Wine Wars in South Africa: Nederburg Auction Keynote

I’m pleased to announce that I’ll be giving the keynote address at this year’s Nederburg Auction in Paarl, South Africa. I was already planning to attend Cape Wine 2012 as a guest of Wines of South Africa, so I was delighted to receive an invitation from the Nederburg Auction organizers to extend my visit by a day or two in order to address their international audience.

About the Nederberg Auction

A premier event on Cape Town’s wine calendar, the Nederburg Auction serves to showcase the spectrum of award-winning wines and rare Cape finds created by the country’s most talented winemakers. Since its beginnings in 1975 with the ‘famous five’ founding participants; Delheim, Groot Constantia, Overgaauw, Simonsig and of course Nederburg, and an offering of just 15 wines, the Auction has evolved into an international event where major local and overseas wine buyers bid for a stringently selected range of the finest wines created by South Africa’s most talented winemakers.This year marks the 38th year of this prestigious event.


Here’s a video about the 2011 Nederburg Auction.

The Press Release

Guests at this year’s prestigious Nederburg Auction won’t want to miss the keynote address by best-selling US author and wine expert Mike Veseth on Saturday 29 September at Nederburg in Paarl.

With the state of the global economy crisis posing many challenges to the wine world and the South African wine industry in particular, this acclaimed US economics professor and “wine economist” will bring his considerable expertise to the speaker platform, tailoring his keynote address around the subject of how South Africa can win the Wine Wars. This aptly follows the fresh insight presented by last year’s speaker, David White, into the changing wine landscape and the future implications for the industry and consumers.

He will discuss the market trends that are redrawing the world wine map and the terroirists (those focused on a wine’s terroir or place of origin) who resist them. Veseth believes that wine businesses are at a critical crossroads, shaped by the powerful forces of globalisation, corporate branding and the exploration of new markets.

As a professor in international political economy at the University of Puget Sound in Tacoma, Washington, Veseth is regarded as an authority on the political economy of globalisation and the global wine market, applying his sharp and astute mind to analyse and understand the complex dynamics of the international wine world.

Nederburg Auction Business Manager Dalene Steyn says: “While believing in preserving the essence and the soul of wine, Mike is also well-versed on breaking into new markets in China, Australia, France and the US. With this combination of a love for wine along with extensive business and economic acumen, we believe he will inspire and motivate wine lovers in South Africa – just like he has done elsewhere in the world.”

The editor of The Wine Economist blog and author of more than a dozen books has won critical praise for his recent book“Wine Wars: The Curse of the Blue Nun, the Miracle of Two Buck Chuck and the Revenge of the Terroirists (2011)”, which draws remarkable conclusions on the market forces that drive the wine industry. The book has won several awards and prizes, including being selected as Best American Wine History Book 2011 by Gourmand International and a Wine Book of the Year by JancisRobinson.com.

Mike Veseth will address guests of the Nederburg Auction at 09:00 on Saturday 29 September in the Graue Hall, prior to the start of the day’s bidding session. For further information visit http://www.nederburgauction.co.za. The Nederburg Auction is sponsored by Nederburg.

I’m honored to be asked to give this keynote address and pleased to be associated with such a prestigious event.

The Trouble with Wine Porn

Not for everyone.

Sometimes I have doubts.  Here at The Wine Economist we seem to be interested in what you might call everyday wines. Not that you necessarily drink them every day, but they are generally available and you can buy them if you can afford them. It’s a matter of choice. Everyman wines might be a better term if it didn’t sound just a little bit sexist.

Wine Porn

But much of the wine world seems preoccupied with impossibly expensive or incredibly rare trophy wines. A lot of attention is given to stories, ratings, tasting notes and images of wines that only a lucky few of us will ever have an opportunity to taste.

I’m tempted to call this wine pornography,  mirroring the well-documented phenomenon of food porn. Stare if you like, drool if you must, but never, never  touch!  (I didn’t coin the term; I found it in Jancis Robinson’s “Wine Porn of the Highest Order.“) The whole Bordeaux en primeur phenomenon strikes me as borderline wine porn, if only the soft-core kind.

Wine porn may be a harmless vicarious thrill for the most part, but like pornography generally it can be a problem when people become compulsively attracted to it. I’m worried that all the fuss that trophy wines receive really does divert us from the excellent Everyman wines on offer and the problems and delights of everyday wine life.

Broadbent to the Rescue

Well, thank goodness for Michael Broadbent. I realize that this is an unlikely thing for me to say at this point because it would be easy to make the case that Broadbent is one of the inventors of wine porn. As the director of the wine department at Christie’s auction house in London, he certainly helped create the winner-take-all economic environment that fuels the wine porn industry now.

