Wine Economics2008-07-25T00:19:59Zhttp://wine-econ.org/atom.aspxQuick BlogThe Father of Wine Economics?tag:wine-econ.org,2008-07-24:cd265934-84b4-45d2-93ef-5b78cbede9d8Michael Veseth2008-07-24T07:45:02Z2008-07-24T07:28:00ZUniversity of Puget Sound and The Wine Economist)

Adam Smith is generally regarded as the Father of Economics, even though many wrote on economic topics before him. Was he also the Father of Wine Economics? 

The case for Smith’s paternity is made in the most obvious (and least likely) of places, The Wealth of Nation (1776), his most famous work. It is the obvious source because Smith wrote about everything in Wealth of Nations: history, theory, policy, even provided practical advice. It is the least likely place to look, however, because it is so little read (really read, if you know what I mean) and because people only remember the book for two thing: the Invisible Hand and the Pin Factory example of the division of labor. But there is a lot more to be found, including an early treatise on wine economics.

Adam Smith wrote a good deal about wine. This was partly because he traveled in France and learned about wine markets first hand. But it was also a fact that Britain was for centuries a wine-drinking country, as John Nye’s fine book explains, just as it is so today, with a practical interest in wine market concerns.

The foundation of Smith’s wine economics is laid out early in Wealth of Nations, Book One, Chapter 11: Of the Rent of Land. Here Smith tries to explain why some kinds of land earn more than other lands. Land suitable for viticulture earns higher rent, Smith said, and has long done so.

That the vineyard, when properly planted and brought to perfection, was the most valuable part of the farm, seems to have been an undoubted maxim in the ancient agriculture as it is in the modern through all the wine countries

But viticultural profits were constantly threatened, Smith argued. Not by nature, although this could cause bad crops, and not by high taxes, although he argued against them. The chief threat (or perceived threat) to viticultural earnings was expansion to new lands. Old vineyards, as he called them, were threatened by New Vineyards — and would seek protection from them or to prevent their development. This section reads very well today if you change Old Vineyards to Old World wine and New Vineyards to New World Wine. Certainly New World Wines (and their vineyard, cellar and marketing practices) are seen by many Old World producers as a threat to their livelihood. Adam Smith understood why Old would seek by any means to prevent development of the New. You don’t have to have a Ph.D. in economics to already know that he did not approve.

Smith wrote about terroir, too. I can’t really say that Adam Smith invented terroir, the idea of a special taste of place that winemakers strive for, but I can say that he understood its economic value. Smith wrote that

The vine is more affected by the difference in soils than any other fruit tree. From some it derives a flavour which no culture or management can equal, it is supposed, upon any other. This flavour, real or imaginary, is sometimes peculiar to the produce of a few vineyards; sometimes it extends through the greater part of a small district and sometimes through a considerable part of a large province.

I note with interest that Smith recognized terroir and doubted the reality of its existence in the same sentence (”real or imagined”). It isn’t terroir that really matters to a wine economist, I suppose, it is only that people think there is terroir. Smith wrote at length about the economics of these special wines and, because of their limited quantities, the premium prices they could command. Any modern winemaker, upon reading this section, would immediately try to create an A.V.A. to cash in on the possibility of terroir by limiting supply.

The whole quantity of such wines that is brought to market falls short of the effectual demand, or the demand of those who would be willing to pay … The whole quantity, therefore, can be disposed of to those who are willing to pay more, which necessarily raises the price above that of common wine.

A small part of this higher price … is sufficient to pay the wages of the extraordinary wages bestowed upon their cultivation, and the profits of the extraordinary stock which puts this labor in motion.

Smith’s treatment of wine is not complete - there is no discussion of cork versus screw-cap, for example, and no treatment of en primeur wine futures, but what he does say shows pretty clearly how well he understood the political economy of wine.

So, to answer the question that started this entry, is Adam Smith the Father of Wine Economics? Probably not, is my answer. His analysis in Wealth of Nations is certainly very good, but I am pretty sure that earlier economists did not ignore the wine market. The reason: because wine was so very important to economy and society from the earliest days.

]]>The Most Profitable Wine in the Worldtag:wine-econ.org,2008-07-17:9e06d85d-fa38-4dc3-a3fc-22ee734609fdMichael Veseth2008-07-17T14:54:33Z2008-07-17T14:47:00Z

July 17, 2008 by by Michael Veseth (University of Puget Sound and The Wine Economist)

Following the Money to New Zealand

2128.jpgWhat’s the most profitable wine in the world? Not the most expensive single wine (like Chateau Pétrus or Screaming Eagle), but the most profitable type of wine? Guardian wine critic Tim Atkin raised this question is an article called “Bottle Banks” and it is interesting to think about what the answer might be.

Profits, of course, are all about the difference between price and cost. So which country gets the highest average price for its wine exports? Most people are surprised to learn that it is New Zealand (see footnote below). New Zealand is unusual among wine producing countries in that its exports are almost entirely premium and super premium wines. The domestic Kiwi market for low cost bulk wines is filled by imports from Australia and Chile, leaving NZ producers free to focus on higher value export markets. This nearly single-minded concentration on upmarket wines results in high average export prices.

New Zealand would therefore be a prime suspect for the most profitable wine-making country - if higher production costs don’t offset the price advantage.

Easy as 1-2-3?

I was not completely surprised, therefore, to read Atkin’s conclusion that the most profitable wine is probably Marlborough Sauvignon Blanc from New Zealand, which is by far that country’s leading wine export. Atkin writes that

I was sitting talking to the owner of a top New Zealand Sauvignon in Australia recently when he proudly took out his mobile phone and showed me pictures of his bespoke Maserati. ‘Kiwi Sauvignon is cheap and easy to make and commands a premium,’ he explained. ‘And by the time I have to pay my growers for their grapes, the wine is already on the market.

That certainly sounds easy enough. Atkin continues

He’s got a point. Marlborough Sauvignon generally produces heavy crops (partly a result of fertile soils, but also of vineyard practices). Once it’s in the winery, all the average producer has to do is crush the grapes, add yeast and ferment it at a cool temperature in stainless steel. A matter of days later the wine is ready for bottling.

Nothing could be simpler really, although I didn’t know you could make wine in just a few days. I wonder why everyone doesn’t just get up and go to Marlborough to make Sauvignon Blanc? Since economists are trained to be suspicious of easy money stories like this, I thought it would be interesting to talk to someone in the New Zealand industry about profitability.

Hidden Complexity

So I wrote to Neal Ibbotson, managing director of Saint Clair Family Estate Wines in Blenheim (Marlborough). I met Neal in 2004 when I was doing research for a book on globalization. Neal was a pioneer winegrower in the Marlborough region — Neal and Judy planted their first vineyard there in 1978 –  and someone whose knowledge and opinion I value a lot. The 2003 Saint Clair Wairau Reserve Sauvignon Blanc that I sampled on that visit was the most memorable NZ wine I have ever tasted.

Neal didn’t comment on the Guardian article directly, but what he had to say helped me understand the hidden complexity of the situation.

Marlborough Sauvignon Blanc can in fact be a pretty profitable wine, but that doesn’t mean that everyone is rolling in cash.

Neal writes that

It is very profitable for the best grape growers on the best soils where they can combine relatively high yields and high quality. Say 5% of Marlborough’s growers. These growers deservedly reap the benefit from having out laid the capital and taken some risk and are very fortunate that the grapes they grow are a unique product, in strong demand.

It is less profitable and is in some cases unprofitable, for those growers who are in more marginal areas on less productive soils where yields and often quality are not as good

It can also be quite profitable for the very best wine companies who produce a high quality product and have good access to the markets. Say 10%. There are however both Marlborough Sauvignon Blanc grape growers and wine companies that are unprofitable. {It’s worse in some other parts of NZ.}

There are also a number of cases of new labels that have been produced, by would-be winemakers, that are sitting in the bottling halls, or on retail shelves, gathering dust whilst interest accrues in their bank accounts. In addition there is the huge capital requirement to take a small producer, normally profit marginal, to a medium or large producer where profitability is more likely

This is clearly a more realistic picture of the NZ wine industry. There some firms that are very profitable due to cost advantages or because they are able to leverage unique assets, like reputation or special vineyard characteristics. But there are other firms that, lacking these advantages, scrape by or lose money. Distribution is the big bottleneck in the global wine business, and wineries with access to efficient distribution have a head start towards profit goals. Inevitably in any industry with heterogeneous inputs and outputs, the profit profile is complicated.

