Modelling the demand and supply determinants of Australian wine grapes

This study presents an econometric investigation of the demand and supply determinants of the dominant premium wine grapes in the warm inland regions of Australia. Motivated by the extensive use of long-term contracts, market concentration, the lag between vine planting and grape production and the lingering impact of unexpected export demand, a market disequilibrium model is employed to estimate demand and supply elasticities. Demand is found to statistically significantly depend upon own prices, and fluctuations in income, exchange rates and the level of wine stocks. Important identified supply determinants include current prices, a quantity partial adjustment process, a time trend and lagged relative prices with regard to non-premium and other premium varieties. The resulting elasticity estimates provide important information for model simulations relating to potential tax changes and the impact of research and development. The results also identify key changes in market conditions, including the export-driven excess demand of the 1990s and measures of the subsequent excess supply of the 2000s.