Australian Wine Outlook: Modified Rapture

“Modified rapture” is a line from Gilbert and Sullivan’s comic opera The Mikado. The dialogue as originally written was “Rapture!” but the actor who played Nanki-Poo was apparently a little too enthusiastic about it during rehearsals and Gilbert kept unsuccessfully asking him to tone it down. (You will understand why the rapture was incomplete if you view the YouTube video above.)

Finally, in complete frustration, Gilbert barked, “Modified rapture!” as a stage direction. And that’s exactly what the actor said, taking it literally as a text revision. Modified rapture, indeed! And it became a permanent part of this entertaining scene.

Dutch Disease Dilemna

Modified  rapture – that’s my reaction to the good news about the Australian dollar (AUD). The Australian wine industry has suffered mightily from the “Dutch Disease,” which is what happens when a boom in one sector of the economy causes an over-valued currency that makes other sectors less competitive.

Exports to China, especially mineral exports, have been the boom sector and they have pushed the Australian dollar to incredible highs relative to the U.S. dollar.  This has created a dilemma – pass the foreign exchange costs along to foreign buyers and you risk losing sales. Absorb the foreign exchange impact and margins shrink and sometimes dip into the red.

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Rapture: the short term view

The over-valued Aussie dollar has affected all segments of the Australian wine industry, but bulk wine sales have been perhaps the most impacted because international competition is so fierce for commodity wines. Bulk wine sales account for about 45% of New World wine exports, so lots of business (and grower incomes) hang in the balance when the exchange rate shifts by even a penny or two.

Good News: A Short Sharp Shock

So the recent fall in the Australian dollar as shown above must be greeted with joy by Australian growers and producers. Although it was expected that the AUD would depreciate eventually, I’m not sure anyone would have predicted such a “short  sharp shock” (to use another Gilbert and Sullivan line).

What caused the change? Well, Australians might say that it hardly matters – good news is good news.  But good news doesn’t always last as the graph below indicates. This isn’t the first time that the AUD has tumbled and we can’t be entirely sure that it will not rebound (hence my “modified” description). And although the recent trend is welcome it must be noted that the AUD is a long way from its value back in early 2009, when it was even cheaper relative to the dollar than the 85-cent valuation that one analysis has predicted.

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Modified rapture: the longer view

The AUD Trifecta

As I see it, the sudden shift is the result of a trifecta of effects. The first and most important is the slowing of the Chinese economy, with the resultant decrease in demand for Australian minerals. That’s one. The second is the shift in Japanese monetary policy. Abenomics, as it is called, is pumping up Japan’s money supply in an attempt to jump-start the economy.

This has driven down the yen’s value, which encourages some investors to repatriate funds previously placed abroad to take advantage of the fact that each host country Australian dollar (for example) now yields a larger home country yen profit. A good time to cash in your chips and bring your money  home.

Finally, the U.S. Federal Reserve has announced that it is “tapering” its expansionary monetary policy, which has boosted U.S. interest rates and perhaps caused some “carry trade” international investment to shift to the U.S. from other countries (like Australia, for example).

So the result is good news and I think it might last, but it is important to realize that the trend could be reversed if China’s growth rate picks up (as most people hope it will) or if U.S. and Japanese monetary polices change dramatically. Fingers crossed — there is a lot on the line!

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Foreign exchange historical tables are from Oanda.com.

I couldn’t resist adding this classic Mikado video — the “short sharp shock” appears at about the two minute mark. Enjoy.

Stein’s Law and the Coming Crisis in Argentinean Wine

Stein’s Law, named for famed economist Herbert Stein, holds that if something cannot go on forever it will stop.  Unsustainable trends ultimately yield to the inevitable in one way or another.

Stein’s Law seems to be simply stating the obvious, but you would be surprised how many people find a way to ignore the obvious when it is in their interest to do so.  As Upton Sinclair wrote, “It is difficult to get a man to understand something if his salary depends on his not understanding it.”

