Australia's Treasury Wine to make premium Penfolds in California amid U.S. reset

By Colin Packham

SYDNEY (Reuters) - Australia's Treasury Wine Estates, the world's biggest listed winemaker, announced plans on Tuesday to produce its premium Penfolds brand in California as part of a reset of the company's North American strategy.

The idea to produce the brand outside Australia had been discussed for years, a company official said. But analysts said the diversification was timely as a diplomatic rift between Canberra and Beijing threatens to harm Treasury's exports to China, a major market.

Penfolds Chief Winemaker Peter Gago said they would use grapes from California's Napa Valley from the 2018 harvest onward. "We are striving to add outstanding Californian-sourced wines to our offering by fiscal 2022," he said in a statement.

The plan to produce a premium wine in the United States comes five years after the company had to destroy product when exports of low-end brands failed to win over U.S. wine drinkers.

"It sets Penfolds up for the next phase of growth," Angus Lilley, Treasury's deputy chief marketing officer, told Reuters.

Lilley said the U.S. plan was not in response to the current spat between Australia and China, which has seen wine products from six Australian producers held up at Chinese customs.

Treasury said it planned to export wine from California, but analysts said those plans could be affected by trade disputes between Washington and Beijing, which has threatened a 15 percent tariff on U.S. wines.

Analysts said it was advisable for Australian winemakers to explore their options.

"Diversification is prudent," said Phin Ziebell, an agribusiness economist at National Australia Bank.

"There is some uncertainty around China, which has driven the market, so wine producers will need to look at other places," he added.

Prime Minister Malcolm Turnbull last year cited Chinese meddling in domestic affairs as justification for new foreign interference laws passed last week. China denies meddling and says Australia has a "Cold War mentality".

Australian wine exports to China surged with a 2015 free trade deal and changing consumer tastes, but the latest tensions suggested industry sales this year could miss a forecast to top A$1 billion ($738 million).

Wine shipments have slowly resumed passing through Chinese customs, said Tony Battaglene, chief executive of the Winemakers Federation of Australia, an industry group.

"The speed that shipments clear customs is much slower than what is was in early 2018," he said.

Analysts say exporters like Treasury can ill afford a prolonged dispute between the two countries, which had two-way trade of A$170 billion last year.

Treasury reported a 37 percent increase in first half profit in January, driven by growth of 60 percent in sales to North Asia, a division that includes China.

Australian cattle graziers and citrus growers also fear they are being sidelined by China as a result of the row.

Canberra may challenge the relationship further if, as widely expected, it bans Chinese telecommunications equipment maker Huawei Technologies Co from participating in a 5G broadband network.

($1 = 1.3543 Australian dollars)

(Reporting by Colin Packham; Editing by Darren Schuettler)