Not only are Marlborough profits not uniformly high, according to Neal, they are also not certain. High prices require high quality and the ability to maintain a reputation for exceptional wines (I will talk about what Saint Clair is doing in this regard in a future post). But there are other factors to be considered. Neal writes that …

Most wineries are struggling to some degree with the increasing cost of buying in Sauvignon Blanc grapes, and the high value of the NZ $ which increases the cost of NZ wine in the market place and makes any additional increase in price from the wineries extremely difficult. Because of increasing prices for Marlborough Sauvignon Blanc grapes and the high NZ$ at present most wineries are caught between a rock and a hard place

This reminds me of a discussion I had with Jane Hunter of Hunters Wines in 2004. (Hunters was one of the first NZ Sauvignon Blancs to break into the key British Market and establish the region’s reputation there). What is the biggest threat to your industry, I asked her. The appreciation of the NZ dollar, she replied without hesitation.

Tim Atkin might be right about Marlborough Sauvignon Blanc, but he’s also wrong. I think it must be a very profitable wine for some (I wonder … was he talking to someone from Cloudy Bay?), but making wine and then making money making wine isn’t as easy as he suggests, even in Marlborough.

(Footnote: Here is an interesting fact: Canada actually earns higher per liter revenues from its bottled wine exports than New Zealand, according to my copy of The Global Wine Statistical Compendium, but comparing it to New Zealand is like comparing apples and oranges. Or table wine to ice wine, to be more specific. Canada’s wine exports are tiny compared to New Zealand, but the per-bottle revenues are high because it is mainly expensive ice wine - sweet dessert wines made from grapes left on the vine so that freezing weather can concentrate the juice and flavor.)

]]>AAWE Papers in Portland: Global Warming and Wine on the West Coasttag:wine-econ.org,2008-07-10:1a6eb854-3ae8-4b76-bb79-1d6aaa662d0cKarl Storchmann2008-07-10T18:13:25Z2008-07-10T10:30:00ZJournal of Wine Economics)


The impact of weather on wine quality has been well documented for thousands of years. However, not until recently have economists approached this phenomenon quantitatively. As documented by Orley Ashenfelter (see our article about Judging Bordeaux Vintages: Intuition and Super Crunching), warm and dry weather in the Bordeaux region can produce a wine that is substantially more expensive than a wine from a wet and cold vintage. In regions that are already at the temperature optimum the relationship may be the other way 'round.

At least on paper, the step from weather to climate is a small one. For the last 6-8 years, there has been is a growing body of literature on the relationship between viticulture and global warming. Some of these papers assess the economic impact on wine and vineyard prices. (see, for instance, "Go North Young Grapes" in SLATE) others evaluate the impact of global warming on wine quality (e.g., this article in the journal 'Climatic Change').

 

Last year, Greg Jones, a climatologist at Southern Oregon University, and collaborators published a widely noticed paper in the Proceedings of the National Academy of Science PNAS (click here for the paper). They predict that increases in the frequency of extreme hot days (>35°C) during the growing season will eliminate winegrape production in many areas of the United States, including parts of the Napa Valley. Grape and wine production will likely be restricted to a narrow West Coast region and the Northwest and Northeast, areas currently facing challenges related to excess moisture.

 

At the Annual Conference of the America Association of Wine Economists in Portland (Aug 14-16) Greg Jones (together with Gregory Goodrich of Western Kentucky University) will present a paper that evaluates the causes of longer growing seasons, less year-to-year variability and fewer frost days on the U.S. West Coast. Is really global warming the sole driving force or are these effects caused by periodical phenomena such as El Niño–Southern Oscillation (ENSO) and the Pacific Decadal Oscillation (PDO)?

 

The result: The currently experienced longer growing seasons and small year-to-year variability is the result of a combined effect of both a general temperature increases and periodical effects. When the PDO returns to a multi-decadal cold phase, wine growers across the western USA will likely experience greater variability in wine quality.

 

Here is their abstract:

Trends in climate variables important to winegrape production in the western United States include fewer frost days, longer growing seasons, and higher spring and growing season temperatures. These trends have been related to a steady increase in wine quality and a decrease in year-to-year variability. While the trends in climate have been linked to increasing sea surface temperatures in the eastern Pacific, it is unknown whether this is caused by climate change or may be part of natural oscillations in the Pacific. In this study, 15 climate variables important to winegrape production were analyzed for 10 wine regions over the western USA. The variables were stratified by phases of the El Niño–Southern Oscillation (ENSO) and the Pacific Decadal Oscillation (PDO), both separately and then in combination (modulation effect) to determine if there are any significant differences between teleconnections. ‘Wine Spectator’ vintage ratings for Cabernet Sauvignon wines from the Napa Valley were also stratified by the same method, and multivariate statistics were used to determine which variables are most important to wine quality.

 

ENSO phase by itself was not found to be important to either climate variability in wine regions in the western USA or wine quality in Napa Valley, but the cold phase of the PDO was found to be associated with increased spring frosts and a shorter growing season that results in lower ratings relative to warm PDO. The combination of neutral ENSO conditions during the cold phase of the PDO was nearly always associated with low quality wine in the Napa Valley, which is a function of cold springs with increased frost risk, cool growing seasons, and ripening period rainfall (cold PDO), and above-average bloom and summer rainfall (neutral ENSO). Although climate trends toward generally warmer growing seasons with less frost risk have occurred, this research highlights the impact of climate variability on wine quality where, should the PDO return to a multi-decadal cold phase, wine growers in the Napa Valley and across the western USA will likely experience greater variability in wine quality.

 

Evidence of these conditions have occurred during the 2007-08 winter and into spring 2008 where a much colder and wetter than normal winter in the PNW and northern California has been seen. A lingering moderate to strong La Niña event in the tropical Pacific has been boosted by the influence of the larger cold phase of the PDO in the North Pacific. The result has been higher snow packs throughout most of Washington, Oregon, and northern California and anywhere from a one to four week delayed bud break or bloom (grapevines and orchard fruit, respectively) followed by an increased frequency of frost. During the third week of April 2008, some of coldest conditions since the mid 1970s caused widespread damage to everything from cherries, peaches, pears, apples, to winegrapes. As of April 24th winegrape growers in Sonoma and Napa had already estimated a 10-25% yield loss due to frost and are still waiting for spring to come.

]]>Wine Economics Feature in "The Economic Journal"tag:wine-econ.org,2008-06-30:fa0771b0-940d-487a-9d92-eb6c62552fadKarl Storchmann2008-06-30T18:27:24Z2008-06-30T14:22:00ZJournal of Wine Economics)


Wine economics increasingly establishes itself as a distinct economic discipline. Recently, "The Economic Journal" published a series of wine-related articles. Needless to say that all articles are by editors or board members of the "Journal of Wine Economics"





Richard Baldwin Professor of International Economics at the Graduate Institute in Geneva, CEPR Policy Director, and VoxEU.org Editor-in-Chief summarizes the articles as follows:

"Why do economists have to take the fun out of everything?

Wine lovers worldwide enjoy discussing the finer points of terroir; Saint-Estèphe is harder than Pauillac, as every connoisseur recognises. It’s the heavier, thicker soils, don’t you know?

All bunk, according to recent research by Olivier Gergaud and Victor Ginsburgh. Using a database on terroir characteristics such as land characteristics (exposures of vineyards) and techniques (grape varieties, picking method, bottling, etc.) in 100 vineyards combined with data on measures of quality (ratings and auction prices), they show that endowments don’t matter. It’s technology. The French marketing myth of terroir won’t die easily, but the smart money should ignore it.

Publishing in the same issue of The Economic Journal, the dean of terroir debunkers – Orley Ashenfelter – studies the prices of Bordeaux vintages. Older Bordeaux taste better so the same wine is sold twice; when it’s young en primeur and when it’s ready for decanting.

In a sober market, the wine’s en-primeur price should be an unbiased predictor of its ready-to-drink price. Not so. The quality and prices of vintage Bordeaux is predicted by the weather that created the grapes, but this easily measured determinant is ignored by purchasers at the en primeur auctions. Instead, the prices paid by early buyers are influenced by tasting results, especially the ratings of Robert Parker.

Smart money ignores Parker. Get a weather report for the vintage year and a copy of Ashenfelter’s ‘Predicting the Quality and Prices of Bordeaux Wine'.

Fine advice if you’re aiming for value-for-money in your cellar. Making money requires a different approach. Predicting a beauty contest winner is not, as Keynes famously opined, a matter of judging beauty but rather judging the judges judgment on beauty. When it comes to Bordeaux, the judge-in-chief is Robert Parker.

Michael Visser and colleagues estimated the Parker effect on en primeur prices using a clever quirk. For years, Parker has come to Bordeaux to taste and grade the wine when it is extremely young. Statistically, his grades have a huge impact on prices. But in 2003, it didn’t work. Fearing war in Iraq, Robert stayed home in the Spring of 2003 and his grades were published only after the determination of the en primeur prices. Using the 2002 and 2003 en primeur prices for approximately 250 wines from a large Bordeaux wine broker, they estimate the Parker effect. About 2.80 euros per bottle."


