosé VDF Syrah / Grenache

10 Spain Time on target HARVEST WATCH: La Mancha s harvest likely significantly reduced by intense heat and drought The summer s very hot, dry conditions continued in Spain throughout August and into early September. As a result, the harvest in Castilla-La Mancha commenced 10 days earlier than normal. In July the Cooperative Agro-Alimentarias forecast a La Mancha harvest of 21.5 million hectolitres, down over 11% from 24.2 million hectolitres in Since then, with the heat continuing, there has been talk of a La Mancha harvest as small as million hectolitres, down 25%. The non-irrigated vineyards will bear the brunt of the adverse meteorology: some of these could see crop losses of up to 40-50%. The harvest in La Mancha is approximately at its midpoint. International varietals such as Sauvignon Blanc, Chardonnay, Merlot and Syrah as well as Muscat and Grenache are mostly in. The Tempranillo harvest is now in full swing, while harvesting of the late-ripening Airén usually harvested mid to late September is already underway. Varietal 2016 bulk wines are running out. Overall, Spain remains probably the cheapest place to source wine in the world, but prices for Spanish varietal whites for example are currently as expensive as they are for their French equivalent and the prices on all remaining 2016 generic and varietal wines are nudging up week-on-week: the market price for these is now at the same level as for the new 2017 wines based on sample approval or pre-harvest sales. Lending weight to the claims of a reduced harvest, some big players have paid 15-20% more for grapes this year than last, a price hike that will translate through to the price for 2017 wines. All buyers in need of 2017 international varietals out of Spain such as Cabernet, Merlot, Shiraz and Sauvignon Blanc must take into account the global picture (a balanced supply-demand situation and 2018 wines in Chile not being ready until May onward), look at their needs as soon as possible, and be in the starting blocks ready for the new buying campaign. Buying will take place quickly, and inventory will go fast: for instance, it is very likely that 2017 varietal Chardonnay and Sauvignon Blanc will be sold out by the end of the year. On the generic wine front, buyers will have a little more scope to wait and see if the market softens. However, they must still be prepared to act quickly and make reservations. Again, take into consideration the global picture, and do no assume because in previous years the prices declined through the campaign that the same will happen this time. With regards to rosé, year after year Spain s production of rosé is stable or declining, and this year due to the expected smaller overall harvest more material will be directed into red production. Buyers of good quality rosé should thus be ready to act as soon as the buying campaign gets underway because the good quality in good volumes will be quickly sold. In short: be prepared, know that it will be a more complicated picture than in previous years, and don t arrive on the market surprised. Everyone will be buying; there s a good chance those who hesitate will end up buying high-priced, lower quality wines. Finally, Spain s grape juice concentrate market is going to be under big pressure. Concentrate production from the 2017 harvest will definitely be smaller as more juice is redirected towards more lucrative wine production. Severe frost, hailstorms and drought in the GJC powerhouse of La Manchuela, one of the best Bobal regions producing high-proof colour red grape concentrate, will impact the 2017 crop severely there. See next page for pricing. 10