Argentina’s Inflation Problem

And so we consider the case of the Argentinean wine industry. It’s not just the wine sector, of course, it’s the whole Argentinean economy, but wine is especially affected.  Something’s going to happen according to Stein’s Law, because it can’t go on forever as it has up to now, but it is hard to know exactly what.

The problem begins with Argentina’s high inflation rate. The official statistic puts the annual increase in consumer prices at around 10%, but this number is viewed with disbelief by the international economic community. The Economist magazine quit publishing the official figure in 2012, saying “Don’t lie to me, Argentina” to the officials there. The most commonly cited estimate of the actual inflation rate is 25% per year.

Inflation is a sensitive political issue in Argentina as it is in every country that has ever experienced a hyperinflation crisis (think Germany, for example). Some in Argentina go to great lengths to deny the obvious reality of inflation.

The story (which may be true) is told about a McDonalds restaurant in Buenos Aires that displayed all the usual products on its big backlit menu board except the signature Big Mac. Where’s the Big Mac? Oh, we have that price hidden around the corner so that no one will see it — especially the people from The Economist magazine who use it to estimate the purchasing power of the peso in their Burgernomics index!

Inflationary Squeeze

As a recent article on The Drinks Business website suggests, high inflation is putting the squeeze on Argentina’s wine producers. (The squeeze is made worse,  I understand, by government policies that restrict imports of products used in wine production as part of a general policy to control foreign exchange reserves). Production costs (grapes, labor, etc.) may have doubled over the past four years, putting a squeeze on margins.

It is difficult to pass these peso costs along to consumers in the U.S., Canada, the U.K. and Brazil, the main export markets. Consumers are price sensitive and while the average export price of  varietal Cabernet and Merlot wines have risen by 7.2% and 24.8% respectively in the past year, this provides only limited relief from rising costs since Malbec takes the lion’s share of the export market and its dollar export price has risen by just 1% in the last year and by an average of only 2.8% per year since 2009.

Purchasing Power Inaction

The textbook remedy to this situation is for the foreign exchange value of the peso to fall to achieve what economists call Purchasing Power Parity. In a system of market determined exchange rates, according to the PPP theory, a 25% fall in the domestic purchasing power of the peso due to inflation should result in a 25% decrease in its foreign exchange value.

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And indeed the peso has depreciated, but not by nearly enough to overcome the inflation difference between Argentina and the four main export markets. The peso has fallen in value by about 20% in the last two years, if we look at the official exchange rate, so each dollar of export earnings brings in more pesos,  but inflation-driven peso costs have increased by much more.  That puts a real squeeze on margins. This can’t go on forever — something has to give.

[I'm told that the black market exchange rate is 8 pesos per U.S. dollar, far below the official rate of about 5 per dollar. Such a big differential is often an indicator of crisis to come.]

Something’s Gotta Give

What happens when a country gets itself caught in a squeeze like this? Well, the conventional wisdom is there needs to be a sharp currency devaluation followed by monetary tightening to control inflation. This is a painful process and Argentina has been through it before. What if the government ignores the conventional wisdom? Internal adjustment must eventually take place to restore competitiveness if external adjustment through the exchange rate is ruled out.

A recent Wall Street Journal article about real estate prices in Buenos Aires shows one pattern of adjustment. The dollar prices of luxury apartments have tumbled as owners seek to cash out of their real estate investments and buy into the more credible U.S. currency.  The WSJ reports that

In May last year, Argentine President Christina Kirchner strictly limited access to U.S. dollars and other foreign currencies in a bid to stem capital flight. With the Argentine peso facing about 25% annual inflation (government figures, widely discredited, set the rate much lower), and an unofficial exchange rate that has effectively devalued the peso sharply, demand is high for dollars.

These days, the main feature that foreign buyers say they look for in a Buenos Aires property has nothing to do with closet space or a wide terrace. It is a seller with a bank account outside Argentina to which they can legally wire funds. This is a way to get around having to convert any dollars wired into Argentina into pesos at the official rate, after which it is nearly impossible to convert back into dollars at the official rate.