This article was published by VoxEU.org on June 28 at www.voxeu.org/index.php?q=node/1274

]]>Dollar Daze in the Wine Walltag:wine-econ.org,2008-06-25:3a013f9a-872f-4ac9-8dcc-7cc7eee6a01bKarl Storchmann2008-07-06T04:22:04Z2008-06-25T05:17:00ZUniversity of Puget Sound and The Wine Economist)


You know that wine economics has become mainstream when you find yourself listening to it on the car radio.

The Dollar and the Wine Wall

Marketplace, a program of American Public Media that is broadcast by many National Public Radio stations, recently featured a story called U.S. Winemakers Toast a Strong Euro. Go ahead and click on the link to listen to the story or read the transcript.

The basic idea, which my International Economics students will recognize immediately, is that exchange rate changes create many direct and indirect winners and losers. This is particularly true in the increasingly integrated global wine market. The Euro has appreciated from about USD 1.35 per Euro to about USD 1.55 in the last year, which means that a wholesale €10 bottle of French or Italian wine’s dollar cost has increased from $13.50 to $15.50. This pushes the retail price from about $20 to $23 or $24, assuming a full cost pass-through, which puts it at a different price point on the supermarket shelf. Higher shipping costs will nudge the dollar price a bit higher still. Basically, you’re looking at a $20 wine selling for as much as $25. U.S. wines are corresponding cheaper in Eurozone countries.

U.S. winemakers hope that the falling dollar will be their ticket to higher sales abroad. I wrote about this in January when a group of Washington and Oregon wineries organized an export event in London. It is difficult to get traction in foreign markets, but the dollar’s weakness should help.

In the meantime, rising import prices here give domestic wines an advantage. Wine buyers tend to make most of their purchases around particular “comfort zone” price points and rising import prices should create some advantageous substitution effects. This comes out in the Marketplace interview. One wine professional puts it this way

Say if they used to enjoy a Sancerre for $20 and now their favorite producer is $25, they’re going to look for a comparable producer in that same price range that they originally purchased.

And the idea is that the “comparable producer” might be from the U.S., although this isn’t always the case.

Now Things Get Complicated

A falling dollar encourages exports and discourages imports — so far we are following the textbook pretty closely. But real world economics, and wine economics in particular, is seldom so simple. Foreign wine producers and distributors obviously have an incentive to keep from losing their market and there are many strategies to soften the exchange rate effects. The New Zealand producers, for example, seem to have been pretty successful in finding new markets for their wine and strengthening their reputation in response to the rising New Zealand Dollar. So far NZ wine seem to be defying gravity — higher quantities and higher prices too. But not everyone can pull of this bit of magic (or necessarily do it forever in New Zealand’s case).

One way to retain market share is for European exporters, distributors and retailers to absorb some of the exchange rate effects themselves, limiting what economists call the “pass through effect.” Canadian wine columnist Anthony Gismondi wrote about this in April in the Vancouver Sun.

I think European winemakers will be under a lot of pressure this year as container shipping costs continue to rise and the Euro’s strength persist. Not all of these higher costs can or will be passed along immediately in the form of higher dollar prices. The biggest effects will probably be felt on low cost wine, where the shipping cost effect is proportionately greater and price sensitivity is higher, too. Look for foreign wineries to go upmarket if they can and to absorb costs or adjust in other ways if they can’t.

But high end wines are not immune from exchange rate problems. Decanter reported in March that the strong Euro was expected to depress prices for Bordeaux en primeur sales.

Winners & Losers

The dollar hasn’t fallen uniformly relative to all currencies. A dollar buys 3.1 Argentine pesos today, for example, which is about the same as a year ago (Argentina’s compounding economic problems have caused a run on the currency in recent days). The Chilean Peso has not appreciated as much as the Euro and the South African rand is actually cheaper in dollar terms than a year ago.

One well known Australian brand, Lindemans, has been sourcing wine from Chile and South Africa to keep costs down as the Australian dollar has risen — a controversial but not uncommon practice in today’s small world of wine. Look for the Lindemans “Country of Origin” wine series.

This suggests that the Dollar Daze on the Wine Wall might feature some interesting shifts, from France and Italy (and Australia and New Zealand) to Argentina, Chile and South Africa. Is it my imagination or are the wine critics and magazines already riding this wave by featuring these New World regions more prominently in their publications?

]]>AAWE Papers in Portland: Wine Price and Subjective Appreciationtag:wine-econ.org,2008-06-20:c9d3c1cb-809f-4afd-83ad-18d35a531cbeKarl Storchmann2008-06-21T07:15:25Z2008-06-20T15:30:00ZRobin Goldstein (fearlesscritic.com) and Johan Almenberg (Stockholm School of Economics)


Suppose good X is similar to good Y, but has a considerably higher price tag. Most of us would probably expect good X to be slightly better than good Y along some dimension. Such an expectation would not imply that we would always purchase good X: the difference in how much we appreciate the two goods may be small, and not worth the increased expense. The point is simply that it seems reasonable to expect there to be some noticeable additional quality to the more expensive good.

 

In the forthcoming issue of the Journal of Wine Economics, we present our study “Do More Expensive Wines Taste Better? Evidence from a Large Sample of Blind Tastings” (joint work with A. Dreber, J. W. Emerson, A. Herschkowitsch, and J. Katz). Our main finding is that participants in blind tastings do not appreciate expensive wines more than cheap wines. In our sample of over 6,000 blind tasting observations, compiled by food and wine critic Robin Goldstein and discussed at length in his new book, The Wine Trials (Fearless Critic Media, 2008), we find that the correlation between price and overall rating is in fact small and negative, suggesting that individuals on average enjoy more expensive wines slightly less.

 
There is no reason to expect individuals with a great deal of experience of drinking wine to be similar to individuals with little experience in this regard. Using wine training (such as participation in a sommelier course) as a proxy for wine expertise, we were able to separate these “experts” from the rest of the tasters in the sample. We find indications of a small positive correlation for experts. This correlation is only marginally significant (the p-value is just below 0.10, despite the large sample size) and the coefficient is quite small, suggesting that even for expert tasters the correlation between price and subjective appreciation is less than overwhelming.

In both cases, the coefficients are of a moderate magnitude, but non-negligible, given that wine prices cover such a large range. Suppose that Wine X costs ten times more then Wine Y in dollar terms. In terms of a 100-point scale, such as that used by Wine Spectator, our estimates predict that non-experts will assign an overall rating that is four points lower for wine X, whereas experts will assign an overall rating that is seven points higher.

Why, then, do everyday wine drinkers spend money on expensive wines? The price tag itself may influence how much we appreciate the good. This is in line with a familiar finding in marketing research: increasing the price of a good sometimes increases the demand for the good for psychological reasons alone (see for example Cialdini, 1998), by signaling that the good is covetable. Goldstein explores this effect in The Wine Trials, which examines the methods of modern wine marketing, the undue deference of consumers toward numerical ratings in industry publications such as Wine Spectator, and the inconsistencies between controlled blind-tasting results and those sorts of ratings, which exhibit a strong positive correlation with price.

In a sense, our paper is a companion piece to Plassmann et al. (2008), in which experimental subjects reported higher levels of satisfaction from wine they were told was more expensive, even when it wasn’t; functional magnetic resonance imaging suggested that their brains responded differently to the taste experience itself. While Plassmann et al. seek to isolate the effect of contextual information (about price) on the experience of the wine, we seek to remove all contextual information (about price, producer, country of origin, varietal etc) and look at the subjective appreciation of the wine itself.

 
References:

Cialdini, R B (1998) Influence: The Psychology of Persuasion. New York: Collins.

Goldstein, R. (2008). The Wine Trials. Austin: Fearless Critic Media.

Plassmann, H, J O’Doherty, B Shiv and A Rangel (2008). Marketing Actions Can Modulate Neural Representations of Experienced Pleasantness. Proceedings of the National Academy of Sciences 105(3): 1050-1054.

]]>Australian Winequaketag:wine-econ.org,2008-06-16:abcc974b-357a-454c-a7e9-28ccbe72758aMichael Veseth2008-06-16T16:03:29Z2008-06-16T15:52:00ZUniversity of Puget Sound and The Wine Economist)

Market tremors seem to be felt everywhere — food, fuel, money, natural resources. And now in the wine world.

Wine Tremors

It has been hard to ignore the feeling of instability in the wine world for the last few months. There has been a lot of shifting around of brands and alliances, as if the big wine producers are feeling off balance and need to get recentered. In January, for example, Constellation Brands, the world’s largest wine company, sold off their high volume Almeden and Inglenook brands along with the Paul Masson winery to The Wine Group. The reported logic was that Constellation wanted to focus more on premium and superpremium wines. The Wine Group is a privately held San Francisco-based company that has its roots in Coca Cola’s old wine division. (See Note below.)  It makes and markets a variety of high volume brands, including Franzia, Concannon, Corbett Canyon, Glen Ellen, Mogen David and several international brands.. It is the third largest wine company in the United States, behind on Gallo and Constellation, with 44 million case sales in 2007.

