For many reasons economists are intrigued by organic and biodynamic wines.  One of the many interesting questions is: Do organic wines command a price premium? And if yes, how high is it?

In general, producing organic produce is significantly more expensive than producing regular produce. Assuming the same crop yields per acre the per ton production cost of organic almonds is about 18% higher than for conventional ones. For broccoli this is about 15%. The cost studies of UC Davis are an excellent source for any kind of crop including grapes. http://coststudies.ucdavis.edu

Below I copied the 2004 cost tables for organic and conventional Chardonnay grapes grown in Sonoma county. (Both Chardonnay reports and many other reports can be downloaded from coststudies.ucdavis.edu)

Assuming a crop yield of 5 tons per acre, conventional grapes cost approximately $2,477 per ton. For the same specific yield, organic grapes cost $2,791 – a difference of almost 13%. However, assuming that per acre yields of organic fruit are normally lower this difference is likely to be much higher. If the organic vineyard yields only 3 tons per acre the cost will shoot above $4500 per ton, i.e., about 80% higher than for conventional grapes.

Conventional Chardonnay (Sonoma County, 2004)

Organic Chardonnay (Sonoma County, 2004)

As a result, organic winegrape growers need to command significantly higher prices to break even. This can easily be seen from the tables that report the respective net returns dependent on prices and crop yields. Even if the organic winegrape grower had the same yield per acre as his conventional counterpart (which he probably does not) he needs a substantial premium to survive.

Conventional Chardonnay (Sonoma County, 2004)

Organic Chardonnay (Sonoma County, 2004)

What does all that mean for organic wine?  The logical consequence must be: organic wine should be substantially more expensive than conventional wine.

 
Magali Delmas of UCLA’s Institute of the Environment and Laura Grant of UC Santa Barbara assessed the “price premium” for organic wines in the U.S. We published a first version of their research as an AAWE Working paper (AAWE Working Paper No. 13) which is downloadable from our website.

Their main finding is a “price paradox for organic wines.” Most wine makers distinguish between certifying their wine as organic and putting it on the label. While the organic certification raises the price by about 13% (probably driven by better quality) putting the eco-label on the bottle will more than offset the price gain and lead to a net loss.

Both will present their research at the AAWE Meetings in Portland (Magali Delmas will also talk about biodynamic wines, but that is a different story).

Here is their abstract:

Eco-labeling signals that a product has been eco-certified. While there is increasing use of eco-labeling practices, there is still little understanding of the conditions under which eco-labels can command price premiums. In this paper, we argue that the certification of environmental practices by a third party should be analyzed as a strategy distinct from although related to the advertisement of the eco-certification through a label posted on the product. By assessing eco-labeling and eco-certification strategies separately, we are able to identify benefits associated with the certification process independently from those associated with the actual label. More specifically, we argue in the context of the wine industry that eco-certification can provide benefits, such as improved reputation in the industry or increased product quality, which can lead to a price premium without the need to use the eco-label. We estimate this price premium of wine due to the eco-certification of grapes using 13,400 observations of wine price, quality rating, varietals, vintage, and number of bottles produced, for the period 1998-2005. Overall, certifying wine increases the price by 13%, yet including an eco-label reduces the price by 20%. This result confirms the negative connotation associated by consumers with organic wine. The price premium of this luxury good due to certification acts independently from its label, a confounding result not previously demonstrated by related literature.