Something will have to give in the wine industry, too, if the exchange rate doesn’t adjust and the currency controls continue. In the meantime, I think every effort is being made to control costs and to keep margins out of the red. But, as Herb Stein might say, this can’t go on forever so somehow it will stop.

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Herbert Stein may be best known today as father of Ben Stein, the actor, law professor, and columnist, but he was ever so much more famous in his day as a chairman of the president’s council of economic advisers

Little known fact: the Pabst beer company held an economics competition in 1944 (the year of the Bretton Woods conference)  for the best plan to sustain high employment in the post-war era. Herb Stein’s plan was named the winner from among the more than 36,000 entries. He was 28 years old and the prize was $25,000 — the equivalent of $330,000 today.

The Scrooge Report: Holiday Wine Gifts

No wonder economics is called the “dismal science” — sometimes our rigorous analysis threatens to spoil everyone’s fun.

Take holiday gift-giving, for example. The conventional wisdom is that “it is better to give than to receive” and while there is some merit in this if everyone gives (so that everyone receives), I think you can probably see the collective action problem here. Only an economist (or maybe an excitable child) would point out that, strictly from a material accumulation point of view, there are real advantages in being on the receiving end!

A Badly Flawed Process

But it gets worse because some economists suggest that it may be better not to bother with gifts at all. Don’t give gifts, give cash. Or, better yet, keep the cash and spend it on yourself. Gift-giving itself is a badly flawed process. This Scroogish sentiment is in part the result of Joel Waldfogel’s famous article on “The Deadweight Loss of Christmas.” Waldfogel concluded that Christmas, for all its merriment, was actually welfare-reducing because recipients do not generally place a value on gifts that is as high as their cost. They end up receiving stuff they would never have purchased with their own money.

The cost of giving gifts exceeds the benefits, so gift giving is an economic drain. Dismal, huh?  Here’s how it works.

Your aunt paid $50 for the sweater that she gave you. How much would you have paid for it? $50? $45? $40? Well, the fact is that you had the option of buying it for $50 and didn’t, therefore you must not have valued it at the full amount. So its value to you is probably  less than what your aunt paid. But how much less?

Economists seem to agree that the best case scenario is that there is about a 10 percent average loss in gift-giving, which I call the “Santa Tax,” although the “yield” as reported by survey respondents varies a good deal. The National Retail Federation estimates that Americans will spend more than $550 billion on holiday gifts in 2012. If the deadweight loss rate is just 10 percent, that would be a $50+ billion Santa Tax this year. Yikes!

There are many problems with this way of calculating holiday giving gains and losses. It is pleasing to give gifts, of course, and this should be taken into account. But how much would you be willing to pay for the pleasure?  And would your pleasure have been less if you had just given cash? The efficiency loss might be less with a cash gift, but perhaps the pleasure of giving (and thus the incentive to give) would be diminished, too.

Santa Tax Wine Edition

Then we can argue about the size of the Santa Tax. Is 10 percent about right … or do you suspect (as I do) that it might be much higher, especially when you are buying gifts for people who are much older or younger or who have very different tastes or needs from your own? Have you ever received a gift that was 100 percent deadweight loss? If you are honest you probably have. But it’s the thought that counts, isn’t it? How big a Santa tax is too much?

Which brings us to the wine part of the problem. Doesn’t it seem like the Santa tax is probably even larger for wine gifts than for many other things? Most of us have experienced the deadweight loss when a bottle of wine that we’ve paid good money for doesn’t turn out to be worth what we’ve spent. So it is no surprise that the loss rate might be even worse when other people are doing the buying (and giving) for us.

Giving wine as a gift is risky (unless it is someone you know very well) because there are so many different choices and individual tastes differ so much. There are lots and lots of good wine  gift choices, of course, but it is easy to get caught in the Santa tax trap. I’m sure that a lot of holiday wine gifts miss the mark badly.