11 Key Takeaways Prices on all remaining 2016 generic and varietal wines are nudging up week-on-week. Taking into account the tightening global situation and the expected reduced 2017 harvest in Spain, buyers in need of 2017 international varietals out of Spain must be ready to act quickly once the buying campaign starts. Ditto buyers of good quality rosé. There s slightly less urgency on generics, but, again, do no assume because in previous years the prices declined through the campaign that the same will happen this time. The global market is now more complex. Be prepared. Ciatti Contact Nicolas Pacouil T E. nicolas@ciatti.fr Spain: Current Market Pricing (EUR per liter; Ex-Winery) 2016 Generic White Moscatel White Blends (Higher Quality) Generic Red Sauvignon Blanc Generic Red (Higher Quality) Chardonnay Cabernet Sauvignon Generic Rosé Merlot Varietal Rosé Syrah Italy Time on target HARVEST WATCH: Forecast to be as much as 26% down in size on last year Due to April s frosts, June s hail and the intense heat and prolonged drought since, the Italian wine industry is amid finishing what some have called its most challenging harvest in more than 20 years. It is expected that every producer region will see a significant reduction in production: on 22 August the Assoenologi (Italy s enologist association) forecasted an Italy crop of 41.1 million hectolitres, down 25% from 54.1 hectolitres in Il Corriere Vinicolo subsequently headlined with a 3 September estimate from research firm Ismea and UIV (Italy s wine producer union) of 40 million hectolitres, down 26%. The heat and drought made Italy s harvest a race to the finish: it is already almost over, even on the reds, two weeks ahead of schedule. The compressed nature of the harvest meant the normal schedule of varietal readiness did not apply, with wines ready for picking at overlapping times. The Ismea-UIV forecast finds all wine regions with shorter crops than last year: the smallest drops come in Friuli V.G. (-11.5%) and Trentino A.A (-12.5%) in the country s northeast, plus in Campania; the biggest drops come in Abruzzo and Puglia (both -30%), Basilicata (-32%), Lazio, Toscana and Valle D Aosta (all -32.5%) and Sicily, Umbria and Sardinia (all -35%). See next page for more on Italy. 11

12 This expected harvest shortfall, combined with the tightening supply-demand situation globally, means the market in Italy is very active. Offer prices are only valid for two days or so before being revised upward again. As such, it should be noted that any pricing data on this Italy page is merely indicative, given to provide a sense of the market only; prices are subject to change rapidly. Give Ciatti a call. International buyers on the Italian market must deal with low 2016 inventory, a projected low stock of 2017 wine coming on line and rising prices, but also competition from the local market, whose players can offer quicker loading and payment terms. International buyers requiring Italian volume should be ready to move quickly to reserve their needs. Rising prices are a problem for buyers, but the bigger concern is that there will not be enough volume to cover everybody s needs. There will also likely be a significant gap between this vintage and 2018 s. Production of Pinot Grigio DOC delle Venezie is forecast to be at least 20% down. If the new DOC rules regarding 70% of yield from grape to wine are taken into account, the total loss of production could be around 30%. IGT Pinot Grigio from Terre Siciliane, Puglia, Terre di Chieti and Oltrepò Pavese is sold out. No Prosecco prices have been released at the moment. From being the cheapest Italian red DOC, Montepulciano DOC Abruzzo is expected to rise by 20-30% in price. The price for remaining 2016 stock is at EUR75/hectolitre. Sicilian Nero d Avola will be DOConly (Nero d Avola DOC Sicilia) from the 2017 vintage onward, meaning a reduction in the yield even before the adverse weather which is expected to reduce Sicily s overall harvest by as much as 35%. The price is currently at EUR100/hectolitre. Chardonnay will be one of the varietals most affected by the weather, with entry level material currently starting from EUR80-85/hectolitre. Merlot, meanwhile, is at EUR65-70/hectolitre, with top quality Sicilian Merlot at EUR130/hectolitre. Cabernet will be in the same price bracket as Merlot, but with less available quantities. The Moscato area in Piemonte was strongly affected by the frost, hailstorms and very hot temperatures: this will increase prices on varietal Moscato and likely suppress volumes of excess material that could have been used by bottlers of generic sparkling Moscato. On generic reds, Sangiovese from Puglia has been harvested and will start at much higher prices than in 2016, but should remain favourable in price to Spain s offer. Prices are close to EUR5/hectodegree. It s too early for price indications on Montepulciano and Lambrusco. On the generic whites, producers are currently reluctant to sell because prices are increasing day-by-day as 2016 inventory is low and both internal and international demand is strong. Generic white is priced almost at EUR5/hectodegree. Key Takeaways The 2017 harvest is likely to be significantly reduced in size. Prices will rise on each variety to varying extents, including on generics. As in Spain, potential buyers must be ready to act quickly once the buying campaign starts. Be prepared. Ciatti Contact Florian Ceschi T E. Florian@ciatti.fr Italy: Current Market Pricing (EUR per liter; Ex-Winery) 2016 Generic White Generic Red Chardonnay Cabernet Sauvignon IGT Pinot Grigio Merlot DOC Prosecco * 2016 Primitivo / Zinfandel Chianti * *Bottled Price 12