I felt another tremor on Tuesday, when a Decanter.com story reported that Constellation had sold more of its wine brands, this time to a new Healdsburg, California-based group called Ascentia Wine Estates. The wineries are Geyser Peak Winery in Alexander Valley, Atlas Peak in Napa, Sonoma Valley’s Buena Vista Carneros, Gary Farrell Winery, Washington’s Columbia Winery and Covey Run, and Idaho’s Ste Chapelle. They produce about a million cases of wine a year between them. Vineyards in Napa and Sonoma county were included in the $209 million deal. The logic, the article said, was to allow Constellation to continue to sharpen its focus on key upmarket brands.

There are several interesting things about this sale. From the Constellation standpoint brands like Geyser Peak, Buena Vista Carneros and Columbia are a good deal more upscale than high-volume Almaden and Inglenook brands that were sold in January. Constellation sold 59 million cases of wine in the U.S. alone in 2007, so the loss of a million case capacity is less important, I think, than the sign that the company is very serious about reshaping itself to adapt to changing market conditions. Constellation says that they are going to focus on fewer brands at the top of the pyramid and I guess they really mean it.

Ascentia is clearly making a different bet. Ascentia is a private group that includes major investors GESD Capital Partners, a San Francisco-based private equity fund, wine distributor WJ Deutsch & Sons and Jim DeBonis, former chief operating officer of Beam Wine Estates (several of the brands included in this deal were part of the Beam Wine Estates portfolio when Constellation acquired that operation last year).

The involvement of the Deutsch family is significant. Deutsch is the masters of marketing and distribution of value-priced wines. They partnered with Australia’s Casella family to create [Yellow Tail], the best selling import wine in the U.S. (I have written about this in my [Yellow Tail] Tales article. They also import and distribute George DeBoeuf, J. Vidal Fluery and other important wine brands. They clearly see opportunity where Constellation does not. It will be interesting to see how this group adapts to the shifting wine landscape. I cannot believe that they are through assembling their new portfolio because I think there may be more wine brands on the market soon (see below).

Winequake

The news from California on Tuesday regarding the Constellation-Ascentia deal was interesting. But the news from Australia in yesterday’s Financial Times as stunning and represents the first of what might prove to be a series of significant winequakes.

Foster’s, the big Australian drinks group, announced major write-downs of its wine assets and the resignation of its CEO, Trevor O’Hoy. The FT’s Lex column summarized the situation like this:

We all know the feeling: a night of bacchanalian excess followed by regrets and a light wallet the next morning. Foster’s, after a 12-year bender in which it spent A$8bn in the wineries of Australia and the US, has a severe hangover. Australia’s biggest beer and winemaker on Tuesday announced A$1.2bn of write-offs, lowered profit forecasts and parted company with its chief executive.

Foster’s last big splurge, the A$3.7bn purchase of Southcorp, is partly responsible. Foster’s bought the Australian winemaker in 2005 for a generous 14 times enterprise value to forward earnings before interest, tax, depreciation and amortization, among the highest multiples for deals in the wine sector at the time. It even mocked Southcorp, as it attempted to defend itself against the hostile takeover, for being unduly conservative with respect to its own earnings forecasts.

Fast-forward three years and the hubris has been punished. Integration was botched, partly due to the ill-judged decision to blend sales forces into a single unit in Australia. In the US, distribution was poorly managed. External factors packed the final punch. Australia’s vineyards produced a glut of wine and prices plummeted. The Aussie dollar surged, from about 76 US cents at the time of the acquisition to 95 cents today. Foster’s reckons that every cent move lops A$3.2m off the wine business’ earnings before interest and tax - forecast to total A$1.2bn this year.

Fosters owns 22 wineries in five countries and 60 wine brands, including Beringer, Lindemans, Wolf Blass, Penfolds, Rosemount and Matua Valley. Among other things it is writing off A$ 70 million of bulk wine inventory. It will try to trim its US inventory by 1.4 million cases. (Fosters was the fifth largest wine seller in the U.S. in 2007 with 20 million cases, about the same as Bronco wines and its Two Buck Chuck brand). This is more than a tremor. What does it mean? It is a Foster’s problem, or does it have larger significance?

The assumption for the last few years has been that bigger is better in the global wine market and that big global firms like Constellation and Foster’s had an unbeatable advantage. Is this just a shakeout, or are these recent events a signal that the world of wine is experiencing a fundamental change? Watch this space for updates.

Note: Coke purchased Franzia some years ago and built its wine division from that foundation. The Franzia family now owns Bronco Wines, the Two Buck Chuck company.

]]>The Welfare Gains of Wine Market Globalizationtag:wine-econ.org,2008-06-12:6d2f01d7-b371-4888-84dc-80ddb09aea08Karl Storchmann2008-06-12T19:37:56Z2008-06-12T08:14:00Zgokcekom@shu.edu)

Increasingly wines arrive in the American wine market from all over the world. Accomplishments such as being on the Wine Spectator’s yearly best 100 wines for vintages from places such as Argentina or South Africa would not have been possible fifteen years ago.  Yet the market continues to expand with wine produced in more and more countries around the world.  The American wine market is one of the most open in the world. The result is that the American wine drinker has increasingly diverse options in their wine choice.  Yet, with all this diversity, is the American consumer benefiting through cheaper and better quality wines? 

To answer this question, my graduate student, Andrew Fargnoli and I wrote an article in the Journal of Wine Economics, (December 2007: 2(2), pp. 187-195), “Is Globalization Good for Wine Drinkers in the United States?” where we analyzed changes in price, quality, and variety of wines available to consumers since 1988. We focused on these three dimensions because it is sensible to think that wine drinkers will be better off with lower prices, higher quality, and greater variety.

To determine the nature of the changes in wine price, quality and variety, we examined the Wine Spectator’s Top 100 list which has been published every year since 1988.  If average American wine drinkers were each year to go out and buy the top 100 wines, would they pay less money, have better quality and more variety in national origin in 2005 than in 1988?  Each year the Wine Spectator uses the same four factors to determine the list. They are taste, availability, price, and the x-factor, which takes into account how significant the wine’s achievement for that year has been.  These factors exclude the very expensive, the very rare and boutique wines and allows our study to concentrate on the so-called “average” American wine drinker. 

Our findings show that globalization has benefited the American wine drinker. We find that there is an overall decrease in the real price of a shopping cart of all 100 wines from year to year. For instance, the real price (in 1988 prices) for the basket of the entire Top 100 list was $4,313 in 1988; $3,132 in 1993; $2,533 in 1999; and $2,421 in 2004.  That is nearly a 44% decrease in prices from 1988 to 2004.  At the same time, there was no significant change in the quality of the wines on the Top 100 list. From 1988 to 2005, average score did fluctuate within a range of 1.66 points—the difference between highest average score 93.61 (in 1988) and the lowest average score 91.95 (in 1996).  But as a whole these fluctuations in quality can be tacked up to chance and are not significant.

In terms of variety, the number of countries appearing on the Top 100 lists over the 18 years represented in this study increases, from six countries in 1988 to a total of eleven countries in 2005.  In 1988, only six countries—namely France, Italy, Spain, U.S., New Zealand, and Lebanon (the latter two each with only one wine)—are represented. In 2005, the number of countries nearly doubles to eleven.

Our econometric analyses show that the decreasing wine price over the past 17 years can be explained by the loss of shares of the Old World countries: Replacing a French wine with a U.S. wine lowers the average real price by 1.0%; an Australian wine by 1.1%; and a wine from non-incumbent countries by 1.5%. To put it differently, replacing an Old World wine (French, Italian, etc.) with a New World  wine (US, Australia etc.) lowers the average real price by 1%.  Replacing an Old World wine with a New-New World wine (Chile, South Africa etc.) lowers the average real price by 2.5%. The increased presence of newcomers puts significant downward pressure on prices.

Thanks to globalization, the world of wine is filled with greater variety, the same level of quality and, at least for the wine drinker in the United States, it is also a more affordable one.

This Table provides you with a data summary of the paper!

[This article was published in the June 2008 Issue of Wine Business Monthly]

]]>AAWE Papers in Portland: Price Premium for Organic Wines?tag:wine-econ.org,2008-06-10:7c8b0c03-546a-4a60-b6b8-5b4dda38d4b4Karl Storchmann2008-06-10T19:50:31Z2008-06-10T07:52:00ZJournal of Wine Economics)


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.