Maybe that’s why wine enthusiasts receive so many “wine gizmo” gifts instead of wine — but those gadgets are subject to the Santa Tax, too.  The New York Times‘s William Grimes recently complained about this problem.

Across the land, Christmas trees spread their fragrant branches over packages containing monogrammed Slankets, electric golf-ball polishers and toasters that emblazon bread slices with the logo of your favorite N.F.L. team.

But for some reason, the culture of wine and spirits provides especially fertile ground for misbegotten concepts like these. Year after year, it yields a bumper crop of inane but highly giftable innovations like wineglass holders that clip onto party plates, leather beer holsters and octobongs, the most efficient method yet devised for eight college students to consume a keg’s worth of beer simultaneously.

Tyler Colman, writing on his Dr Vino blog, singled out gifts of fancy automated corkscrews for particular criticism. You can probably think of some high Santa tax wine paraphernalia that you’ve either given or received yourself.

Beyond the Octobong: Wine Economist Gift Guide

OK, I suppose the octobong is out, but some of the wine gizmos that Grimes reviews in the article are sort of weirdly fascinating. I guess I can see why they are given as gifts (even though you might never spend your own money on them). So where does that leave us when it comes to wine gifts?

My first bit of advice is simple: don’t give a bottle of wine to friends or relations, share it with them. There is something about a shared experience that transcends a simple commodity transfer. (From a technical economics standpoint, I think sharing adds  some “public goods” elements to the deadweight loss equation that can cushion the Santa Tax loss). Trust me, from an economic theory standpoint, sharing is the way to go.

In fact the more I think about it the more I believe that sharing rather than giving is the key. Sharing a bottle of wine rather than just giving it may seem a bit selfish and is certainly more expensive (since time as well as money are involved), but sharing changes the game from transaction to relationship and this seems to me to be the essence of both the holidays themselves and wine, too.

More Gift Advice (and Shameless Self-Promotion)

Back to giving and receiving. Best gift to give a wine enthusiast? A copy of the new paperback edition of Wine Wars, of course. (Shameless self-promotion never takes a holiday).

Best wine gift to receive? It’s gotta be Wine Grapes by Jancis Robinson, Julia Harding and Jose Vouillamoz — the brilliant 1242 page survey of 1368 wine grape varieties. So many grapes, so much information, such beautiful illustrations. This jeroboam-sized book will provide years of detailed research use (including very cool DNA analysis of wine grape origins!) and hours and hours of simple browsing pleasure for any curious wine geek.

Weight? Yes, quite a lot of it; 6.8 pounds shipping weight according to Amazon.com (although my copy feels light for its size). Deadweight loss? Forget about it!

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Click here to view a pdf of Waldfogel’s original article, which appeared in the December (of course) 1993 issue of the American Economic Review. The illustration is of a certain Mr. Grinch, who may or may not have been an economist.  Happy holidays everyone!

Wine Uncorked: The Rise of Big [Really Big] Box Wine

This is the fourth in a series of articles on Tight, Fat and Uncorked, the three trends I see shaping the wine industry. This week’s topic is how wine is becoming increasing “uncorked” and what this implies.

If you take the “uncorked” metaphor and add it to the “box wine” reference in the title, you might reasonably assume that I’m going to talk about alternative wine packaging — boxes, bags, 1-liter tetrapak containers and so on. That would sure make sense.

But you’re wrong. The box I’m talking about is big [really big] as in 20 foot ocean shipping containers holding maybe 25,000 liters of bulk wine in a “flexitank” bag.

Welcome to the New World of international wine trade — the ultimate ‘uncorked’ experience!

The Incredible Bulk

I’ve known about Big Box wine for a while — my 2009 post on “Wine’s Future: It’s in the Bag [in the Box]“ is one of the most-read articles in Wine Economist history. But I didn’t realize how big the big box wine trade had become until I received a Rabobank  report titled “The Incredible Bulk: The Rise in Global Bulk Wine Trade” earlier this year.