13 South Africa Time on target HARVEST WATCH: The ongoing severe drought is causing big concern for the 2018 harvest Spring has officially commenced in the Western Cape and, following a very dry winter on top of two years of below-average rainfall, water usage restrictions are already in place. The aggregated water level in Cape Town s catchment dams as of 4 September stood at 35.1%: this compares to 60.6% on the same date of 2016, 73.8% in 2015 and 102.4% in In years past, the Western Cape has received good rainfall in October and November, but the rainfall this time would need to be very considerable for the drought situation to be alleviated in any meaningful way. Naturally, there is big concern among growers. Due to the high pricing on the international market and now concerns regarding Spain and Italy s 2017 harvests, the market in South Africa is very active on the request side, with a lot of new potential buyers from China, Russia, Europe and North America. But the supply side is quiet: there does not seem to be much wine left available on the open market in South Africa. Supply of varietal bulk Sauvignon Blanc, Chardonnay, Cabernet and Merlot has been, and remains, very tight; now Shiraz and Pinotage is tight, so too even generic red, generic rosé and Cinsault rosé. There remain some pockets of generic white available. Most of what becomes available on the open market is wine previously reserved that went unshipped. Buyers should respect loading terms or risk losing their reservations. Producers had been happier due to the price increases this buying campaign on average by 5-8% across all varieties and the quick and early nature of contracting. However, the ongoing drought is now causing real concern as thoughts turn to the 2018 harvest. Key Takeaways Varietal bulk, generic red, generic rosé and Cinsault rosé are all now tight in supply. Pockets of generic white are available. August and the start of September did not bring much replenishment to the catchment dams: drought is a big concern for the 2018 harvest. Ciatti Contacts Vic Gentis T E. vic@ciatti.fr Petré Morkel T E. petre@ciatti.co.za South Africa: Current Market Pricing (SA Rand per liter, FOB Cape Town) 2017 Generic White Generic Red Chardonnay Cabernet Sauvignon Sauvignon Blanc Ruby Cabernet Chenin Blanc Merlot Muscat Pinotage Generic Rosé Shiraz Cultivar Rosé Cinsaut Rose

14 Australia Time on target HARVEST WATCH: 2017 harvest came in at an estimated 1.93 million tonnes, up 5% on 2016 Australia s grape and wine sector has welcomed an AUD50 million (USD40.2 million) Export & Regional Wine Support package from the federal government. This package entails a three-year plan to increase the value of Australia s wine exports up to a record AUD3.5 billion and support increased international wine tourism in regional communities. The package was launched in Adelaide by Deputy Prime Minister (and Minister for Agriculture) Barnaby Joyce, and Assistant Minister for Agriculture, Senator Anne Ruston. Minister Joyce said the Export & Regional Wine Support package aims to build on the Australian wine industry s significant growth in recent years at a time when its exports are forecast to exceed 800 million litres and AUD2.5 billion in The package would aim to deliver up to 8% per annum value growth across all export markets to , including 15-17% in China and 6% in the US. He added that the package will help to attract up to 40,000 more international tourists to visit our world-renowned wine regions, and take the great Australian wine tour, by , delivering an estimated AUD170 million to the economy. New legislation to reform the Wine Equalisation Tax (WET) rebate in order to rid the system of rorting (sharp practices), enhance integrity and help it deliver on its original purpose has passed through parliament. From July , the WET rebate cap will be reduced from AUD500,000 to AUD350,000 and its eligibility criteria has also changed: a wine producer will now be required to own at least 85% of the grapes used to make the wine throughout the winemaking process. The altered eligibility standard is designed to address virtual winemaking schemes where the WET rebate is being claimed multiple times on the same parcel of wine. Under the new changes, wine producers will now be required to sell wine packaged in a container not exceeding five litres and branded with a registered trademark. Treasury Wine Estates (TWE) has posted a 55.3% jump in full-year net profit to AUD269.1 million, mainly boosted by strong earnings growth in the Americas and Asia regions, and cost savings. Revenue for the year to June 30 was up 8.1% to AUD2.53 billion, and the company declared a 50%-franked final dividend of 13 cents a share, a one cent increase over last year s corresponding unfranked payout. The company has also settled a shareholder class action brought against it for allegedly engaging in misleading and deceptive conduct, for AUD49 million. TWE said the settlement which is without admission of liability includes interest and costs, and is fully insured so it will not affect the company s financial results. Key Takeaways The grape and wine sector has received an AUD50 million support package from the federal government that is partially aimed at boosting wine exports. From July , the WET rebate cap will be reduced from AUD500,000 to AUD350,000 and its eligibility criteria has been tightened to minimise the opportunity for sharp practice. Ciatti Contacts Matt Tydeman T E. matt@ciatti.com.au Simone George T E. simone@ciatti.com.au See next page for pricing. 14