]]>New World meets the Old in Argentinatag:wine-econ.org,2008-06-04:8952b5b3-9210-45e5-906e-2ba5b98fb265Michael Veseth2008-06-04T10:01:39Z2008-06-04T09:49:00ZUniversity of Puget Sound and The Wine Economist)

The latest news from Argentina is good — exports are up 40%, according to a report on Decanter.com. A New World wine success story! Or is it?

Old World versus New World

Everyone who writes about wine ends up talking about Old World versus New World wines at some point. It is convenient shorthand, I guess. The OId World usually refers to the European heartlands of wine, France, Italy, Spain. The New World is pretty much everyplace else, but especially the US, South Africa, Australian and New Zealand, Argentina and Chile.

Simple dichotomies are often problematic and I think Old World versus New World raises some issues. Old World is often code for tradition, terroir and sophisticated taste while simple industrial wines are associated with New World producers. But it is easy to find counterexamples on each side of the divide. It’s hard to think of Beaujolais Nouveau as embodying the three Ts of Old World orthodoxy — Nouveau seems like the classic Chateau Cash Flow McWine. There are many New World producers, on the other hand, who seem to take the traditions of wine very seriously. John Williams at Frog’s Leap comes to mind. So sometimes it is difficult to know where Old World ends and the New one begins

This is particularly true of Argentina. Winegrapes came to Argentina in 1541, a couple of hundred years before vines showed up in Australia and New Zealand. We tend to think of Argentina as a New World producer because it seems like its wines have only appeared on world markets in the last ten years or so. In fact, however, if you look back a few years you find a much different narrative– a classic Old World wine story.

Old World Argentina

Argentina was settled by migrants from the Old World wine countries, especially Spain and Italy, so it is not unexpected that wine has long been part of its culture. But it might surprise you to know how much Argentina reveals its Old World roots. Argentine wine consumption has until quite recently been very high — Old World high. Looking back to the early 1960s, for example, the heaviest wine consumers in the world were the French (122 liters per person per year), Italy (107), Portugal (100) and then Argentina (83). Spain (61 liters per capita) and Chile came next. No other country came even close.

Argentine wine production was necessarily quite high, too. While France and Italy dominated global wine output in the 1960s, producing almost half of all wine between them, Spain (10%) and Argentina (7.5%) came next (followed by the North African countries that exported mainly to France). Argentina was the Australia of the 1960s.

But with one big difference. Australia (and to a lesser extent Chile) are significant wine nations today because of their high export volumes. Argentina, however, has always produced mainly for domestic consumers (it was actually a net importer of wine in the 1960s as near as I can tell). So it is Old World in terms of wine production and consumption, and has only recently become New World in terms of its global export market presence.

Argentina shares two other important wine attributes with its European relations, both of which are related to wine crises. Argentina’s first crisis, from which it is still emerging, was caused by protectionism. Starting in the 1930s, Argentine winemakers sought and received protection from foreign competition and then subsidies to support domestic production. Arthur Morris of the University of Glasgow wrote a good article on this a few years ago in the Journal of Wine Research. Winegrowing in the subsidized, protected market focused on quantity rather than quality and bad but very cheap wine was the result. There was no incentive to favor quality in the vineyard because good grapes and bad grapes were all mixed together in the cheap bulk wines that urban workers gulped down. Argentina made a lot of wine, but didn’t export any. Who would buy it? This produced, predictably, a crisis of over production.

Don’t Cry: Market Reforms

The big change occurred, according to Professor Morris, when Argentina’s economic policies changed course in the 1990s. The subsidies dried up and decent wines began to trickle in from abroad, establishing a higher standard. The game was up for inferior domestic brands. Competition changed the wine market dynamic, shifting it from quantity to quality. It took only a few years for higher quality Argentine wines to reach the world market, where you see them today. That’s when Argentina became a “New World” producer.

The market reforms that the Argentine industry implemented in the 1990s remind me of the EU agricultural market reforms that Old World wine producers will experience in the next few years. The Argentine reforms seem to have worked, which may be a good omen for the Old World producers, but the industry had to live through a deep crisis first.

It is a good thing that Argentina has made the shift to a wine exporter because of the second crisis it shares with the Old World: collapsing domestic demand. Wine consumption has fallen by about half in France since the 1960s, for example, as consumers have shifted from wine to beer, spirits, sodas and now water. Wine demand declined proportionately more in Argentina, from 83 liters per capita in the 1960s to only less than 30 liters today. The Decanter.com article reports that this trend continues.  Argentina has dodged this bad news bullet to a certain extent, however, because of its new focus on quality-driven export markets.

The map of world wine consumption is changing fast. You could define the Old World as the part of the map where high consumption rates have collapsed– France, Italy and Argentina are all there. The New World is where wine cultures are actually growing. Wine market reforms, like those that Argentina has taken and the EU now plans, seem necessary to rebalance the map and align global demand and supply.

Older, Newer: The Wine Lexicon Evolves

Pretty soon we are going to have to invent new terms to describe planet wine– Old World and New World have just about run their course. China and India are obviously not Old World wine countries (although China has made wine for nearly 2000 years) and not exactly New World, either. Perhaps, taking a cue from financial markets, which talk about emerging market economies, we will call them Emerging Wine countries.

And then there are countries like Georgia, Romania and Moldova that produce huge amounts of wine, some of which is now finding its way onto global markets. Old World or New? Old World, if you go by history. Georgia is where wine was first made, according to some historians. But the wine industries in these countries are still recovering (emerging) from the dark Soviet years, when quantity ruled and quality pretty much disappeared. Now, as their industries modernize, they are beginning to enter the market, too. So are they the Oldest World — or maybe the Newest one — and confronting the biggest challenges?

]]>AAWE Papers in Portland: Acceptability of Low-Alcohol Winetag:wine-econ.org,2008-05-31:b23c3b5f-21d9-4ea4-89ea-2db68fa37df8Karl Storchmann2008-05-31T18:25:51Z2008-05-31T10:44:00ZJournal of Wine Economics)

Back in 1987 at the Los Angeles County Fair, a blend of Chenin Blanc and Riesling by Ariel’s Vineyards of San Jose was awarded a gold medal. It was evaluated by many judges at a blind tasting. Nothing special you would think. But Ariel’s wine was de-alcoholized and contained less than 1% of alcohol and competed with regular white wines. This was worth a longer report in the New York Times.

Given the treatment that a wine has to undergo in order to lose some or all of its alcohol, this is a fairly amazing result. De-alcoholized wines have been produced in Europe and the United States for decades. There are several methods to partially or totally extract the alcohol from the wine ranging from heating (which also removes most flavors) to more advanced methods such as cold filtration, spinning, reverse osmosis and transport osmosis (see also Wine Business Monthly).

In reverse osmosis, a small portion of wine is passed over one side of the fine-bore filter membrane under pressure, and smaller molecules (water, alcohol and some acids) are forced through the membrane creating the permeate. This permeate is then distilled, and the original water that was removed is added back thus lowering the alcohol content of the original wine.

Transport osmosis is a membrane technology that uses the difference in vapor pressure to draw the alcohol in the wine through the hydrophilic membrane and into the stripping water. The stripping water can be re-circulated in the system until the alcohol content of the feed wine and the stripping water are essentially the same.

In the spinning cone the liquid is spun at high speeds until the alcohol separates, a small amount of which is then returned to the drink.


Given that in many high-quality wineries winemakers want to move their wines as little as possible, oftentimes working with natural gravity and free flows, these de-alcoholization procedures sound pretty invasive. Hard to believe that they do not affect the taste of the wine. But earning a gold medal at a county fair is a relative achievement. Some of you may remember Orley Ashenfelter’s report on wine judges that was published in the "Journal of Wine Economics" entitled “Tales from the crypt: auctioneer Bruce Kaiser tells us about the trials and tribulations of a wine judge.” (click here).

At the AAWE Conference in Portland from Aug 14-16, Josselin Masson (Montpellier SupAgro), Philippe Aurier (University of Montpellier II) and Francois D’Hauteville (Montpellier SupAgro) will present a new experimental study about consumer assessments of alcohol-reduced wines.

The authors conclude that, “on the sensory level, reduced alcohol in wine does not seem to be a negative factor, and it is even possible to create a positive taste preference for low-alcohol products, as the blind testing evaluations reveal. When the consumer is informed about the alcohol level, consumption level of low and of high alcohol wines do not significantly differ.”  

