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Saturday 2 August 2014

Port producers push through big price increases for first time in a decade

26th June, 2013 by Patrick Schmitt

Although the critically-acclaimed 2011 Port declaration has re-ignited interest in the category, producers in the Douro are dealing with the double impact of surging brandy prices and a declining demand for entry-level Ports.

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Brandy prices have risen by €2.80 in the last two years, although retail prices for Port are up only €0.23 on average

According to Adrian Bridge, CEO of The Fladgate Partnership, the price of spirit for fortifying wine in the Douro has gone up by over €1 per litre since last year, and around €2.80 since 2011.

Bridge, whose company announced yesterday the acquisition of Wiese & Krohn, said the purchase of a company with significant stocks of Port would, to some extent, mitigate the increase in brandy prices in the short term.

Highlighting the extent of price increases over the last two years, Bridge told db that the his company had bought spirit at around €0.90 per litre in 2011, but at €2.60 in early 2012, and around €3.70 this year.

He said that the price increase over the past year would equate to around €0.56 extra per bottle, but with the price of Port in major European retailers rising by only around €0.23, producers are not passing on the full extent of the increased cost.

Nevertheless, Bridge said his company were treating this year’s price as a “speculative high”, and he expects the price of spirit to stabilise at around €2.20, which is approximately the cost of producing brandy in Spain’s La Mancha.

He added that a current price of €3.70 was already lower than a peak of €4 at the start of the year.

Cause of the surge in prices is both increased demand for brandy across Europe, as well as a reduced supply of grapes following a reduction in vineyard area and the removal of EU subsidies for distillation in 2008.

“200,000 hectares of vineyards have disappeared across the whole of Europe,” said Bridge, although he added, “some of that will come back.”

As for demand, he recorded, “A lot of alcoholic beverages are using spirit made from distilled grapes,” while he also acknowledged the impact, although lesser, of the rising call for grape-based sugar (rather than beet) for the fruit juice market.

Exacerbating the problems of an increased cost of spirit for Port producers are new payment terms.

Historically there were two subsidies for the distillation of excess grapes – one for the production of the spirit, and the other for the distillers to hold stock – allowing Port producers to order the spirit, take delivery, and then pay for it 6-9 months after the harvest in the Douro.

However, in 2012 and then again this year, Bridge said that the distillers demanded a pre-payment before making the spirit, requiring producers to buy their needs in April/May for the harvest in September.

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Controlling the amount of Port produced is a quota called the beneficio set each harvest by the Port Wine Institute

“In terms of cash flow this has been quite difficult,” stated Bridge.

He added, “We have had to push up prices this year but essentially we have been holding those price increases for several years… because we had substantial stocks, we could delay passing on the cost increases in spirits.”

Similarly, Paul Symington, co-chairman of Symington Family Estates said the Port trade is putting through “really big price increases for the first time in a decade, which the supermarkets have had to accept in the last six months.”

“There are two major things happening,” he continued. “One is the horrendous increase in brandy prices, and the other is the reduction in stocks.”

Controlling the amount of Port produced is a quota called the beneficio, which is set each harvest by the Port Wine Institute.

This has been set below the level of demand over the last three harvests, meaning that Port stocks held by the producers have now dropped by €80m over  three years, according to Symington.

This year’s beneficio, he believes, will again be fixed at a level below current sales, because “the general trend is to keep supply short”, particularly as the region is suffering from a long term decline in demand for inexpensive tawny and ruby Port, particularly from France – the largest export market for Port by volume.

On a more positive note, both Bridge and Symington stressed the extraordinary success of the 2011 vintage declaration.

“We are sold out,” stated Symington. “The demand has been much stronger than it was for the 2007s.”

Bridge added, “2011 is big news, and it has brought the spotlight back onto Port, which one needs to exploit.”

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