15 Australia: Current Market Pricing (AUD/litre unless otherwise stated) NV Dry White NV Dry Red Chardonnay Cabernet Sauvignon Sauvignon Blanc Merlot NZ Marlborough SB NZD Shiraz Pinot Gris Muscat Price stated are indicative only; all offers subject to prior sale and subject to volume, drawdown and terms New Zealand Time on target HARVEST WATCH: At an estimated 396,000 tonnes, a smaller 2017 crop than expected The export value of New Zealand wine has reached a record high, according to the 2017 annual report from New Zealand Winegrowers (NZW). Now valued at NZD1.66 billion (USD1.20 billion), up 6% in the 12 months to 30 June 2017, wine is now New Zealand s fifth-largest export good. Exports to the US have led such strong growth, passing NZD500 million for the first time (up 12%). New Zealand wine became the third most valuable wine import into the US, behind only France and Italy. NZW s report adds that, over the past two decades, New Zealand s wine industry has achieved average annual export growth of 17% per year. With diversified markets and a strong upward trajectory, the industry is in good shape to achieve NZD2 billion of exports by 2020, said Steve Green, NZW s chairman. Meanwhile, NZW has made it easier for tourists to New Zealand to explore the country s wineries by adding a wine tourism section to its website nzwine.com/visit showcasing over 450 wine experiences. According to NZW, touring New Zealand s wineries and vineyards has become a significant drawcard for visitors, with 24% of international holidaymakers making it part of their itinerary (up from 13% four years ago). The new Visit section of nzwine.com allows tourists to search wine regions using a Google map tool, or filter listings by region and four experience types: Sip (enjoy cellar door tastings); Dine (dine in a winery setting); Stay (overnight in vineyard accommodation); Play (partake in on-site activities, such as tours and other experiences). See next page for more on New Zealand. 15

16 Key Takeaways New Zealand s wine exports rose 6% in the 12 months to 30 June 2017 to reach NZD1.66 billion, with Ciatti Contacts exports to the US an area of particular growth. NZW Matt Tydeman Simone George expects the industry to achieve NZD2 billion by T T E. matt@ciatti.com.au E. simone@ciatti.com.au Craft Beer Update As previously reported, the John Fearless Co now has available a selection of New Zealand hop varietals for sale in the US, South America and southern Africa. New Zealand hop varietals are sought-after across the craft beer world for their unique Southern Hemisphere aroma and performance in many beer styles. The varietals John Fearless has available are: New Zealand Hops Offered by John Fearless Aroma Varietals Motueka, Taiheke, Pacifica Dual Purpose Varietals Southern Cross, Dr. Rudi, Pacific Jade Experimental Varietals Orbit For more information, please view our range of hops via the John Fearless website at johnfearless.com/ or contact Rob Bolch, CEO and partner, via rob@johnfearless.com. 16

