Wine paying duty on the world market: 1.1 billion euros estimated additional costs

The Censis-Alleanza Cooperative Agroalimentari (social investment studies center and agro-food cooperative alliance) study, "The fever of costs", was presented in Rome, yesterday. The state of the art study pointed out high priced energy, increases in raw materials, the impact on world economies, and war as the unpleasant ingredients on the "menu" of current events, which will cost Italian wine 1.1 billion euros more in 2022. It is a tsunami of prices that will affect companies’ profits as well as running the risk of compromising effective competition on International markets. We must also add, under the heading of losses, more than 212 million euros in exports to Countries at war - Russia and Ukraine first of all, but also Belarus. Furthermore, we must bear in mind that downward repercussions are quite likely to occur even in strategic Italian wine markets such as the United States, the United Kingdom, France and Spain.
On the other hand, accounts can be quickly added up. Turnover for the supply chain in 2021 amounted to 13.6 billion euros. However, if we apply this figure to the 78.4% share of intermediate consumption necessary for production, the value of intermediate consumption in the supply chain is established at 10.7 billion euros for 2021. By using the variation in production costs of wine products, which between February 2021 and February 2022 equaled 10.5%, the current value of intermediate consumption would reach 11.8 billion euros. The difference, therefore, is equal to 1.124 billion euros. This figure expresses “an additional burden on companies’ profits that will inevitably reduce their margins, and compromise competition on International markets”, Luca Rigotti, Wine Coordinator of Alleanza Cooperative Agroalimentari (and at the helm of the leading Trento area Cooperative, Mezzacorona, ed.), said.
The various components of energy products contributed substantially to increases in production costs. The average annual increase between February 2021 and February 2022, was +31.4%, while the increase in fuels equaled +38.3%, electricity +16.7% and lubricants as much as +70%. Some production factors used in cultivation, such as fertilizers and manures have risen to +32.3%.
Even the materials used for wrapping and packaging have undergone increases that will inevitably be reflected in the final price of wine. Between January 2021 and January 2022 - and therefore, before the effects of the outbreak of the war in Ukraine were felt - the price of producing glass increased + 8.5%, and corks + 9.4%. Paper and packaging instead, have increased between +23% and +30%.
“The increase in the costs of energy and production materials confirms the challenging situation in which wine companies have been immersed for several months now”, Rigotti continued, “together with the very serious problem related to materials being made available and accessible. It is necessary to find new instruments, along the lines of those the Government has already issued, to try to reduce the effects of the crisis and therefore not lose any more margins of competition. Moreover, the European Union needs to intervene urgently to put a shared ceiling on the price of energy and gas, and evaluate the possibility of playing the role of single buyer on the market”.
Logistically, the wine supply chain has been dealing with a highly critical scenario for months. Over the past twelve months, airfreight transportation has increased more than 20%, while prices of sea transportation have increased + 36.2%, between the beginning of 2021 and the beginning of 2022.
In all of this, the probable slowdown of economies in many Countries must also be considered, since it was predicted before the outbreak of the war between Russia and Ukraine. The Cooperatives reported that the International Monetary Fund had calculated, just before the conflict, that the shocking cost increases in energy and raw materials would have compromised 1.3% of the 2022 GDP in the United States and France, 1.5% in the European area, up to 3%inthe United Kingdom and almost 5% in Spain. The lack of growth in these Countries, which are the main economic partners of the Italian wine supply chain, risks affecting the excellent 2021 export results (when they tumbled the 7 billion euro wall - an absolute record, ed.). And, the risk is even greater, considering that in the past year the United States increased imports of Italian wine more than +18 percentage points, France +17.8%, Spain +17.2 %, and in Europe, Italian wine exports grew +9.9%. Then, there is the direct impact of the war, on wine.
In 2021, Russia had requested Italian wines for a total of about 150 million euros - more than +18% increase in demand. Sales will certainly have to be reshaped due to the difficulties companies are having with payments and transactions. The Ukraine imported wine for a value of 55 million euros. It is a market that has oriented their wine choices towards our producers, registering + 30% increase in purchases. However, the biggest problem, which crosses the whole economy, is that the conflict has made energy become even more expensive. Censis and Alleanza delle Cooperative pointed out that between January and March of this year, the price of oil increased from just over 78.00 US dollars to 118.00 US dollars, increasing + 50.9% in just over 60 days. Going back to the beginning of 2021, the variation reached + 130.6%. Gas purchased in Europe cost 19 euros per MWh in January last year, twelve months later it was 78.50 euros and it reached the share of 132 euros on March 11, 2022. The price of coal has almost quintupled in a little over a year. It cost 133.00 US dollars per ton and has reached 681.00 US dollars just recently. The price almost tripled between January and March alone. The picture portrayed implies serious consequences for growth expectations in 2022. In the latest publication of Outlook, the OECD (Organization for Economic Co-operation and Development) estimated that the combined effect of increase in energy and raw material prices between February 24th (the day of the Russian invasion) and March 9th (Outlook publication day), instability in the area will lead to - 1.08%, fall in global demand, - 1.4% among European countries and - 0.88% in the United States. The effects are not quantifiable now on International trade and individual Countries’ exports. In addition, the "stagflation", condition, which the West had never again experienced since the 1970s, would become the most probable hypothesis to describe the course of the next few months in many Countries, since inflation and the price rush will weigh even more on spending and investment decisions. The lack of growth in these Countries, which represent the main economic partners of the Italian wine supply chain, risks affecting the product’s excellent export results in 2021.