 

Here is their abstract:

This paper addresses the potential of fostering the sensory and psychological acceptability of a product which has been significantly altered. In the case of low-alcohol red wine, we conducted a longitudinal study of consumption at home, allowing us to measure both the quantities consumed and the hedonic evaluations before and after exposure to the product. During the first phase, 24 consumers were divided into two separate groups, and, over a two week period, were given wine containing a reduced alcohol content of 9%, as well as a “standard” wine containing 12.5% alcohol. During the second phase, 40 consumers were given a wine containing 12% alcohol but with a label indicating 10.5% or 13.5% alcohol, according to the same alternate protocol. The results of the first blind testing suggest a good sensory acceptability of the reduced alcohol wine which persisted after the trial of the two products. The second phase, with information provided, indicated an equivalent psychological acceptability of the supposedly “weak” alcohol level and the supposedly “strong” alcohol level because the quantities of the products consumed were equal regardless of the information accompanying the products. This result is inconsistent with previous studies comparing the acceptability of wines containing varying degrees of alcohol. Although  the size of the sample made it difficult to obtain significant results, our result  suggest that, while prolonged exposure has not changed the usual behavior, it seem to have a (positive) effect on expectations  towards the innovation. 



]]>The Future of Wine?tag:wine-econ.org,2008-05-27:e3a3a858-e831-4753-b890-960a6c168852Michael Veseth2008-05-27T16:29:52Z2008-05-27T16:19:00Z

May 27, 2008, by Michael Veseth (University of Puget Sound and The Wine Economist)


What will the world of wine look like in 50 years? A look in the crystal ball.

What if the Chinese were French?

A journalist with a Brazilian newsweekly called me on Thursday to ask for help with a story on China. The magazine is doing a sort of “worst case scenario” report on the potential impact of China’s economic growth on world markets. What would happen to oil prices, for example, if the Chinese used as much fuel per capita as Americans do? Yikes, that would be a lot of drivers using a lot of gas and it would send oil prices through the roof. What would happen if Chinese consumers generated as much waste and pollution per person as people in the West? Once again, the global effects would be dramatic.

What would happen, the journalist asked me, if Chinese tastes changed and they drank as much wine per capita as the current world champions, the French? Well, that is a very interesting question, even if it isn’t a very realistic one. Annual Chinese consumption of wine is about a half-liter per capita and rising, according to my copy of The Global Wine Statistical Compendium (and a lot of that wine isn’t grape wine, as I wrote in The China Wine Syndrome). Wine consumption in France, on the other hand, is 55 liters per person and falling (it was more than 120 liters per capita in the early 1960s).  The figure is about 8.5 liters per capita for the U.S. and 20 liters per capita for Great Britain.

It is hard to imagine how Chinese wine consumption could rise to the current French level. Heck, it is unlikely that the French will sustain their current level for long. But it isn’t entirely out of the question that Chinese consumption could rise to the world average, which is about 3.5 liters per capita per year. That’s a lot smaller increase than the Brazilian reporter was concerned with, but it would still have a huge impact on global wine markets. Much of the increase would probably be met by higher Chinese production; China is already a major wine producer — smaller than Chile but larger than Portugal in total production. But the global effects would be substantial and prices would surely rise.

We can already see some indication of the potential “China Effect” in the market for fine wine. Everyone seems to think that at least some of the rise in Bordeaux prices in recent years is due to Asian and especially Chinese purchases. This trend seems likely to accelerate now that Hong Kong has eliminated its high tax on wine transactions so that it can become the auction hub of the Asian wine market. The latest Wine Advocate reports prices of 2005 Bordeaux that reach stratospheric levels — $500, $1500, $2500 per bottle! This is what happens when a global market focuses on an object of speculation — huge rents (excess returns) are created. As China (and India, too) become more completely integrated into global markets for products like fine wine, these rents will likely rise higher still.

The View from London

The Brazilians are not the only ones interested in the future of wine. Berry Bros. & Rudd (BBR), the London fine wine house, recently celebrated its 310th anniversary with the release of the Future of Wine Report written by four of their top wine buyers (Alun Griffiths MW, Jasper Morris MW, Simon Field MW and David Berry Green). It makes pretty interesting reading if you are interested in what wine markets might look like in 2058.

I say wine markets (plural) because BBR correctly recognizes that there is not one wine market but many interrelated ones. The fine wine market, BBR predicts, will see the rise of China and India as important factors in terms of both demand and supply. “I absolutely think China will be a fine wine player rivaling the best wines from France,” writes Jasper Morris. Britain will become an important producer of fine wines, too, perhaps especially Champagne-like sparklers.

Wine prices will soar even higher, according to the report. “If values increase by 15% per annumn, as they have been doing recently, a case of 2005 Ch. Lafite-Rothschild, currently available for £9,200. could be worth just shy of £10 mllion by 2050,” according to Simon Staples.

The forecast changes are more dramatic in the volume wine market. China will be the world’s largest wine producer. Global warming will shift wine production from France to Eastern Europe and from Napa Valley to Canada. Australia, the report speculates, could see a collapse of its volume wine industry if recent droughts persist. Goodbye Yellow Tail. Hello boutique producers in cooler, wetter areas like Tasmania.

Brands will become even more important in the volume business, BBR suggest. “In 50 years, consumers will ask for wine by the brand name or flavour and won’t know, or care, where it has come from. Grapes will be genetically modified to change a wine’s taste,” according to Jasper Morris, “and producers will add artificial flavourings to create a style wanted by consumers.” Wait — OMG I think I drank those wines back in the 1970s when I was in grad school!

Bottles and corks? They’re history. Corks will disappear because they are inefficient — the contamination rate is too high. Bottles are heavy and environmentally problematic. Tetra pak containers (like the ones used in today’s French Rabbit wines) and other sustainable packaging systems will prevail for volume wine.

The Future of Wine?

So what should we think of these visions of the future of wine? Economists like to say that prediction is difficult, especially about the future, so long range forecasts need to be taken for the educated guesses that they are.

Some forecasts, will be wrong because they are more or less simple straight line extrapolations (How much wine would the Chinese drink if they were French? How much will fine wine costs if its price compounds at the current rate?). It seems to me that simple projections are usually wrong because they are sensitive to initial conditions. Who is to say if long term trends will match those of the recent past?

Some predictions, like the £10 million case of wine, are extreme, but others are probably too conservative. The wine world has a way of surprising us — who in 1958 would have predicted the importance of Chile and Argentina today or the decline of consumption and production in France? People matter, too. People and their ideas are powerful forces that do not always respect historical trends, as reflection on the recent death of Robert Mondavi remind us.

Kenneth Boulding, the great 20th Century social scientist, once wrote a history of the future. He looked back to see what people in the past had said about the world just ahead. What he learned, he told me, was that when the future eventually rolled around, it never matched the predictions, it was always unexpected. The best way to prepare for the future, he concluded, was to prepare to be surprised. I expect this rather general advice applies as well to wine.

]]>AAWE Papers in Portland: Health Information and Wine Choicetag:wine-econ.org,2008-05-24:64cea003-2fed-426c-9a7d-1b0cf3b1fb7eKarl Storchmann2008-05-24T12:21:36Z2008-05-24T10:13:00ZJournal of Wine Economics)

During the past decade, it seems, we have been inundated with information regarding the health benefits or dangers of wine. However, associating wine and health is not new.  The medical profession has recognized the healthful and nutritive properties of wine for thousands of years. Hippocrates recommended specific wines to purge fever, disinfect and dress wounds, as diuretics, or for nutritional supplements, around 450 B.C. On the Mosel, many vineyard names are health related. Bernkasteler Doctor or Trittenheimer Apotheke (pharmacy) are just a few examples.

Most of the pathogens that threaten humans are inhibited or killed off by the acids and alcohols in wine. Because of this, wine was considered to be a safer drink than much of the available water up until the 18th century.

Wine is a mild natural tranquilizer, serving to reduce anxiety and tension. As part of a normal diet, wine provides the body with energy, with substances that aid digestion, and with small amounts of minerals and vitamins. It can also stimulate the appetite. In addition, wine serves to restore nutritional balance, relieve tension, sedate and act as a mild euphoric agent to the convalescent and especially the aged.

French paradox
Only when CBS’ news magazine "60 Minutes" reported in November, 1991, the phenomenon that has come to be known as the French Paradox did popular thinking of wine as medicine rather than toxin begin to return. Typically, the diet of people in Southern France includes a very high proportion of cheese, butter, eggs, organ meats, and other fatty and cholesterol-laden foods. This diet would seem to promote heart disease, but the rate there was discovered to be much lower than in America; herein lies the paradox.

Anti-Cancer & Coronary Benefits
Moderate consumption of red wine on a regular basis may be a preventative against coronary disease and some forms of cancer. The chemical components thought to be responsible are catechins, also known as flavanoids and related to tannins . Catechins are believed to function as anti-oxidants, preventing molecules known as "free-radicals" from doing cellular damage. One particular form of flavinoid, called oligomeric procyanidin, recently proved to prevent hardening of the arteries.


There are also compounds in grapes and wine (especially red wine, grape juice, dark beers and tea, but absent in white wine, light beers and spirits) called resveratrol and quercetin. Clinical and statistical evidence and laboratory studies have shown these may boost the immune system, block cancer formation, and possibly protect against heart disease and even prolong life.

