Unhappy Families: Wine Cooperative Failure and Success

Tolstoy wrote that happy families are all the same, but each unhappy family is dysfunctional in its own special way.  I think wine cooperatives might be the opposite of Tolstoy’s families: the unhappy ones are all the same, but each happy one succeeds in a different way.

Made when Alto Adige was Austrian.

This is not a theory, only a working hypothesis (a.k.a. educated guess) based upon some recent fieldwork. We all know the story of unhappy cooperatives (which I summarized in my last post on Invisible Wineries), but what about the successes?  Answering this question was one of my goals during our recent visit to Italy’s scenic Alto Adige wine region.

A Recipe for Failure?

If I describe the Alto Adige wine economy to you it will sound like a recipe for failure. The region is tiny in terms of wine, producing a total of only about 40 million bottles each year, which is less than one percent to Italy’s total output (and about 1/20th of Gallo’s annual output). Although I don’t have data on this, I am pretty sure that wine is not even the most important agricultural product in the region — I suspect that apples are #1.

The vineyards are tiny and ownership is impossibly fragmented. Typical vineyards are a hectare; the top 100 account for only about 5 percent of the total. And, although popular international varieties are grown here, production is dominated by indigenous varieties such as Schiava (aka Vernatsch), Lagrein and Gewurtztraminer.

Historic barrels at Elena Walch

Against all odds, the Alto Adige cooperatives are among the happy families of the wine world. Seventy percent of Alto Adige’s wine is produced by its 14 cooperative wineries. Although this wine varies in price and quality, of course, it must be said that the best of the cooperative wines rank among the best wines of their type in Italy and perhaps even the world and the cooperatives we visited were prospering.

Thumbing through my copy of the 2007 Gambero Rosso guide to the wines of Italy, for example, I encounter a long list of cooperative wines with the highest “three glasses” ratings. Here’s a list of the cooperatives so honored: Cantina Calterenzio, Cantina San Michele Appiano, Cantina Convento Murie-Gries, Cantina Santa Maddelena/Bolzano, Cantina Viticoltori di Caldaro, Cantina Valle Isarco, Cantina Terlano, and Cantina Termeno/Tramin. Several others earn ratings nearly as high. These are my happy cooperative families.

[By comparison, only about 25 percent of the wine made here comes from 37 private wine estates, which purchase grapes to supplement their estate fruit. They are small wine firms, obviously, but some have international reputations and distribution  — Tiefenbrunner, Elena Walch and Alois Lageder, for example.]

Getting the Incentives Right

Why do cooperatives work here when they seem often to fail elsewhere in Italy and Europe? My very tentative conclusions (based on visits to three cooperatives — Cantina Santa Maddelena/Bolzano, Cantina Termeno/Tramin and Cantina Valle Isarco) can be sketched this way. On one hand, the cooperatives we visited avoided the key errors in institutional set up: they require that members bring all their grapes to the cooperative rather than allowing them to keep the best and dump the rest in the cooperative vats. And they carefully monitor member wine grower practices and grape quality.

Many cooperatives are organized so that the collective cellar is the “buyer of last resort.” Members can keep the best grapes for their own production and dump the rest in the cooperative’s vat. If coop members have a choice, they will keep the best grapes for themselves (putting private interest ahead of collective interest) and the result is that after a while only the worst grapes go to the cooperative and the wines necessarily suffer both in the bottle and in the marketplace. With no alternative but to sell all their grapes to the cooperative,  however, Alto Adige vineyard owners have an interest in raising quality in both their own plots and those of other members.

(I was surprised to learn that the well known Prunotto winery, which we visited in Piedmont, was originally a cooperative, which failed when a harvest of exceptional quality produced almost no cooperative grape deliveries. All the growers apparently kept the grapes for their individual wines rather than add them to the cooperative fermentation vat. The crippled winery soon fell  into private hands. It was eventually acquired by the Antinori family, who have guided it to higher and higher levels of quality.)

Old and new at Cantina Valle Isarco

Getting the incentives right is clearly important, but this is often easier said than done. What happened to the Alto Adige cooperatives to cause them to adopt effective collective arrangements?

