Spain Food and Drink Report Q1 2007

Spain's wine industry is likely to face changes and new challenges over coming years, as the European Commission (EC) and the Spanish government have entered into discussions about production, marketing and trade policy measures as part of the EU's efforts to modernise the European wine sector.

For the country's wine producers, these discussions are of great importance, as the plethora of subsidies the industry has received over recent years has not been able to prevent Spanish wines from coming under increasing competitive pressure from 'New World' wines, both on the domestic market and internationally. While Spain, with around 1.2mn ha, still has the largest wine production area worldwide, it lags behind other Western European producers, most prominently France and Italy, in terms of the quantity and quality of wine produced, owing to climatic factors and business practices.

Wine production is regulated by the EU's Common Market Organisation on Wine as well as domestic legislation, and includes aid for distillation and public storage, storage of wine and musts, use of musts, export refunds, as well as restructuring, conversion, and abandonment.

As a result of Spanish consumers increasingly switching from table wine to higher quality wine, Spanish wine producers shift large amounts of surplus table wine towards distillation, thus benefiting from EU policies that have created a subsidised market for surplus wine and ensure a minimum price for producers.

Export sales are mainly to Germany, the UK, the US, and France but, recently, imports, especially from New World countries, have been on the rise.

In the face of declining wine consumption in volume terms and increasing imports, which threaten growing excess production, the EC has identified a need to act and is discussing the abolition of distillation support and measures that would encourage uncompetitive producers to leave the industry.

Spanish wine producers have not been happy with these suggestions, stating that they would oppose any measures suitable to reduce Spain's wine producing capacity.

Spain is, however, the largest beneficiary of EC funding aimed at upgrading vineyard production during 2006-2007, with the aim to fend off New World competitors. Total EU spending will amount to US$567mn, of which Spain will receive EUR159mn. Under EU rules, the money can be used for varietal conversion, the relocation of vineyards, and improvements in vineyard management, but not for routine replanting.

It remains to be seen in how far the Spanish wine industry will make the most of the support available, in order to remain competitive in the face of increasingly difficult marketing conditions.