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18 Export Pricing: USD per liter Currency Conversion Rates as of September 12, 2017 Argentina (Pricing in bulk; FCA) 2016 Generic White Generic Red Chardonnay Cabernet Sauvignon Torrontes Syrah / Merlot Muscat Malbec Entry-Level Bonarda Malbec Premium Australia & New Zealand AUD Rate: / NZD Rate: NV Dry White NV Dry Red Chardonnay Cabernet Sauvignon Sauvignon Blanc Merlot NZ Marlborough SB Shiraz Pinot Gris Muscat California (Pricing in bulk; FCA) 2016 Generic White Generic Red Chardonnay /2016 Cabernet Sauvignon Pinot Grigio Merlot Muscat Pinot Noir White Zinfandel Syrah Colombard /2016 Zinfandel Chile (Pricing in bulk; FOB Chilean Port) NV Generic White NV Generic Red Chardonnay IGP Cabernet Sauvignon IGP Sauvignon Blanc IGP Cabernet Sauvignon VDF Sauvignon Blanc VDF Merlot IGP Syrah IGP Merlot VDF Syrah VDF Malbec IGP Malbec VDF

19 France (Pricing in bulk; Ex-Winery) Rate: Generic White Generic Red Chardonnay IGP Cabernet Sauvignon IGP Chardonnay VDF Cabernet Sauvignon VDF Sauvignon Blanc IGP Merlot IGP Sauvignon Blanc VDF Merlot VDF Generic Rosé IGP Red Syrah / Grenache IGP Generic Rosé VDF Varietal Rosé IGP Italy (Pricing in bulk; Ex-Winery) Rate: Generic White Generic Red Chardonnay Cabernet Sauvignon Pinot Grigio Merlot Prosecco Primitivo / Zinfandel Chianti South Africa (Pricing in bulk; FOB Cape Town) Rate: Generic White Generic Red Chardonnay Cabernet Sauvignon Sauvignon Blanc Ruby Cabernet Chenin Blanc Merlot Muscat Pinotage Generic Rosé Shiraz Cultivar Rosé Cinsaut Spain (Pricing in bulk; Ex-Winery) Rate: Generic White Generic Red White Blends (Higher Quality) Generic Red (Higher Quality) Sauvignon Blanc Cabernet Sauvignon Chardonnay Merlot Generic Rosé Syrah Varietal Rosé Moscatel

20 Contact Us Argentina Eduardo Conill T E. Concentrate John Ciatti T E. Germany Christian Jungbluth T E. Australia / New Zealand Matt Tydeman Simone George T E. matt@ciatti.com.au E. simone@ciatti.com.au California Import / Export CEO Greg Livengood Steve Dorfman T E. greg@ciatti.com E. steve@ciatti.com California Domestic T John Ciatti john@ciatti.com Glenn Proctor glenn@ciatti.com John White johnw@ciatti.com Chris Welch chris@ciatti.com Canada & US clients outside of California Dennis Schrapp T. 905/ E. dennis@ciatticanada.com Chile Marco Adam T or T E. madam@ciattichile.cl China / Asia Pacific Simone George T E. simone@ciatti.com.au France / Italy Florian Ceschi T E. Florian@ciatti.fr Spain Nicolas Pacouil T E. nicolas@ciatti.fr UK / Scandinavia / Holland Catherine Mendoza T E. catherine@ciatti.fr South Africa Vic Gentis T E: vic@ciatti.fr -or- Petré Morkel T E. petre@ciatti.co.za John Fearless CO. Craft Hops & Provisions CEO - Rob Bolch Sales - Geoff Eiter T E. rob@johnfearless.com E. geoff@johnfearless.com To sign up to receive the monthly Global Market Report, please info@ciatti.com 20