Rabobank’s report focuses on New World wine trade since 2001 and the change in the composition of wine shipments (in terms of bottled versus bulk) is dramatic. Bulk wine (the big box stuff) accounted for about 22% of New World wine exports in 2001 (the remaining 78% was shipped in bottle). By 2010 the bulk share increased to over 40% while the bottle share fell to less than 60%. That’s a near doubling of the bulk wine share of New World wine trade in less than a decade, an amazing shift that is all but invisible to consumers.

Big Green Wine

What drives the shift from bottle to bulk in New World wine trade? The short answer is Big Green, but green in two ways. Green, first, in the environmental sense. Bottled wine is both heavier and bulkier than bulk wine (glass accounts for more than 40% of a standard bottle’s total filled  weight). All else being equal (a big assumption in wine economics) shipping wine in bulk and bottling closer to the final consumer should lower the wine’s carbon footprint.

Tesco, the world’s largest wine retailer,  is reported to be particularly aggressive on this front with bulk wine imports being bottled in screw cap-topped lightweight glass for its high volume private label brands. (Click here to read about their very green “furnace glass” wine bottles!)

Cost is another green (as in greenback) factor and there are savings here as well. Rabobank estimates that bulk shipping yields an average cost savings of $2.25 per standard 9-liter case (they estimate total annual savings of $142,300,000 in 2010 compared with the 2001 level of bulk shipments).  This is a very substantial saving for commodity wines of the type that often appear in private label brand portfolios.

The movement towards increased bulk wine exports started in the Age of Abundance, when surplus wine flooded the markets and it was important to move it as cheaply and efficiently as possible. Those days are now in the past; rising costs and tight margins are likely to make that $2.25 per case saving even more attractive to producers now, especially as they scour the world for supplies of wine (did someone say “Moscato?”) to supplement scarce domestic juice.

Subtracting Value Added

For vertically integrated international wine producers, the decision to ship in bulk and bottle in the domestic market is mainly about these cost savings.  They pay less to ship the wine and pay lower import excise, too, since the wine enters the country at the lower bulk value rather than a higher bottled value.

But more is at stake, as the Rabobank report notes, for wine makers who sell to third party importers. In this case bulk shipping results in a new division of value added in the supply chain, with less in the producing country and more further down the line. The impact is thus complicated: bulk wine shipment subtracts some value added in the producing country, although the lower overall cost encourages exports.

There are also relative price effects to consider. Bulk shipping increases the relative price of traditional bottled wine imports relative to bulk products, a difference that may be magnified as wholesale costs differentials are passed along through the supply chain.

Economic Impact: The Box

The standard 20-foot shipping container (a.k.a. “The Box”) revolutionized international trade when it became widely adopted. It changed everything (OK, maybe not everything) because it was so much more secure and efficient than the previuosly standard “break bulk” shipping system. One of the things it changed was the scale of international transactions because the greatest economies were realized by those who could reliably fill ocean containers.

I don’t think the rise of “uncorked” big box bulk wine shipments is going to change everything in the same way the ocean container did, but I do think the effects will be significant. I’ll talk about this more in my next post where I consider how the world of tight, fat and uncoked wine is likely to unfold.

Economic Impact: Wine [Not Just] By the Numbers

Apple, maker of iPods, iPads and other iGadgets, recently released data that tried to establish the corporation’s economic impact on the American economy (this in response, I think, to charges that its high-outsource policies mean that its products benefit China and other countries more than its U.S. home market).

The company published the results of a study it commissioned saying that it had “created or supported” 514,000 jobs in the United States. The study is an effort to show that Apple’s benefit to the American job market goes far beyond the 47,000 people it directly employs here.

The number of indirect jobs claimed drew attention from economists.

David Autor, an economics professor at the Massachusetts Institute of Technology, said via e-mail that the “entire business of claiming ‘direct and indirect’ job creation is disreputable” because most of the workers Apple is taking credit for would have been employed elsewhere in the company’s absence.

