Analysis of the Chilean Wine Market July 2011 Snea

w revie kP

Production & Demand

1. Production and Demand and Inventory

Productive Vineyard Hectares

20 18
Vineyard Planting Rate, Historical and Projected
Has. in production defined as vineyards over 3 years old

140 120 100 80 60 40 20 0

Last published data point for change in total vineyard area shows minimal increase. 2008 and beyond are estimated

Hectares of Vineyard

16 Change in Has. / Year 14 12 10 8 6 4 2 0

1994 1995 1996 1997 1998 1999 2000 2001

Net Increase Tot. Has. Has. In Production

2002

2003

2004

2005

2006

2007

2008

Chile experienced a big planting boom from 1997 to 2001 Since 2001, Chile has not had any significant net increase in vineyards. It is likely there has been a meaningful amount of renovation (old vineyards ripped out and new vineyards planted) that net each other out in the official statistics

Source: SAG (Chilean Agriculture and Livestock Service), Wine of Chile *InVina estimate

2009

Has. in Production

Total Chilean Wine Production

Total Production, MM Liters 1,000 900 800 700

Production

MM Liters

600 500 400 300 200 100

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Other Table Grapes Viniferous

Chiles annual wine production has increased nearly 300% in the 15 years since 1994 2009 production surpassed the 1 billion liter mark, but is now considered to be an exceptional year Subsequent production in 2010 and 2011 returned to more normal levels when calculated on hl / has. basis

Production per Hectare

Wine Production per hectare of vineyard

Production per Hectare

1,200

140

100 800

80

600 60

400

200

Total Wine Production Has. In Production Prod. / Has.

40

20

The 10 year average production per hectare is 68.4 hectoliters (6,840 liters) per hectare in production (yellow line). The average for the last 4 years has been 74.5 hl/has, which seems to indicate that overall productivity is trending upward from the 4 years between 2001 and 2005. The 2009 average production per hectare increased dramatically up to 82.3 hectoliters per hectare This increase can be partly explained by good rains in 2008 winter, good budding and fruit set in spring 2008, and absence of rains during harvest. The increase in production per hectare also suggests a strong influx of table grapes into wine The 2010 and 2011 production per hectare were closer to historical normals

Source: SAG (Chilean Agriculture and Livestock Service), Wine of Chile HL = Hectoliter or 100 liters

2011*

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

M Has. & Hectoliters per Has.

1,000

120

MM Liters

Chilean Wine Demand

Domestic consumption + Exports
Total Demand, MM Liters
900 800 700 600

Demand

MM Liters

500
Consumption

400 300 200 100

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011*

Exports

2009 export volumes reached a record level of over 693 million liters Domestic Consumption is assumed to be flat at 260 million liters in 2009 (15.3 liters per capita). However, it is extremely improtant to note that there is no reliable source for consumption data, and it is usually calculated as production exports inventory. The inferred consumption figures for 2010 show a dramatic reduction. Exports in 2011 show a 17% decline so far. We are estimating a 12% decline for the year, with imputed consumption returning to normal levels.

Source: SAG (Chilean Agriculture and Livestock Service), Wines of Chile

Inventory
Projection Production, Demand and Inventory, MM Liters
1,100 1,000 900 800 700 Year-End Inventory Total Production Total Demand

Inventory

600 500 400 300 200 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011*

120 million liters lost due to earthquake

The 2011 harvest (no official figures avaialble yet) seems to have come in at ho-hum levels 698 MM liters 2010 year-end inventory figure released recently Bulk exports dropping sharply in 2011 Bottled wine exports continue to grow both in volume and price

Source: SAG (Chilean Agriculture and Livestock Service), Vias de Chile

Total Export Volume breakdown

Volumen Exportacin, Embotellado y Granel

Bottled Wine Demand

800,000,000 Bottled Wine 700,000,000 600,000,000 MM Litros 500,000,000 400,000,000 300,000,000 200,000,000 100,000,000 0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Bulk exports Shortage collapse Price shocks

Bulk Wine Other Total

Bulk wine exports off sharply in 2011 (down 55% so far in 2011, forecasting 45% drop for the year) Bottled wine exports continue increasing, (up 17% so far, forecasting a 14% increase for the year)
Source: Vias de Chile

Bottled Export Price and Volume

Bottled Export Price and Volume
33.00 30.00 27.00 Bottled, US$ / Case 9 Lit. 24.00 21.00 18.00 300 15.00 12.00 9.00 6.00 3.00 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bottled Wine Demand

600 Bottled Price Bottled Volume Lineal (Bottled Price) y = 0.71x + 11.27 R2 = 0.94

500

400 MM Litros

R AG 8.7% yr. C 2010: 10 0 200

200

100

The trend line (R2 = 0.94) shows bottled prices have risen steadily at a rate of some $ 0.71 per year over the last 20 years Although they dropped suddenly in 2009 due to the global financial crisis, in 2011 the prices are resuming their upward march (2011 average is $28.65 per case, and April 2011 average is $ 29.19) The 10 year Average Growth for bottled wine export volume (2000 to 2010) is 8.7%

Source: Vias de Chile

Projection

2. Projecting Production and Demand through 2012

e a d ru p l uTriple-Shock Q
2010 delivered a triple shock to the Chilean wine industry:

Projection Revisited

2009 saw record export figures, which began straining supplies toward the end of 2009 and first few months of 2010 The industry lost at least 120 million liters in the earthquake, or about 13% of annual production The 2010 vintage was small (off by 10% from 2009 vintage) The 2011 vintage is also small

Bottled wine exports continue to grow while bulk wines plummet A significant supply shock will rock the industry in the 2nd half of 2010 and well into 2011. Wine and grape prices will reach levels not seen since the end of the 1990s.

