The effects of Australia’s continuing drought on the wine industry are well known; I wrote about drought and other problems that Australian winemakers now confront last September in a post titled Big Trouble Down Under. An article on the front page of yesterday’s New York Times explains how the crisis is deepening and evolving in frightening ways.

The Global Food Crisis

The article is part of a series on the global food crisis. If you haven’t been paying attention, food supplies around the world are drying up (both literally and figuratively), causing chaos in many places. Food riots are reported in the press almost every day. The crisis has many causes. Drought and climate change have reduced supplies in some areas, for example. Increasing demand is part of the problem, too, especially in China where, rising incomes have encouraged greater consumption of pork, which in turn increases the demand for grain. Rich countries like the U.S. are not helping the situation. Our biofuel policies divert food to the gas pump. All these factors push up food prices and the poorest people are the most affected.

As prices rise and surplus supplies shrink, food-exporting countries have begun to impose export taxes or even export bans in an attempt to keep domestic supplies plentiful and relatively cheap. The effect, of course, is to drive international prices even higher and “beggar they neighbor.” The price of rice rose by 40 percent in a single day last week as these export controls kicked in.

The Rice-Wine Connection

What part does wine play in this problem? Australia was until recently a major exporter of rice, but rice is an especially water-intensive crop and the continuing drought in Oz has dramatically limited production there. The Australian drought is a key part of the global rice shortage story. Wine production, however, makes the problem worse.

As the New York Times explains, winegrape production uses much less water than rice and so, as irrigation costs have soared, farmers have shifted production from rice to grapes. The graphic above shows the economic reality of the situation. Even at today’s crisis price of $1000 per ton for rice, higher water costs make winegrapes the more profitable crop. So while drought has reduced production of both grapes and rice, the substitution effect has reduced the impact on grapes and made the crisis in rice even worse.

Many authors suggest that what we are seeing here is part of an important transformation in the global economy. Globalization linked up producers and consumers at the far ends of the earth in the 1990s and produced a world of abundance and falling prices. The growth this helped produced (plus the associated environmental effects, according to some) are now combining to turn surplus into shortage. It is easy to see this in rice, but it is true in wine as well, as I argued in my post on The End of Cheap Wine. Protectionist policies conspire to raise the problem to crisis level for those who are least able to deal with it.