I tend to agree with Prof. Autor’s comment mainly because I can do the math. If Apple is right, then its small labor force is responsible for an incredible fraction of all U.S. jobs. If we made similar estimates for all other U.S. industries I am confident that the total number of jobs claimed would quickly exceed the total number of jobs … period.

Suspicious Minds

But then I tend to be suspicious of economic impact studies … period … whether they are about the gadget industry or any other industry. And this is due mainly to the incentives that are present. No one ever commissions an impact study unless they have a reason to want to show a large impact (usually it is politics — to prevent a political backlash against Apple’s outsourcing policy, for example, or to encourage provision of “key industry” government benefits).

And I know from personal experience that no one ever takes on an economic impact study without realizing that higher numbers are better for the client. I’m not saying that anything shady takes place. I’m just pointing out the incentives and you know what economists think about the power of incentives!

So (and I’m sure you can see this coming) I’m also suspicious of economic impact studies of the wine industry that are occasionally published. Economic theory says that economic impact (the total value added throughout the supply chain) should be equal to the final sales price of the product. This is such a strong idea in economics that it is stated as an identity rather than an equation or theory.

And the reported economic impact always seem to exceed the final sales by a large margin just like Apple’s jobs study. Yikes. No wonder I have my doubts!

Visible Hands

It is good to be critical in assessing numbers, but I’m afraid my skepticism sometimes goes a bit too far, to the point where I don’t really appreciate how important the wine industry is and how broad its impacts really are. That’s why my travels this year to the Unified Wine & Grape Symposiium and the Washington Association of Wine Grape Growers meetings have been so useful.

It’s not [just] that the presentations have been useful, although they have. It’s really the trade shows that have taken my breath away and provided a needed perspective. I’ve been able to see and meet the people behind the numbers and it has been very helpful.

This was especially true at the Unified in Sacramento, which had two huge floors brimming with about 650 exhibitors. The trade show was so large that Wine Business Monthly created an online planning guide to help visitors navigate the room (http://www.winebusiness.com/planningguide/2012/). Wow! I heard that there was a smartphone app available to optimize your walk through the trade show based upon your business interests. A great idea.

The Ordinary Business of Wine

I’ve pasted in a directory of exhibitors from the 2011 Unified event so that you can see the wine range of businesses that come to the meetings (and the wide range of economic impacts involved, too). I really wanted to use a photo for this, but I couldn’t find an image that captured the sense of the place, so the table (more numbers) will have to do.

Many of these firms are specific to the wine industry, but a number are what I would call “ordinary businesses” (see my last post) that provide the wine industry with the sorts of goods and services that all businesses need, albeit often with a special wine slant. If wine has a large economic impact, and I think it does, these ordinary businesses — banking, accounting, marketing, legal services, flooring, hoses, tanks and even iPad-enabled electronic sommelier apps — are part of the process.

iPad apps for wine? Wow, I guess this means that we are part of the Apple empire, too. (Or is it the other way ’round?)

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Thanks to Ken (who put it better than I did here) for suggesting the “wine as an ordinary business” theme.

A Tale of Two Initiatives

Last year Washington voters went to the polls and defeated a Costco-sponsored initiative to liberalize the state’s wine, beer and spirits markets. The vote was 46.5% Yes and 53.4% No. Initiative 1100 mustered a majority in only four counties — Mason, Kitsap, Island and Douglas — and lost in the Pierce-King-Snohomish urban corridor.

What a difference a year makes! Initiative 1183, also sponsored by Costco, passed handily with nearly 60% of the state-wide vote. Significantly, only four counties voted against the ballot issue this time and all the major population centers were in the Yes column. What happened? Herewith some observations.

1. Times Have Changed

Times have changed? Yes, obviously, although this doesn’t really explain such a large apparent one-year shift in voter behavior. Still it is worth considering how much times have changed if only to gauge how anachronistic Washington’s liquor control regulations seem today.