And then there’s his writing. Gosh! Broadbent’s tasting notes are extraordinary. Some, dare I say,  are voluptuous! My glasses steam up when I read them. But it turns out that he shares many of my distinctly non-pornographic concerns about wine.

Broadbent recently published his 400th consecutive monthly column for Decanter magazine and he used the occasion to talk about the state of the wine world, very much focusing on Everyman and her wines. “My feeling is that consumers have never had so much choice but they have never been so confused,” he said. ‘”The whole world is making a good standard of wine today and they need some guidance.”

The Perfect Disguise Below

This embarrassment of riches sounds like good news, but Broadbent is concerned that the democratization of wine has created a power vacuum that big players will rush to fill. “Big business seems to be taking over and I don’t like the way things are going,’” he says. He’s concerned about the fate of small producers.

Head-spinning number of choices

Well, I certainly agree with Broadbent’s premise. Globalization has spread wine and wine expertise around the world. The discipline of global markets is slowly driving technically flawed wines from the market place (some still hang on, justifying their existence on the basis of low price or disguising their flaws as terroir).   More wines, from more places, with a higher overall quality standard: good news for Everyman.

But globalization really has created problems. More choice is good, but only up to a point. Some times too much is too much, especially as wine draws in new consumers.  The Constellation Brands study of American wine buyers found that 23% of potential buyers were “overwhelmed” by the choice and frequently walked away empty handed. Broadbent’s right about the confusion factor.

Globalization has changed the problem from making good wine to distributing and marketing it. Here (especially in distribution) large firms really do have an advantage, but this is not a new thing. Power in the wine world shifted to those who could manage distribution long ago — with the introduction of the railroad system in France in the 19th Century.

Beyond Wine Porn

Broadbent is concerned that the corporations will destroy wine as they try to simplify it for the mass market. This is contrary to their own business interests, of course, since people pay more for distinctive products. Building a wine portfolio ladder that starts buyers in Two Buck Chuck territory and leads them up to a higher (or at least more expensive) shelf only works if wine’s diversity is preserved.

Dumbing down to create a simple flat wine world is economic suicide as much as it would be an aesthetic tragedy of the commons. But these are desperate times for some large wine businesses and desperate CEOs do desperate things, so I do not rule this out absolutely.

I guess I am more optimistic about the future than Broadbent, even if I share his concerns. I think there is a pretty large middle ground between the bland corporate wine that worries him and the spicy wine porn that troubles me. This probably suggests that the state of wine today is quite good!

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Congratulations to Michael Broadbent on his 400th Decanter column and his extraordinary life in wine.

Time to Invest in Wine?

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” — Mark Twain, Pudd’nhead Wilson (1894)

I wonder what Mark Twain would say about speculating in wine in October, May or any other month? I expect he would be suspicious of the idea. Mark Twain was a great author but a lousy investor. His cautious attitude toward investment was based upon his own disastrous financial experiences.

I was reminded of this quote this morning when I opened the New York Times “Special Section on Wealth & Personal Finance.”  The cover features a half-page color image of an exploding cherry pie (or maybe it’s strawberry — what do you think?). I am not really sure what it means.

What Time Is It?

But the theme of the special section is pretty clear — time to consider alternative investments and investment strategies.  And on page 4 I found the article that got me thinking about Mr. Twain’s investment advice: Investing in Wine: Now May Be the Time by William L. Hamilton. It’s an interesting article — click on the link to read it.

The idea, of course, is that wine prices have been falling, so this is an opportunity to buy in at the market bottom.

“It’s a great time to buy wine, the best time in a decade,” said Charles Curtis, who is in charge of Christie’s North American wine department. “People we’ve never heard of are jumping into the market, taking advantage of the lull to get into collecting, now that they have access.”

I am naturally a bit suspicious of buying advice given by people with an interest in the sales.  They always seem to think that now is the time to buy.  Rising prices? Buy now because they can only go higher.  Falling prices? But now before they rise again.  Mr. Curtis may be right, and I’m sure his recommendation is honestly given, but he might be wrong, too.

Uncommon Times

These are uncommon economic times and market changes are unusually hard to predict, which makes investing even in fine wines feel a bit speculative. Alfred Marshall, the great Cambridge economist, argued that markets are generally as stable and predictable as an apple in a bow. Prices fall when there is a surplus until the excess supply is gone. Prices rise when there is a shortage until the shortage disappears.  The movement towards stable equilibrium is quite strong and predictable.

But wine markets today look a bit more unstable — more like that exploding pie now that I think of it.  Here’s another quote from the New York Times article.