One recent study, published in the 2004 year-end edition of the American Journal of Physiology, indicates that resveratrol also inhibits formation of a protein that produces a condition called cardio fibrosis, which reduces the heart's pumping efficiency when it is needed most, at times of stress. More evidence suggests that wine dilates the small blood vessels and helps to prevent angina and clotting. The alcohol in wine additionally helps balance cholesterol towards the good type.

Research is ongoing and it is a mistake for anyone to radically change their consumption pattern based on preliminary data. A study of obese mice showed that doses of resveratrol prolonged their lifespans, but for a human to duplicate this prescription using wine, he would to drink over 250 gallons per day!

 

On the other hand, many of these studies have been heavily criticised. Some of the older studies have been attacked by critics who charged that the results were biased because the abstainers studied included many people who were not drinking because they were already in bad health, or were possibly abstaining alcoholics. Others point at the income bias. Wine drinkers have higher incomes than the rest of the population and live a healthier life in general.

 

AAWE Economics Paper: Consumer Choice

Whatever the truth is, the arrival of new information influences our choices. When the news is out that red wines prolong you life -- who wants to stay with white wine or even beer?  Among the 14 sessions at the Second Annual Conference of the American Association of Wine Economists in Portland from Aug 14-16, 2006, one is entirely devoted to “health and wine”; of course, from an economics point of view.  


Brenda Dyack of the Australian Bureau of Agricultural and Resource Economics (ABARE) and Ellen Goddard of the University of Alberta at Edmonton, examine the influence of health information about red wine on consumption for Ontario, Canada, from 1991 to 1998. They find that about 25% of the increase in red wine consumption is due to new information about red wines’ beneficial health impact. Not bad, if you think what that means in terms of dollars.

 

Here is their abstract:

This paper describes applied econometric research that tests the commonly-held hypothesis that information change concerning the relative health benefits of consuming red and white wine caused a switch in preferences from white wine to red wine.

A significant effect of health information change on consumer choice of red versus white wine is estimated.  Approximately one half of the change in demand over the period 1991 to 1998 in Ontario, Canada is estimated to have been caused by a combination of the ageing of the post war “baby boom” generation and the change in health information provided by newspapers. The results are based on the following: 

- Measurement of the flow of new information about the health impact of consuming wine;

- Development of Health Information Indicators for All Wine and for Red Wine based on the measured health information flow; and, 

- Estimation of the impact of health information change on consumption of four wine types (red and white domestic and imported wines) using a two-stage translog demand model for wine that incorporates the Health Information Indicators.

The approach to measuring information change developed here is novel; however, it is an extension of the method used by others who have previously developed proxy variables for the quantity of health information change based on counts of articles. The new method involves scoring the flow of information.  The score reflects both the quantity and the quality of the information provided.

This paper provides evidence to support the widely-held belief is that red has been substituted for white wine due to increasing evidence that red wine provides cardiovascular health benefits. Although there seem to have been many reports linking red wine consumption to better health and it may seem like an obvious cause and effect situation, until now, there has been no significant empirical evidence to support the claim. The results provided here indicate that consumers have made a significant and sustained change in behaviour in response to information they received about healthy food choices.  This means that consumers have:

- Received enough information to induce a change in their beliefs;

- Trusted the information they received;

- Changed their attitudes/beliefs about the good; and,

- The change in attitude has been translated into an effective and substantial change in demand for red and white wines.

The implications of this kind of consumer response to information change for consumers, governments and producers are not trivial.  For other goods, recent concerns about food safety and other health consequences of consumption have highlighted the impact of consumer purchasing decisions on consumer health, producer profits and government responsibility for reporting on health impacts of food consumption. The Health Information Indicators developed here provide a refinement of the way information change is measured and incorporated into food demand models. Hence, these improved methods can contribute to better-informed policy choices.

A further, if less surprising result, is that the switch from white to red wine is associated with an ageing population.  Anecdotally, we know that typically, one matures from sweet whites and soft drinks to full bodied reds and scotch. The results here indicate that ageing dominates health impacts although it is expected that the ageing impacts embody some reaction to health information as well.

]]>AAWE Papers in Portland: Wine and Liver Diseasetag:wine-econ.org,2008-05-22:3ff06360-178e-490a-b167-fda16b56e6dbKarl Storchmann2008-05-23T05:01:14Z2008-05-22T05:28:00ZJournal of Wine Economics)

Red wine is supposed to be healthy. As part of the French paradox it may reduce the risk of cardiovascular diseases.  But does it also lower the risk of liver diseases, especially cirrhosis?

Heavy drinking is associated with the development of liver cirrhosis, a severe disease often leading to death. In France, about 9000 deaths are directly due to alcoholic cirrhosis were recorded. However, only about 20% of heavy drinkers develop liver cirrhosis, suggesting that factors other than alcohol are required to promote this liver disease. Being a female and bad nutritional status appear to be especially important risk factors.

Does the type of alcohol play any role in the development of liver disease? A study undertaken in the 1990s in Denmark concluded that the risk of cirrhosis was significantly decreased when wine accounted for 30–50% of the total alcohol dose (Becker, U., 1998. Liver disease. Importance of gender and type of alcohol. Alcoholism: Clinical and Experimental Research 22, Suppl. 1). Good news for wine drinkers and producers.

However, in 2002, a team of French scientists tried to replicate the Danish study and could not confirm the beneficial impact of wine. The French researchers surveyed 102 male heavy drinkers. Forty-two had cirrhosis and 60 did not have the disease. Each of them was assessed for liver status and questioned about their drinking habits. The study found that patients with cirrhosis were more likely to prefer wine as their favorite drink than those free of disease and there was no difference in risk between different groups of heavy drinkers for developing cirrhosis. (Pelletier, S., 2002, Wine consumption is not associated with a decreased risk of alcoholic cirrhosis in heavy drinkers, Alcohol and Alcoholism Vol. 37, No. 6, pp. 618-621).

Today, researchers at UC San Diego School of Medicine released a study concluding that modest wine consumption, defined as one glass a day, may not only be safe for the liver, but may actually decrease the prevalence of Non-Alcoholic Fatty Liver Disease (NAFLD). The study, which appears in the June 2008 issue of the journal Hepatology, showed that for individuals who reported drinking up to one glass of wine per day, as compared to no alcohol consumption, the risk of liver disease due to NAFLD was cut in half. Click on this link for more information.

At the Annual Conference of the American Association of Wine Economists (AAWE) in Portland, Jan Bentzen and Valdemar Smith (both from the University of Aarhus, Denmark) will present a panel model comprising various European countries and a time span of 40 years. They don’t look at individuals but rather at the disease level and mortality rate of entire economies. The main finding: the consumption of alcohol is positively associated with liver cirrhosis. At the country level wine does not play any beneficial role. In other words, livers have not experienced any French paradox.

 

Here is their abstract:

 Since the 1960s wine consumption has decreased dramatically in especially the Southern European countries whereas the countries in the northern parts of Europe have experienced a substitution from beer and spirits toward wine. In this sense there has been a process of convergence taking place regarding per capita consumption of wine among the European countries. Also for the total consumption of alcohol, i.e. the per capita consumption of beer, wine and spirits, the hypothesis of convergence seems to hold.

 In the same time span the number of alcohol related diseases as e.g. liver diseases, have changed significantly in the same direction as the developments in alcohol consumption. The changes in the consumption levels of alcohol in general -- and wine in particular -- are influenced by many factors of which health arguments may have played a crucial role. The alcohol policies of the European countries have become more restrictive during the last decades.

 Using data on alcohol consumption, alcohol related diseases and alcohol policies of 16 European countries we discuss the questions of whether the intake of alcohol is associated with (liver) diseases. Our empirical analysis provides us with strong evidence of a significantly positive relationship between alcohol consumption and the development in liver diseases; this is in accordance with many other micro studies.

]]>Chateau Cash Flowtag:wine-econ.org,2008-05-17:411231ae-1850-4860-9393-41120b983627Michael Veseth2008-05-17T18:47:38Z2008-05-17T18:28:00ZMay 16, 2008, by Michael Veseth (University of Puget Sound and The Wine Economist)

Everyone knows that wine is a big business in the United States, but how big is it and where does the money flow? I’ve spent the last couple of days reading studies of the economic impact of the wine industry to try to get answers to these questions. Here’s a brief summary of what I have found out (follow the links for more details).

Economic Impact Studies

Let’s start with grapes. Grapes were the sixth most valuable agricultural crop in the U.S. in 2005 (and the #1 fruit crop) worth nearly $3.5 billion, according to a 2007 economic impact study by MKF Research LLC, a leading wine economics research consultancy based in St. Helena, California. California accounted for about 6.1 million of the 6.9 million tons of total U.S. grape production in 2005 followed by Washington (415,000 tons), New York (178,000 tons) and Michigan (100,000 tons).  A ton of grapes yields 50-60 cases of wine according to published sources.