Obviously the most important factor is our continuing recovery from Prohibition’s hangover — attitudes and beliefs about alcohol consumption have changed much more and faster than the relevant legal institutions. A second factor may be the changing demographic profile of  the state, which once featured a stronger Scandinavian-American influence that was sympathetic to what I have called “the Swedish Solution” to liquor sales. More current Washington residents come from or have lived in non-control states and see no harm in private liquor sales.

Finally, market power has shifted, with large retailers embracing alcohol as a high margin product segment. Even Wal-Mart sells wine — who would have guessed? Increasingly these firms want to be freed of regulations (apart from obvious legal age restrictions) that reduce business efficiency.

2. Political Gridlock

Most people believe that public policy should be the realm of elected officials and that private businesses should not have too much influence on the laws that regulate them. We know that special interests have more clout in practice than the civics textbooks say they should have in theory, but there are limits and they should be respected. For Costco to write its own laws was seen by some voters as crossing the line. Better to vote No and let the legislature handle privatization.

But political gridlock is the name of the game today and it seems to have gotten worse in the last year as indicated by the continuing federal budget impasse fiasco. Politicians are frustrated with their inability to take decisive action and the voters are fed up. Washington voters are usually suspicious of initiatives, but in this political environment some ballot issues are seen as a lesser evil to grid-locked legislation.

(The exchange between Sean Sullivan and Rand Sealey in the Comments section of this Washington Wine Report post is particularly instructive in this regard.)

3. Voter’s Remorse

A lot of voters wanted to end the state’s monopoly on liquor sales last year (changing times), but they were unhappy with their choices and confused by the process. There were three different campaigns in 2010 — Costco’s pro 1100 push, a campaign for an alternative law (Initiative 1105, sponsored in part by distributors threatened by 1100’s attack on the three-tier system) and an anti-everything effort (ironically also financed by distributors but also including other groups).

Picky voters cast a No vote — they wanted liquor market reform, but not this way.  This time around, their standards were a bit lower. They no longer expected to have really good choices (see item 2 above), so many people held their noses and voted Yes. This isn’t the way to make state laws, but it is the best choice we have, they said.

4. Divide and Conquer

Finally, the architects of I-1183 crafted their proposal to weaken opposition to it. Last year’s I-1100 was designed to create a nearly perfect market environment for large retailers like Costco. Lots of vested interests were threatened and they reacted with vigor.

There was less opposition to this year’s proposal. In particular, while spirits sales will be privatized and the wine market liberalized, I don’t think there is much direct impact on beer. So beer distributors sensibly stayed out of the fight this time. And I-1183 made a point to increase government revenues from alcohol sales, too, eliminating another potential concern.

So whereas in 2010 it was Costco and other big retailers versus distributors battling for voter attention, this time Costco was opposed by a less effective coalition of anti-alcohol groups, state liquor store operators and employees and some Washington wine producers who fear that they will suffer in the new market environment. The opposition was divided … and conquered.

What’s Next?

It is too soon to know what is going to happen when all of I-1183’s new rules go into effect. Certainly the biggest effects will be on spirit sales. The wine impacts will be smaller (but still significant) and quite diverse. Some wine producers are better prepared than others to compete on price through volume discounts, for example.

Some retailers will no doubt reduce wine shelf space (at least in the short term) in order to make room for spirits. Others may expand the space allocated to wine and spirits at the expense lower-margin items. And big box liquor retailers like Total Wine and BevMo are likely to enter the market, too.

It will be interesting to see how the wine market evolves in Washington as it adjusts to this new environment — more to come on this question. It will also be interesting to see if politicians get the message that some voters put into the election bottle.

In the meantime, I plan to encourage my students to study these election results at a micro level to pick out and try to explain more clearly the key electoral shifts that have ushered in this new alcoholic beverage regime.

