Boom Boom! On Money and Wine

I’m just back from the San Francisco Treasury Symposium where I gave the luncheon keynote speech on “Wine Boom and Bust — With Lessons for Finance in the 21st Century.” You might well ask what business a wine economist has speaking to a group of treasury executives (I asked that question myself!), and the answer has two parts.

First,  I actually know a little bit about global finance from my day job as a university professor. I’ve written frequently about global financial flows and especially the periodic crises that seem to plague them.

The other reason is that the conference organizers thought it would be interesting and different to hear someone talk wine, but in a way that would still be relevant to their treasury executive audience. So that was my challenge.

Money into Wine? Easy! Wine into Money … Not So Much

Money and wine are closely tied, although it is an asymmetrical relationship. It is pretty easy to convert money into wine, for example. In fact, it may be a little too easy to do this. Some of my friends report that the whole “money into wine” thing has gotten way out of hand for them. You probably know the problem from personal experience if your cellar has grown bigger than your bank account.

It is harder to convert wine into money, especially if you are in the wine business. The best way to make a small fortune in wine, people tell me, is to start with a large one.  I focused on three aspects of wine economics for my talk: globalization’s opportunities and threats, the “new rules of the game” and the need to embrace (or at least accept) volatility. All these points apply to both wine and 21st Century finance.

Globalization: Opportunity and Threat

Globalization offers a world of opportunity to winemakers and financial managers alike, but it is a complex world and a very competitive one. New markets open their doors … but your market doors are open wide, too. Optimists will see the wine glass more than half full and seize the opportunities that present themselves, hopefully taking the associated costs and risks into account.

One problem with globalization is that the risks are so difficult to fully evaluate. The Australian wine industry, for example, is currently suffering from a bad case of globalization gone bad and part of the problem has nothing directly to do with wine.

Although the Crash of 2008 slowed down the global economy, China continues to surge ahead, its demand for natural resources (one of Australia’s strong sectors) growing year after year. Australian has come down with a bad case of the “Dutch Disease” where success in one sector causes chaos elsewhere. As mineral sales have increased, the strong Australian dollar has depressed the already weakened wine industry by discouraging exports. Click on the “Dutch Disease” link to see my report on this problem.

The [New] Rules of the Game

Global finance is dominated by a number of key financial centers that set the “rules of the game” for money. Wine works the same way, but the centers have shifted and the rules of the game have changed.

Producing nations (think France and Italy) once determined the rules of the game with their AOC designations.  The center shifted to Great Britain, Germanyand the United States in the last 20 years and now the rules are written by those who sell wine (think Tesco, Costco and Aldi) more than by those who produce it. The most successful wine sectors so far are those that have best adjusted to the new rules.

The rules will change again soon, I suspect, as the BRIC and new BRIC nations make their wine market influence felt. I think finance will also experience shifting centers with new rules and have to adjust accordingly.

Volatility was my final point and wine markets have plenty of it. Boom and bust cycles seem to be “baked in the cake” in both money and wine. I talked about Australia’s five big wine booms and busts in the past 150 years and characterized them in terms of Hyman Minsky’s famous “seven stages” description of financial crises.

Beyond Boom and Bust

Booms and busts are bad enough, but wine markets also suffer from medium-term cycles of surplus and scarcity as illustrated by the Turrentine Brokerage “Wine Business Wheel of Fortune.”  High prices today sow the seeds of low prices a few years down the road, according this analysis, which is based on the well-known “cob-web” model of lagged adjustment in agricultural markets.

Anyone who has tried to guide their 401k portfolio (much less manage corporate financial affairs) knows how volatile financial markets can be – the wine world’s bubbles and cycles must seem pretty peaceful by comparison.

Wine and money may be very different, but the problems they face bear a certain resemblance, don’t you think? What can wine teach money in these uncertain times?

One lesson, I proposed, is to “think global but drink local.” This sounds pretty simplistic, but it captures trends that I see in wine today. Economic imperatives have made both global and local markets more important than in the past. Developing direct sales vectors and developing and maintaining personal relationships is high priority today. Wine (like money) is a relationship business that needs constant attention.

Boulding’s Law

But it’s useful (and often necessary) to keep a global mindset even as you cultivate local markets. The world is getting bigger and smaller at the same time and the rules of the game continue to change.

The second lesson is what I call “Boulding’s Law” after Kenneth Boulding, the famous economist. Boulding once made a study of the history of the future. He looked at what people thought about the future at various points in time and then did a “fast forward” though the history books to see if they were right.

His conclusion? When the future came around people were usually surprised. It wasn’t what they expected at all (even if it was exactly what they predicted years before!).

Hence Boulding’s Law: The best way to prepare for the future … is to prepare to be surprised. That holds for wine, I think, and for money, too.

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Thanks to the San Francisco Treasury Management Association for inviting me to speak at their symposium. Special thanks to Jim Lindsay and Larry Goldman.

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