BASE PROJECTION: Supply Increases, Demand is Moderate

Production Assumptions

Projection

2012 2014 production projected at 74.7 hectoliters per has. Demand Assumptions Export volume -12% in 2011 (bulk wines down 45%, bottled wines up 14%), 0% in 2012 and 5% in 2013. This compares to 10 year average volume growth of 11.5% (1999 to 2009) Domestic consumption down to 14.0 liters per capita (vs. estimated average of 15+ liters per capita in last few years)

Wine Production Projection

Wine Production per hectare of vineyard
1,200 140 120 100 800

Projection

80 600 60 400 40
Total Wine Production

200

Has. In Production Prod. / Has.

20 0

0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012* 2013*

Vineyards in production will reach 120,000 has. by 2012 (it was 104,000 has. in 2003) Wine production surged to 82.3 hl./has. in 2009, then dropped to 71.5 hl./has. in 2010 We project 70 hl./has. for 2011, then 74.7 hl./has. for 2012 & 2013

Source: SAG, InVina projection

M Has. & Hectoliters per Has.

1,000

MM Liters

Wine Demand Projection

Domestic consumption + Exports
Total Demand, MM Liters
Consumption

1,000

Exports Total Demand

800 MM Liters

Demand

600

Exports CAGR 2009-2013: 0.2%

400
R AG .1% rts C 09: 13 po 20 Ex 4 199

200

0
2010* 2011* 2012* 2013* 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Export volume recorded a phenomenal CAGR of 13.1% from 1994 to 2009 This was possible as vineyard area doubled in this period No significant net increase in vineyards have been registered since 2001, although export growth was sustainable as these new vineyards entered into production We forecast that export growth will stagnate in the next few years since there are no new vineyards available to increase production. However, the mix of exports will continue the shift out of bulk wine exports and increasing bottled wine exports Also forecasting a moderate drop to 14 liters per capita in consumption

Production, Demand and Inventory

Projection Production, Demand and Inventory, MM Liters
1,100 1,000 900 Year-End Inventory Total Production Total Demand

Projection

800 700 600 500 400 300 200 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013*

Demand Projection: 2010: -2.5% 2011: -2.3% 2012: 0.4% 2013: 4.0%

Total Wine production: 2010: 906mm liters 2011: 924 mm liters 2012: 974 mm liters 2013: 993 mm liters

Inventory as % Demand: 2010: 75% 2011: 78% 2012: 83% 2013: 83%

Analysis
An industry accustomed to double-digit growth based on an ample supply of cheap grapes will be challenged as the growth rate in grape production tapers off Bulk wine volume will remain depressed as demand for bottled wine exports keeps wine prices high New vineyard plantings will resume, though it is unlikely we will see a repeat of the 1997-2001 surge Wine and grape prices will remain high through at least to 2013 as supply barely manages to slowly recover from the structural shortages that were emerging before the 2010 earthquake, and the added shock of losing 15% of production during the earthquake.

Projection

Supplemental Charts

Wine Production Projection

Chilean Wine Production, 000s of Liters Source: SAG (Chilean Agricultural and Cattle Service) 1,200,000 Wines with D.O. 1,000,000 800,000 600,000 400,000 200,000 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Wines w/o D.O. Table grape wines Total

Production

2010 saw a significant decline in production 2011 figures not yet released

Source: SAG

The fundamental issue: The growth in production base has not kept up with demand

Demand / Hectare

Consumo + Exportaciones
140 120 100 80 600 60 400 40 20 0 Liters, Millions 800 Has., 000s 1,200 1,000

Has. In Production Demand / hl per has. Total Demand

200 0

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011*

2012*

To sustain even moderate volume growth, the industry needs yields of 80 hl./has., which is on the high end of historical levels, and above the 5 year average of 73.9 hl. / has. Add to this the significant losses suffered in the earthquake which suggests that grape and wine prices will be very high for the next few years.

Source: SAG (Chilean Agriculture and Livestock Service), Vias de Chile

2013*

Year-end inventory as % of sales & average wine prices are negatively correlated

Inventory as % of Sales

Inventory as % Dem and and Cabernet Price 120% 100% 80% 60% 40% 20% 0% Inventory / Demand Cabernet Price, $ / Liter 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 800 700 Cabernet Price, $ / L 600 500 400 300 200 100 0

Inventory as % Demand

Strong negative correlation exists between the Year-End Inventory as% of Demand (consumption + exports) and the Average Price of Cabernet Sauvignon in the local market. The coefficient of correlation from 1999 to 2009 is -0.92
Year-end inventory is from the previous year (so 2006 year-end inventory is correlated to 2007 prices). Source: Cabernet pricesCCV web site, where they attribute the source to: ODEPA. Elaborado con informacin de la SNA. A partir de Junio 94 SIPRE. These figures are checked against our own observations. Inventory and Demand: SAG and Vias de Chile. *2010 prices based on our own observations

Wine Price Projection

Inventory as % Dem and and Cabernet Price 120% 800

Wine Price Projection

Inventory as % Demand

600 80% 60% 40% 20% 0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* 2011* 2013*
Inventory / Demand Cabernet P rice, $ / Liter

500 400 300 200 100 0

While total inventory grows, it grows only moderately as a % of sales The relationship between inventory and prices suggest Cabernet wine prices will hover in the CLP$ 300 to $ 400 per liter range

Source: Cabernet pricesCCV web site, where they attribute the source to: ODEPA. Elaborado con informacin de la SNA. A partir de Junio 94 SIPRE. Inventory and Demand: SAG and Vias de Chile

Cabernet Price, $ / L

100%

700