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Click here to view an interactive 2011 election map provided by the Washington State Secretary of State’s office. Click here to see the county-by-county results for Initiative 1100 in the 2010 general election. Click on the map above to see the Wine & Vines article where it appears.

Kudos to Sean Sullivan and his Washington Wine Report blog for his thorough analysis of the initiatives in both 2010 and 2011. Sean opposed I-1183 because of its potential negative impact on the Washington wine industry, but correctly predicted that the measure would pass.

Fluid Dynamics: Charting the Global Wine Market

I’m in Innsbruck today, on my way home from the annual meetings of the American Association of Wine Economists. About 160 of us gathered last week in Bolzano, Italy, which is surely one of the most beautiful wine cities in the world, to ponder the state of the world of wine.

I’ll be writing about the meetings in future posts (and about fieldwork we did while in Italy, too),  but for now I want to focus on the conference’s final session, which was on the global wine market.

The gist of the session was that the global wine market is going through a period of seemingly chaotic change (hence the “fluid dynamics” title to this post). Several new trends are emerging and each of them can be tracked, but it is hard to know how they will interact in the global markets.

I’m not sure any one of the speakers (see list below) stressed the uncertainty of the dynamic interaction, but this was the message that came through to me.

Up the Down Staircase in Europe

In Europe, for example, there is some good news in the form of increased wine consumption among young people — a possible reversal in the secular decline in wine consumption in “old world” countries (a group that includes Argentina) which has been responsible in part for the global wine market surplus. A good sign that demographic trends may be changing in a positive way.

On the other hand, there is bad news about the EU wine market reforms that were designed to dry up Europe’s wine lake by rationalizing the wine system there and forcing/permitting wine producers to compete head to head with new world wine companies. The recession’s effects are being used as a tool by anti-reform interests and it now appears possible or likely (depending upon who is talking) that the whole reform program may be ditched in order to stabilize grower incomes.

Although European consumers may be drinking more wine, it is not the wine that the reforms were designed to eliminate, so structural imbalances (and high budget costs) may soon return.

Bulking Up (and Down)

Australia is another dynamic wine region. While wine officials have high hopes for China in the future, the present is problematic. Bottled wine exports (with their higher value added) have dropped quite suddenly and more of the export demand is now being met with lower value bulk wine. This is not a step in the right direction for the long term, of course, although I’ imagine that some Australian producers are happy to export in any form.

Javier Merino from Argentina noted the recent growth in both Chile and Argentina (Argentina is the mirror of Australia, reducing its bulk wine exports and increasing bottle wine sales) as well as the economic problems that both nations face (exchange rate issues in Chile, inflation in Argentina).

China is on (almost) everyone’s mind, of course, as it appears to be one of the major growth areas for the near future, but Brazil and Russia are growing, too, and on the radar for countries with extra wine to sell (which is more or less everyone).

This Changes Everything

But South Africa may be a different story. Nick Vink said that he believes that South Africa’s markets of the future are Africa and India (not Britain and the US) as wine consumption rises in these regions and favorable wine market reforms are implemented (a particular problem in India, I believe, but probably in many parts of Africa, too).

Wine markets shifting to Shanghai? That’s interesting. To Nairobi? That’s very interesting! Nonlinear dynamic systems are very sensitive to initial conditions and the Africa shift (or any of the other changes mentioned here) could very easily “change everything” in faraway corners of the world of wine.

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Here’s a list of the wine economists who spoke at the session on the Impact of the Economic Crisis on the Global Wine Market

  • Kym Anderson (University of Adelaide, Australia)
  • Johan Swinnen (University of Leuven, Belgium)
  • Nick Vink (University of Stellenbosch, South Africa)
  • Julian Alston (University of California, Davis, USA)
  • Javier Merino (Área del Vino, Mendoza, Argentina)

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The Wine Economist is going to take a short “Fourth of July” break to give me time to get my notes in order. We’ll be back in a few days with more from our fieldwork in Italy. In the meantime, run out and buy a copy of Wine Wars — it makes great holiday reading.

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