Every Happy Cooperative is Different

I think the unique history of the Alto Adige wine region has something to do with it. Alto Adige has been a wine growing region for thousands of years. Production seems to have peaked around 1910 when nearly 10,000 hectares (25,0000 acres) of vines covered the region, which was then part of Austria. The local industry was devastated by the combination of World War I, the Treaty of Versailles (which transferred the territory from Austria to Italy) and then the Great Depression. Alto Adige producers found that the couldn’t sell their wines in Italy (which still thought of them as the enemy) or in Austria or, well, anywhere given the Depression.

The Alto Adige wine industry collapsed except for rather limited production for local consumption. The valley floors were taken over with more profitable apple orchards; vines grew only on the steeper hillsides.

When DOC regulations were instituted in the 1960s, the lines were drawn to reflect this history. Wine grapes were limited to the hillsides, where quality was generally higher, and apples ruled the valley floors, crowding out vineyards there. Apples were still more profitable than grapes in the 1960s, so the DOC lines reflected local economic reality.

Vineyards today occupy about 5300 hectares (13,000 acres), half of the peak level and, as noted above, they are fragmented into tiny plots of surprisingly high value. The limited vineyard area combined with the success of the cooperatives and wine estates makes these small plots some of the most valuable vineyards on earth — second only to those in Champagne, one winery owner told me. When the tiny vineyards change hands so do hundreds of thousands of euro. Wow!

This is not to say that all the wine made in Alto Adige is of the highest quality. I would say that the majority of the production of the cooperatives is still simple low cost Schiava — these easy-to-identify pergola-trained vines are everywhere. But the trend is clearly up and — unlike the worst of the wineries elsewhere — there seems to be a local market for even the most modest bottlings.

Wines of the Cantina Bolzano

Lessons for Europe’s Cooperatives

What lessons can the successful cooperatives of Alto Adige provide for the struggling cooperatives elsewhere in Europe — the ones who have produced the lake of surplus wine and who are threatened by EU reforms on the wine hand and New World competition on the other?

I would like to say that it’s really simple — just adopt the sort of incentive structure that these Italian cooperatives have used so successfully. This is good advice and perhaps a place to start, but I do not think it is as simple as that. We used to talk about Path Dependency in economics. Path Dependency is the theory that “you can’t get there from here.” The road ahead depends on the path you have already taken.

It may not be possible to backtrack on the road that Europe’s unhappy family of cooperatives have taken, which has left many of them dependent upon subsidies and crisis distillation.

My working hypothesis is that Alto Adige’s unique history (and geography, too) put them in a position that  allowed them to succeed (or forced them to do so?).  The “unhappy family” cooperatives may not be able to transform themselves, but rather may be victims of their own history. Perhaps, like the Prunotto case, their future lies in private ownership.

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The photos I have inserted in this post show the contrasts we found in Alto Adige cooperatives and wine estates.

Invisible Wineries: Europe’s Controversial Cooperatives

If, as I suggested in my last post, there are “invisible” wines, then it makes sense that there are also invisible wineries. Here in the U.S. for example we are accustomed to”virtual” wineries that are invisible in the physical sense. They frequently exist as brands in the portfolios of larger wine companies, but have no distinct location or particular terroir.

The wines are often sourced from many regions, wherever the price-quality mix is right, and the blends are determined by supply and demand. Some virtual wineries become durable brands, but most are like ghosts — they appear and disappear as wine buying trends or market opportunities change.

(Just now, for example, I’m noticing a lot of red blends from invisible wineries — an opportunity to dispose of surplus Syrah?)

One-Fourth of the Global Glass

Virtual wineries are an interesting phenomenon but they’re not what I want to discuss here. The invisible wineries that concern me are Europe’s cooperative wine producers.

The Oxford Companion to Wine (2005) gives a sense of the importance of European cooperatives as a production sector. Here are excerpts.

“Since 1975, more than half of the wine produced in France has been produced by co-operatives, and the total area of vineyard owned by their members is also more than half the French total”

“Nearly two in every three German vine-growers today belong to the local co-operative, although their vineyards are often a small, part-time activity which therefore, cumulatively, represent almost a third of the total German area under vine”

“In Italy, the cantina sociale is no less important, accounting for over 60 per cent of the country’s production.”

