Will half the wine sold in the United States in 2025 be imported? No — that’s crazy talk. But 40 percent seems very likely and 45 percent isn’t out of the question. The trend towards half imports is fairly strong even if the day we hit the 50-50 import – domestic milestone is likely to be a bit further down the road.
Not a River in Egypt
I want to talk about the forces that are driving the 50-50 trend in this post and then focus on changing U.S. strategy next week.
Imports accounted for about 35 percent of U.S. wine sales in 2012 — enough of a jump from previous years to get everyone’s attention. And even though it is easy to say that this is just a short term blip that will disappear now that 2012’s big vintage is in the tank, I think that we need to take the trend seriously
As I tell my students, Denial isn’t just a river is Egypt. It’s a good idea to face the facts. Here are five reasons for the rising import trend.
Five Steps Toward 50-50
1. The U.S. is now the world’s largest single wine market and continued growth is likely, but not guaranteed. Macroeconomic uncertainty is still high and competition from ciders and craft beers could certainly eat into wine’s expanding market. The trend is up, but lots could still go wrong.
2. Because the U.S. market is growing (and Europe continues to stagnate), we are clearly in the cross-hairs of every wine producing region on earth. Everyone wants to get into our restaurants and onto store shelves and many will succeed, which is where the 50-50 trend begins.
3. U.S. wine producers will find it difficult to meet all of the rising domestic demand, which will create an opening for imports. Yes, great efforts are being made to expand vineyard capacity to make up for the many years when such investments were uneconomic. But it might not be enough. Water availability and cost will limit expansion at some point, for example.
What economists call “opportunity cost” is a more immediate factor in some parts of California — vineyard land in some areas could be more profitably used to produce almonds and pistachios and that’s what will happen if current trends continue. The competition isn’t domestic wine versus imported wine, as you might expect, it is profits from wine grapes versus alternative crops. And wine grapes no longer have the upper hand in many cases.
4. So domestic wine demand may grow faster than domestic wine supply. Can imports fill the gap? Yes, now more than ever. The surge in global bulk wine trade over the last five years — bulk wine shipments now account for 45 percent of all New World wine trade — convincingly demonstrates that global wine production has become a tightly integrated industry. As one wine executive told me a few years ago, it’s a small world after all. Very small. And it’s smaller still today.
Pull Ahead then Draw Back
5. U.S. wine exports are likely to add to the trend, but not necessarily in the way you might suspect.
U.S. exports have risen and although this is a difficult sector to forecast because so many factors (such as exchange rates, foreign economic trends, etc.) are involved, I think growth will continue. Higher exports increase the import ratio both directly (selling the wine at home would crowd out foreign sales) and indirectly through import duty and excise tax drawbacks. (Click here to read a 2012 UC/Davis report on the drawback program.)
The wine drawback program allows a refund of 99% of import duties and excise taxes on wine for which the importer has matching exports of commercially “interchangeable” wine. Because per-unit import duty and excise tax rates are substantial compared to the price of bulk wine, use of the program is high for bulk wine imports, which compete with wine from low-price Central Valley grapes. Bulk wine exports dominated imports until 2009 and the program stimulated import growth. Now, with imports and exports roughly in balance, the program stimulates both exports and imports—leaving net trade in bulk wine roughly in balance.
— Summary of the U.C. Davis Report
Now I know what you’re thinking: who’s going to import wine and then export it — that’s nuts. Ah, but it doesn’t have to be the very same wine — you can import Moscato from Argentina, for example, and export a different variety to Britain or somewhere else and so long as certain rules are respected, the drawback will kick in. The focus is on inexpensive bulk wines, as the report suggests, because that’s where the relative impact of both duties and drawbacks is greatest.
Getting the full advantage of drawbacks requires a careful balancing of imports and exports by individual firms. If you import a lot, then you have a strong incentive to export to get the tax paybacks. And if you increase exports as I think U.S. wine producers will, you have a strong incentive to import more, too. If both imports and exports increase, as the UC/Davis report cited above suggests, then import market share rises.
How strong is the import incentive? Well, it depends on the particular case of course, but one of the speakers at the Unified cited a case where the drawback payment was almost equal to the price of the wine being imported. For a firm that was already exporting, the imported wine was nearly free. (I don’t have details of this transaction, but the source of the story is completely reliable; I wish I had been there when the deal went down!)
Bottom line. More and more of the wines on store shelves will be imports as the U.S. wine market continues to expand and evolve. What will this mean for domestic producer strategies? Come back next week to find out.
Note: this is the second of three posts where I try to make sense of what I learned at this year’s Unified Wine & Grape Symposium. Thanks to everyone I met at the Unified for giving me their views about current wine trends and future prospects.