Globalization and Wine Costs
The March 2008 issue of Wine & Vines
reports three stories of how global forces are pushing up the cost of
making wine in the United States. They make interesting reading for
anyone interested in how the wine industry is changing today.
The first article examines the rising cost of planting new vineyards. Environmental concerns are causing winegrowers to substitute steel posts and stakes for the old treated wood products that have been used for years. Steel makes the vineyard greener, but it is now pushing the vineyard bottom line into the red because the cost of posts and wire has been pushed up by surging demand in for steel in China.
Once the vineyards are planted the vines need to be pruned and the grapes harvested. This is normally a pretty labor-intensive process but machine alternatives exist and the technology has improved considerably over the last 20 years, according to a second article in the magazine. Winemakers are laying out vineyards with wider spacing to accommodate mechanical pruning and harvesting. This is partly because of rising labor costs in the United States and partly because unreliable federal immigration policy makes access to foreign vineyard workers uncertain. High end winemakers may be willing to pay up to $750 per acre for careful hand harvesting, but many others are willing to employ machinery for a cost per acre of $70 to $250 (plus the $150,000 - $250,000 cost of the machine). The cost difference is significant, of course, but my sense is that this trend would be much weaker if federal immigration policy were more stable and industry-friendly.
Bottle Top and Bottom Line
Winemakers are being squeezed everywhere — input costs, labor conditions and even on the cost of the capsules that protect the cork and decorate the bottle top. High end wines often use imported tin capsules for their sleek and beautiful appearance. But their cost is being pushed up in three ways.
First, the price of the raw material - tin - has soared due to high demand in China, where it is used to solder electronic connections. Tin sold for $3600 a ton in 2002 and $6600 in 2005. It costs $16,500 a ton today due to the China effect and speculation associated with it. This huge increase is necessarily reflected in rising capsule prices.
But wait, there’s more. Rising oil prices and demand for shipping container space has helped push up the cost of shipping tin capsules from Europe by 27 percent. The third and final factor is the falling dollar, which makes everything from Europe more expensive. Much more expensive, given the dollar’s recent collapse. Winemakers are having to consider how much a tin capsule adds to their wine’s image, since it is obviously taking from, not adding to, the bottom line.
Global market forces (steel, oil, tin, shipping costs, exchange rates) and the government policies that try to contain them (think immigration) are squeezing winemakers in many ways. It will be interesting to see how much the industry is transformed by these effects.
The cost increases cited are not that significant except at the lowest price category. The difference between mechanical and machine harvest, for example, if $100 a ton adds 13 cents to the costs of a bottle of wine. Let's say foils have gone up from 10 cent to 20 cents. Together we are talking less than 50 cents on the shelf. Steel endposts amortized over the life of the vineyard are a penny a bottle. Even at the highest end, buying the most expensive vineyard, amortizing the state of the art winery, using the most expensive barrels, paying the most expensive winemaking and labor, and bottling in heavy bottles with wooden boxes and it is still difficult to come up with $15 to $20 a bottle in wine costs. The biggest driving force in wine prices is owner's greed. Pure and simple.
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Morton makes an interesting point, but a flawed one. Sure, these cost increases are only significant at the lower end of the market. But in the main, wine IS the lower end of the market. People involved in or close to wine consistently over-estimate the size and importance of the mid-premium to luxury sector. But most wine sold globally is produced at a level where one or two cent adjustments per bottle make the difference between profit and loss.
If this blog were only concerned with so-called 'fine wine', then it would be true that these costs have little real impact on end-consumer prices. But a global view of wine accepts that 60% of the volume of wine in the world and a quarter of the value of wine is in the bulk sector. What Europeans call Table Wine. Un-branded, un-named, multi-regional, sometimes multi-national blends sold in large volume formats for 'drinking' not 'thinking'.
Even in the 'quality wine sector', where origin, vintage and brand/producer matter, the vast majority of producers are affected by these changes. In the UK, a wine at £3.29 will have £1.47 of duty, 20 pence in transport costs, the cost of bottles, labels, capsules (probably with lower tin content as per the article) and the margin requirements of some of the world's most demanding retailers. By most estimates, that would leave between 2 and 10 pence over for wine. If you're only spending 4 pence on the wine (not inconceivable at this level) then sure, these costs rises are having a huge impact.
If winery owners can charge more for their wines because demand is sufficient, then that's not 'greed', it's because the market deems those wines 'worth it'. Who wrote the law that wine retail prices have to reflect the cost of goods that went into them? I certainly don't see it on designer watches, cars, branded jeans or a can of soft drink. On that basis the Mona Lisa should be worth a couple of Euros.
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