“As in Italy, co-operatives are extremely important in Iberia, where grapes are so often grown alongside other crops. According to Metcalfe and McWhirter, more than 60 per cent of each vintage was delivered to one of Spain’s 1,000 wine co-operatives or Portugal’s 300 … in the late 1980s and this has not changed substantially. However, the percentage of bottled wine sold by co-ops in Spain remains tiny—between 10 and 15 per cent of their total production, the rest being sold in bulk, with a substantial percentage going directly to distillation”

The numbers will be different today, of course; probably lower because of the effects of the EU reforms, but that’s still a lot of wine. Since France, Italy, Spain Portugal and Germany together account for roughly half of total world wine production and all of these countries have substantial cooperative sectors, I estimate that as much as a quarter of the global glass is filled by wine made by cooperatives, an incredible amount given how little attention these producers usually receive (that’s the invisibility part).

The Invisibility Cloak

One reason cooperatives are often overlooked is the “high quantity, low quality” stereotype that they wear like a Harry Potter invisibility cloak. No one much wants to think or talk about mediocre wine when excellent wine is so much more interesting.

The stereotype that cooperative wines are cheap plonk can be blamed in part on the relatively few cooperatives that have established “visible” brands that define the category. There are cooperatives that achieve real excellence (watch for my next post), but most people are likely to think of Tavernello or Riunite when they think of cooperatives, not Cantina Sociale dei Produttori del Barbaresco, for example.

Italy’s best selling brand, the ubiquitous Tavernello, is a product of the Caviro cooperative.  In the United States the most famous branded cooperative wine is probably the product of Cantina Sociale Riunite. That’s right, the sweetish fizzy Lambrusco that was for many years the best selling Italian wine in the country: Reunite on ice. So nice!

So the stereotype is understandable, but it is also unfair (as stereotypes tend to be). In fact, taking the long view, it is important to appreciate that cooperatives as a group actually improved wine and wine-making throughout Europe.

The cooperative wineries that appeared in the first three decades of the 20th century represented a vast improvement over the cellars they replaced.  Collective investment (plus government subsidies and easy farm credit terms) allowed the purchase of newer and better equipment and facilities overseen by trained professional wine-making staff. Individual winegrowers farming a hectare of two of grapes could never have produced commercial quantities of wine at the standard of the new cooperatives. No doubt about it, in their heyday cooperatives were a step up in wine quality.

They Never Would be Missed

But the cooperative form of business organization also created incentive problems. In many cases the cooperatives were compelled (by agreement or custom) to purchase whatever grapes that their members presented. When they could, members would often retain the best grapes for their own private production and turn the rest over to the cooperative. When many members did this, the quality of the collective wine necessarily fell along with its probably market price. This increased the incentive to keep the best grapes in house and to deliver masses of low quality grapes to the cooperative.

It was a race to the bottom that ended for many wineries with wine so foul its only buyer was the “buyer of last resort” — the government-subsidized “crisis” distillery. This made the cooperatives even more invisible, as Tim Atkins has noted. “If co-operatives were to disappear tomorrow — and there are plenty of people who wish they would — so would Europe’s wine surplus.” Like the people on Ko-Ko’s little list in the Mikado, they’d none of them be missed. You can’t get more invisible than that!

The stereotype of cooperative wines is very depressing but, as Atkins also notes, it is a mistake to define any group by its least attractive member. Some of the best wine in Europe is made by cooperatives and I was fortunate to taste some of it during our recent visit to Italy. What makes these cooperatives different? (And can other wineries copy their formula for success?)  Good questions. Look for answers in the next Wine Economist post.

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I have three books to recommend if you are interested in the history of European wine cooperatives. The Red & The White: The History of Wine in France and Italy in the Nineteenth Century by Leo A. Loubére (1978), The Wine Revolution in France: The Twentieth Century also by Loubére (1990) and Vintages and Traditions: An Ethnohistory of Southwest French Wine Cooperatives by Robert C. Ulin (1996). The Red & The White is one of my very favorite wine books.

Cooperatives and Fair Trade Wine: Unraveling the Paradox

My previous blog entry (see below) presented a paradox. Fair Trade wine might be an effective “ethical consumption” good, I speculated, because wine is one of the few products where consumers routinely know something about production conditions (the who, what, where, when, how and why) and so might be motivated by ethical considerations, such as the equity of grower payments or environmental impacts.

But Fair Trade programs are typically organized through grower cooperatives and coops have a famously bad reputation for quality (see previous blog entry for details). So the paradox is that  while wine might be an ideal Fair Trade product from the consumer standpoint, the cooperative production model dooms it to failure because of low production quality.