Roughly half the grape crop ends up in wine. The other half becomes raisins (30%), table grapes (11%) and grape juice (9%). Raisins and table grapes come mainly from California while Washington is an important player in the juice market (juice grape production actually exceeds wine grape production in Washington!). Juice grapes, mainly native Concords, sell for about $150 per ton (Washington data). Wine grapes sell for much more depending upon varietal type, quality and provenance.

There are about 5000 bonded (commercial) wineries in the U.S., according to the study. Nearly half of these are located in California, as you would expect, with Washington (about 500 wineries), Oregon (about 300) and New York (about 250) trailing far behind.

There are bonded wineries in every state including Alaska . I visited one in Anchorage that blended local huckleberry juice with grape must from Washington State to make Alaskan wine. The study indicates that Puerto Rico’s sole commercial winery closed in 2003, suggesting that the Caribbean wine boom has peaked. 

Follow the Money

One of the things I have learned in studying wine economics is that the wine business is more than wine. Wine (its production, distribution and sale) is important to the wine economy, but there are a lot of associated businesses that are sometimes as important as wine itself. I have seen some small, scenic wineries, for example, that use wine strategically to create an attractive venue for other more profitable activities, such as restaurant sales and money-earning events such as weddings and parties. Wine is important because of the opportunities it creates for other activities.

The economic impact study gives some sense of this. Winery sales totaled about $11.3 billion in 2005, for example, while wine tourism expenditures were reported at $3.5 billion (about 30% of wine sales). Other related industries include wine labs and consulting ($11 million), winery research and education ($31 million) and the value of charitable contributions (goods and services, $128 million).

The economic impact studies I studied are very complete, but they don’t provide data for some interested wine-related businesses. Wine publishing (books and magazines) is a business that is growing as more consumers seek out knowledge and advice. Wine critics may indeed be parasites, as Jancis Robinson recently asserted, but they do generate cash flow even when they add little value.

I am also interested in the growing wine lifestyle industry. Some people build satisfying lifestyles around wine and the material goods that are associated with it and I think that the total economic impact may be quite large. It starts with wine, of course, and glasses, corkscrews, and storage units of various sorts. Wine tourism (eno-tourism according to a European email correspondent) comes next, followed by wine collecting and investing, which can be expensive indeed.

Then finally there is the urge to own a winery or at least live a winegrower lifestyle. There are a number of winery properties for sale today, according to the Wine Business Monthly real estate listings. Some of these are working operations but others are tailored for lifestyle investors. Recently I have become aware of the growth of gated winery communities like this one in Mendoza, Argentina, which offer the benefits of a luxury villa in a planned and managed (but romantic) vineyard setting. I know of several vineyard estate projects like this being developed in the United States.

Wine consumption is rising in the United States, but I think the economic impact of wine is growing faster as wine tourism and lifestyle investments grow. It will be interesting to see if this trend can be sustained or if some aspects of the wine economy prove to be bubbles.

]]>Optimizing Your Personal Wine Cellartag:wine-econ.org,2008-05-14:74d7216f-fef9-481b-addf-0455a249648aKarl Storchmann2008-05-14T19:16:49Z2008-05-14T18:36:00ZJournal of Wine Economics)

According to a report in the online magazine TheStreet.Com, 90% of high-end buyers of homes in U.S. major cities consider a wine cellar a very important factor when purchasing their house. (http://www.winetrend.com/press/wt_thestreet.pdf)

The report goes on “Imagine walking your date into a cellar made entirely of limestone and hand forged wrought iron wine racks to look up through the windows of the vaulted ceiling into the water fountain above it. It can be done – for $800,000.”


Why do people have wine cellars? Certainly for many different reason.  But if you have a wine cellar for other reasons than showing it to your date every day you want to read the latest report by Gary Thompson and Steve Mutkoski of Cornell University's Center for Hospitality Research. It is entitled “Optimizing a Personal Wine Cellar.”

Essentially, the authors devised an analytical model that optimizes the utility derived from a wine cellar. This ‘Personal Wine Cellar Optimizer (PWCO)’ goes well beyond any conventional software packages that are only inventory tracking devices.

The PWCO is complex and considers many variables. The size of the wine cellar, the average wine consumption (the authors assume in their examples one bottle per day), the envisioned lifetime of the cellar, the price of wines bought and many more. I addition, the authors take into account that, up to a certain limit, most wines improve when they get older. The quality gain, however, declines the older the more mature the wine is. All these factors are combined in an Excel sheet and the outcome suggests an optimal wine inventory and drinking pattern.





The Personal Wine Cellar Optimizer (PWCO) takes the existing cellar composition as its starting point. The PWCO then builds a purchase and consumption plan that observes all the hard constraints imposed by the budget and cellar capacity. Wines are selected for purchase randomly, but purchases are biased towards better value wines (i.e., higher quality and lower costs). Wine consumption is scheduled in a way that cellar capacity is not violated, but with a preference for drinking the wine at or near its peak, as well as spreading the consumption over time.

Of course, many applications outside of private cellars are possible. Gary Thompson and Steve Mutkoski are already working on restaurant versions.

The report is downloadable at http://www.hotelschool.cornell.edu/research/chr/pubs/reports/abstract-14724.html

You have to log in but it is free (and worthwhile)



]]>Grubbing Uptag:wine-econ.org,2008-05-09:42d30d0d-9790-4703-812e-1897e79406dbMichael Veseth2008-05-09T15:34:43Z2008-05-09T12:06:00ZUniversity of Puget Sound and The Wine Economist)

Grubbing up is one of my favorite wine economics terms. It means to pull the vines up by the roots and replace them with other agricultural crops. I It is a harsh term, just as it sounds, because it is the opposite of wine — it is anti-wine. Grubbing up isn’t something that a wine lover contemplates with ease, but sometimes it is necessary. The European Union’s Council of Ministers has recently finalized a grubbing up scheme for the EU and it is probably a good idea, even if it may not work.

Watering Down the Wine Lake

The problem is that EU wine production vastly exceeds demand with the result that thousands of liters of wine must be bought up by the EU each year and distilled into alcohol to prevent prices from dropping through the floor. The distillation price support only encourages continued production, waste and expense. It is a mess — a wine lake, as people say — and it has to stop.

A fairly radical plan was introduced a few years ago, one that would have paid farmers to grub up thousands of hectare of vines and introduced market reforms to allow (by deregulating) and to encourage (through supporting programs) European winegrowers to compete more effectively with New World winemakers who are taking their markets.

The package that the Council of Ministers agreed last week is significant even if it is less radical than the original initiative (Decanter magazine called it “watered-down” — never a good thing when you are talking about wine). The program called for subsidies to encourage winegrowers to eliminate up to 175,000 hectares of vines (versus 400,000 hectares in the original proposal), limit chaptalisation (the addition of sugar in the wine-making process) rather than eliminating it, and market-based reforms that encourage and enable winegrowers to compete on world makets (through varietal labeling of wines) rather than hide behind protective barriers.

I’ve been reading up on the details of the final EU plan and it is pretty interesting — the best analysis I’ve seen so far comes from the USDA Global Agriculture Information Network, which you can download in .pdf form at this California Wine Export Program website. The program includes money for grubbing up, of course, and deregulation of wine labels, removal of some vine planting restrictions (so marketable grape varieties can replace uneconomic grubbed up varietals), funds for wine promotion abroad, and so forth. Like any EU program, it is a complicated balance of economic reality, fiscal feasibility and political necessity.

The idea is to help the European wine industry transition to a new market environment, where export markets are growing, domestic markets shrinking and competition is fierce. It is not unreasonable to think that policies like this could work. They worked in New Zealand in the 1980s, for example.

Lessons from Kiwi Wine History

New Zealand today is famous as one of the great success stories in the world wine market. A small nation in an unlikely location, it punches above its weight in the global wine market, holding the title as champion exporter. Not in quantity, obviously, but in price. New Zealand has the highest average export price of any wine producing country.

But such was not the case 25 years ago. New Zealand suffered from a surplus of mediocre wine that could only be sold domestically behind high protective barriers. The industry collapsed with many failed firms from a combination of bad wine and surplus production. The government paid to grub up vines and then opened the market to international competition. Cheap but better wines from Australia flooded in to fill the domestic bulk wine market, leaving New Zealand producers only one choice — make better wine for export. They have done so brilliantly. Their success inspires the EU reforms.

It would be a mistake to think that what worked so well in New Zealand in the 1980s will work equally well in Europe today. It is unlikely that the EU would be willing to let its wine sector reach the sort of crisis that New Zealand experienced and that motivated the dramatic reforms implemented there. If big change comes from big crisis, as I believe (I wrot