Grubbing up is one of my favorite wine economics terms. It means to pull the vines up by the roots and replace them with other agricultural crops. I It is a harsh term, just as it sounds, because it is the opposite of wine — it is anti-wine. Grubbing up isn’t something that a wine lover contemplates with ease, but sometimes it is necessary. The European Union’s Council of Ministers has recently finalized a grubbing up scheme for the EU and it is probably a good idea, even if it may not work.

Watering Down the Wine Lake

The problem is that EU wine production vastly exceeds demand with the result that thousands of liters of wine must be bought up by the EU each year and distilled into alcohol to prevent prices from dropping through the floor. The distillation price support only encourages continued production, waste and expense. It is a mess — a wine lake, as people say — and it has to stop.

A fairly radical plan was introduced a few years ago, one that would have paid farmers to grub up thousands of hectare of vines and introduced market reforms to allow (by deregulating) and to encourage (through supporting programs) European winegrowers to compete more effectively with New World winemakers who are taking their markets.

The package that the Council of Ministers agreed last week is significant even if it is less radical than the original initiative (Decanter magazine called it “watered-down” — never a good thing when you are talking about wine). The program called for subsidies to encourage winegrowers to eliminate up to 175,000 hectares of vines (versus 400,000 hectares in the original proposal), limit chaptalisation (the addition of sugar in the wine-making process) rather than eliminating it, and market-based reforms that encourage and enable winegrowers to compete on world makets (through varietal labeling of wines) rather than hide behind protective barriers.

I’ve been reading up on the details of the final EU plan and it is pretty interesting — the best analysis I’ve seen so far comes from the USDA Global Agriculture Information Network, which you can download in .pdf form at this California Wine Export Program website. The program includes money for grubbing up, of course, and deregulation of wine labels, removal of some vine planting restrictions (so marketable grape varieties can replace uneconomic grubbed up varietals), funds for wine promotion abroad, and so forth. Like any EU program, it is a complicated balance of economic reality, fiscal feasibility and political necessity.

The idea is to help the European wine industry transition to a new market environment, where export markets are growing, domestic markets shrinking and competition is fierce. It is not unreasonable to think that policies like this could work. They worked in New Zealand in the 1980s, for example.

Lessons from Kiwi Wine History

New Zealand today is famous as one of the great success stories in the world wine market. A small nation in an unlikely location, it punches above its weight in the global wine market, holding the title as champion exporter. Not in quantity, obviously, but in price. New Zealand has the highest average export price of any wine producing country.

But such was not the case 25 years ago. New Zealand suffered from a surplus of mediocre wine that could only be sold domestically behind high protective barriers. The industry collapsed with many failed firms from a combination of bad wine and surplus production. The government paid to grub up vines and then opened the market to international competition. Cheap but better wines from Australia flooded in to fill the domestic bulk wine market, leaving New Zealand producers only one choice — make better wine for export. They have done so brilliantly. Their success inspires the EU reforms.

It would be a mistake to think that what worked so well in New Zealand in the 1980s will work equally well in Europe today. It is unlikely that the EU would be willing to let its wine sector reach the sort of crisis that New Zealand experienced and that motivated the dramatic reforms implemented there. If big change comes from big crisis, as I believe (I wrote a book on this theme), then Europe is unlikely to see big change. The social cost of crisis is just too great. The guiding principle of EU policy is to prevent crisis, which makes change that much harder to effect.

Comparing New Zealand to Europe is problematic in other ways, too. New Zealand’s wine production is tiny — a drop in the bucket, really — whereas European producers account for well more than half of all the wine in the world. New Zealand’s grubbing up program may have been difficult, but only 1500 hectares were uprooted rather than the “watered-down” 175,000 set for the EU.

Changing the Rules of the Game

The principle of the EU wine reform scheme is sound, yet many reports that I have read are pessimistic. I think this is mainly because the final reforms are so much more timid that the initial proposal. But there are other reasons for concern.

One thing that economists have learned over the past 25 years is that institutions matter. This is another way of saying that economic forces do not always produce the same results. If the “rules of the game” are different the laws of economics will produce different results. Institutions are the rules of the game in life. Dani Rodrik, my favorite development economist, makes this point in his recent book One Economics, Many Recipes. The nature of local institutions, public and private, formal and informal, shapes the economic landscape in important ways.

This idea applies to the EU reforms in particular. Take the grubbing up scheme, for example. An incentive to repurpose large but unprofitable vineyards in Australia, for example, might well meet with an enthusiastic response because the institutions of wine growing there are different, with large vineyards and a consolidated industry. But European vineyards are much different and represent a completely different model.

Many vineyards (where much of the inferior surplus wine originates) are tiny inherited plots of a hectare or so, frequently on sites with few viable alternative uses. The rules of the game here are much different. A hectare might produce 20-30 tons if badly overcropped and, at perhaps $500 per ton at the local cooperative, gross revenues are too small for a family to live on but too great (compared to alternative uses) to give up. It’s an institutional trap that might be solved by consolidation, but making large vineyards out of these scattered small plots is necessarily costly and difficult.

Under these circumstances growers are likely to hang on to their vines for years rather than accept a modest one-time payment. Grubbing up might need to be forced, not voluntary, to have much effect.

New regulations to allow wines to be labeled according to grape variety (rather than the traditional local geographic designation) might be attractive to a large and distinctly commercial wine producer, but much wine in Europe is still produced by cooperatives that have little to distinguish their wines from others apart form the local designation. What advantage would they have as simple varietals in a world awash with good varietal wine?

A Certain Vision of Wine

It is possible to envision a future where the reforms can work, where the marginal vineyards have gone out of production, where consolidation has increased efficiency and where branded varietals can compete with the world market. (I have even seen some early attempts at EU branded varietals in the discount bins of a local store — more about this in a future posting.) I think it is possible that this vision may be realized — eventually.

But oh, it is such a big jump. The institituions of the small family vineyard and the local wine cooperative seem to me to make these reforms much more difficult. New Zealand’s success will be difficult to repeat.