Sad, if true.  But is it?

Re-Thinking Wine Cooperatives

It is time that we reconsidered wine cooperatives because the old stereotypes do not always hold. From a statistical standpoint, cooperatives are far more important than most of us suspect.  My guess is that more of the world’s wine is made by cooperatives than by the all the huge multinational wine corporations put together.

The Oxford Companion to Wine reports that over half of all French wine production is by cooperatives (caves coopératives).  About two-thirds of German growers are coop (winzeverein) members.  Italian cooperatives (cantina sociale — see the vintage wine poster above) are responsible for as much as 60% of total national output.  Similar high proportions are reported for Spain and Portugal.  That’s a lot of wine!

Since France, Italy and Spain are the largest wine producers by various measures, it follows that a huge proportion ( perhaps 25% to 30%) of the world’s wine  comes from cooperative cellars.  Gallo, by comparison, accounts for about three percent of world production, if the calculations I made a few years ago are correct.

Within this huge puddle of coop wine there is great diversity.  Certainly there is a lot of bad or mediocre wine. Reunite, the Italian cooperative famous for its sweet Lambrusco, is an easy target if only because it is so large and ubiquitous. Some people say that Reunite destroyed the reputation of  Italian wine in the United States in the 1970s with its low quality offerings.

But there are a lot of well-made cooperative products, too. A recent supplement to Decanter magazine, for example, highlighted a number of very successful Italian cooperatives, including San Michele Appiano and Cantina Terlano in Alto Adige and Produttori del Barbaresco in Piedmont. These cooperative make some of the finest wines in Italy, consistently receiving top marks (three glasses) from Gambero Rosso.

Ugly, Bad and Good

So why do some cooperatives produce fine wine and others make plonk — and which kind of wine will Fair Trade coops make?  There is no simple answer to this question because there are several different motives that drive cooperatives with correspondingly different results.

Sad to say, some European cooperatives find themselves organized around national and EU regulations that have until recently given special benefits to cooperatives.  These are subsidy cooperatives and they have had little incentive to quality produce wine because they have been insulated from market forces. Changes in EU wine rules should put these cooperatives on the endangered species list.

Then there the political cooperatives.  Many of the coops organized in the 1920s and 1930s were motivated more or less by socialist or communist political ideologies. Their desire to earn short run revenue, and to share it equitably, often conflicts with the long run need to protect quality and develop markets.  If solidarity requires that no member’s grapes be turned away, no matter how poor their condition, how can good wine result?

Market forces are forcing the political cooperatives to upgrade their standards, however.  Payments are generally no longer based on tonnage alone.  Now ripeness (potential alcohol) and other factors are also considered in many cases. It is a necessary step in the right direction.

Finally, there is a group that you might call the efficiency cooperatives. They are motivated by fundamental market factors rather than subsidies or grower solidarity.  This is a diverse group of winegrowers who share resources in order to be able to afford costly up-to-date technology, the services of skilled winemakers (including the controversial flying winemakers) and even marketing expertise.

The best of these wineries, like Produttori del Barbaresco, have created valuable brands that must be protected at all costs.  Quality wine is the objective, cooperation is mainly the means that allows small individual growers to reap some of the advantages of a large scale operation.

Back to Fair Trade Wine

So what kind of wine will Fair Trade cooperatives produce?  The answer is that some of it will likely be very good,  as I have reported earlier.  But just as there is no reason to believe that all cooperative wine will be bad, there is nothing to say that all Fair Trade cooperative wine will be good.  It will depend upon the motives and actions of the individual producers.  Fair Trade wine, in other words, will be like other wine. Or at least that is my guess.

And that’s too bad, because the advocates of Fair Trade products would love it if “Fair Trade” became a brand that consumers associated with quality (and perhaps it will be).  But being Fair Trade won’t be enough. This wine, like others, will have to earn a place on the table.

Note: Thanks to Martin Cubertafond at Sciences-Po in Paris for insightful correspondence on this topic.

Cooperatives and the Fair Trade Wine Paradox

Fair Trade Communion Wine from Chile

My first taste of Fair Trade Wine was  very satisfying, as I explained in this space a few weeks ago. The New Direction Malbec that Sam’s Club has been selling for about $10 makes a strong first impression (it was named the world’s best Fair Trade red wine in a British competition) and makes me optimistic about this class of “ethical consumption” goods.

[The image at right is the label of a Fair Trade sacramental wine from Chile that is marketed to Catholic churches for Communion use– can you get more “ethical consumption” than that?  Nice idea — but 15% alcohol? Wow! Better keep an eye on those altar boys.]

Leigh Barrick, a student in the wine and society class I taught last semester, wrote a paper arguing that Fair Trade wine may be an especially good candidate for success because  many wine consumers are actually interested in the details of production and not just the final product.   If you don’t know or don’t care about who made what’s in your glass and how then ethical issues such as how much small growers are paid or how the environment is affected are difficult to motivate.

Wine is one of the few products we buy where we can frequently find the answers to who/what/when/where/how and why right on the label or on the promotional “shelf-talker.”  Wine is good, I tell my friends, but wine and a story is much better and a Fair Trade or sustainability story makes the wine experience more satisfying for many people.

A Fly in the Ointment

But Fair Trade is not a panacea.  Leigh argued, based upon her prior research into Fair Trade coffee programs, that there are many hurdles in the path of Fair Trade wine’s success.  One issue that I have been thinking about recently is the role that grower cooperatives play in Fair Trade programs.

Cooperatives have a generally poor reputation in the wine industry.  When I think of cooperatives the first thing that comes to my mind are those famously bad wines from poorly run cooperatives in the South of France.  You know the ones I’m talking about, the cooperatives where growers are paid by the ton pretty much regardless of the quality of the grapes they bring in.   The resulting wines are often thin, acid and tannic. These cooperatives  are a classic example of the Prisoners’ Dilemma, where collective interest and individual interests are at cross purposes.

The collective interest of the cooperative members is of course to produce good quality wine at a competitive price so that their “brand” (which may be just the village or region AOC classification) has some value and they can earn a decent living.  If the vineyards were owned and run by a single owner, with a specific interest in the brand, chances are that yields would be lower and quality would be the focus.

But, given that they are paid by the ton, each individual winegrower has a strong incentive to maximize yield. Quality generally suffers.  Any individual grower who sacrificed quantity for quality would get lower income without  significantly affecting the quality of the wine, since all the grapes dumped in the same press in a worse-case-scenario cooperative. As each grower responds logically to individual incentives, wine quality falls and the collective interest suffers. Europe’s lake of unsellable plonk is often blamed on the poor wines that this fouled-up incentive structure spews out.

Wait — It Get’s Worse

This image of wine cooperatives is enough to make you lose hope for Fair Trade wines, since they are typically made using arrangements centered on grower cooperatives (which act to distribute the higher payments and coordinate the communal investments that are the whole point of Fair Trade programs).  If you need grower cooperatives to make Fair Trade wine work, and if cooperatives make lousy wine because of their incentive structures, then the future of Fair Trade wine looks pretty grim.

The story gets worse when you look at French wine history.  French wine cooperatives were created to be Fair Trade organizations (although no one thought to call them that). As France industrialized and urbanized a hundred years ago, wine market power shifted from the growers, who owned the vineyards,  to the distributors and negoçiants, who controlled access to the big markets.

Negoçiants had what economists call monopsony power.  A monopolist is the only seller of a product and so can drive price up.  A monopsonist is the only buyer and so can push price down.  If the big negoçiant wouldn’t buy your just-picked grapes you were sunk, so growers were coerced (or felt coerced) into selling their grapes or wine for rock bottom prices. The negoçiants held the power because they could always buy grapes from your neighbor or the growers in the next village, but you had few options. Putting all your grapes back in the cart and shopping around for higher prices from another buyer in another town was not a very attractive alternative to taking whatever the negoçiant was willing to pay.

Will History Repeat?

Grower cooperatives were created to give growers protection from this cut-throat competition and to allow them to capture a larger share of the value of their production by banding together to negotiate a fairer collective price.  This sounds a lot like the motivation behind today’s Fair Trade groups. And it worked, too, according to the evidence I’ve seen, at least for a while.  But then the Prisoners’ Dilemma problem appeared and quality went down the drain.  Or at least that’s how the story is usually told.

Will today’s Fair Trade cooperatives suffer the same fate as their antecedents in the South of France and elsewhere in Europe?  Perhaps.  But there is reason to think the Fair Trade wine story might have a happier ending.  Watch for my next post on this topic.

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