Though falling prices kept many collectors from selling, reducing the amount of wine on the market, returning prices in the last four months have produced an uncomfortable volume of wine to sell, said Charles Curtis of Christie’s.

The first part of the sentence describes how a market responds to surplus  — falling price causes sellers to pull some goods out of the market.  The second part describes a market in shortage — the opposite condition — where rising price brings sellers into the market. This is not a combination of forces that you expect to see in the same paragraph much less the same sentence.

There are a number of supply-demand changes that could account for this (Econ 101 students — do your stuff), but one distinct possibility is what economists call over-shooting, which is a characteristic of some financial markets and especially foreign exchange markets and maybe now wine markets.  When over-shooting occurs, prices don’t drop smoothly to equilibrium like an apple in a bowl. Rather they over-shoot the equilibrium and then shoot back up. Back and forth, sometimes in increasingly unstable cycles. Market equilibrium and the “true market price” are hard to determine.

It is difficult to know where prices will go next in a market like this and the difference between “investing” and “speculating,” at least in the short run, is not completely clear. I don’t give investment advice (or rate wines, either, which makes this an unusual wine blog), but I’m not planning to rush into high end wine markets just yet. Too risky for me.

Investors vs Collectors

But then I’m not really a wine investor.  In my reading I find the terms wine investor and wine collector often used as synonyms, but I’m not sure they should be.  A wine collector buys what he or she wants to own (and, presumably, drink). It’s a personal thing. A wine investor should buy what other people will want to own, which might have nothing to do with personal taste.  I have known only a few real wine investors but lots of wine collectors who  justify at least some of their purchases as investments, but don’t manage them as they would a real investment.

In today’s market, however, both groups need to realize that there is a significant speculative element to their wine purchases and keep Mark Twain’s 115 year-old warning in mind!

Note:  Stephen Bachmann at Vinfolio posted an interesting reponse to this article. Click here to read it.

Asking the Right Questions about Wine

It’s finals week at the University of Puget Sound, so I’m thinking about the question, what wine goes best with final exams and term papers?  A sweet wine, to capture the sweet taste of success?  Some bubbles to celebrate finishing one set of tasks and moving on?  Or maybe a bitter sweet wine, because moving on inevitably means leaving some people and relationships behind?  Hard to figure how best to match a wine with all these emotions. It’s a difficult question.

Dump Bucket Drills

But I know one wine that doesn’t match up very well.  My class on “The Idea of Wine” organized an informal tasting on Monday to celebrate finishing their term papers.  The main project was a blind tasting of inexpensive (some were very inexpensive) Merlots.  I was impressed with the students’ serious efforts to evaluate and score the wine and their recently acquired (and, for college students, somewhat unnatural) propensity to use the dump bucket.

We tasted other wines including a Chinese wine that Brian West personally hauled back from Beijing a few years ago.  It was a 1999 Changyu Cabernet Sauvignon.  Changyu is China’s oldest winery and a good example of a mid-market Chinese wine (I wrote about Changyu and the Chinese wine industry in The China Wine Syndrome).

I found a video review of this wine on the web (click here to view it, but be forewarned that there is some harsh language used by the reviewer) that described the wine as being all about ashtray and coffee ground flavors with aromas of urinal crust.  Hard to imagine.  Until you taste it, that is.  The description is right on the money.

I’ve read many optimistic reports on the Chinese wine industry, mostly based on high potential production volumes and not so much on quality.  The quality wasn’t there in 1999, based on this wine, but there is reason to believe that things are changing.  I sure hope they are! The dump bucket got good use on this one.

Hard Heads, Soft Hearts

I’m reading my students’ final papers now – they are quite good, by the way – and I thought you might be interested in their topics.  I gave them great freedom to choose topics that interested them or related to their academic majors.  You can find a list of the paper titles at the end of this post.

Most people think education is about learning the right answers, and this is certainly important, but I think the more valuable skill is learning to ask the right questions, and this is true about wine.  I was impressed by the creativity of the questions my students asked.

One student, a Finance major, asked why Treasury bill auctions and wine auctions have different structures and what the impacts might be? A very interesting theoretical treatment. Another student did fieldwork in three wine retailers to try to understand the actions and interactions of wine buyers and wine sellers. The result was a revealing first person account of wine consumer behavior.  An economics student who grew up in Napa Valley examined issues relating to migrant labor there, combining economic theory, empirical data and personal observation very effectively.

All the papers were very interesting. My favorite title: “How corks are being screwed over” (an analysis of the cork versus screw cap debate).  Imagine, I get paid to read this!

Looking at the list of paper titles, I’m struck by how many students were drawn to issues of sustainable or ethical production and consumption:  organic wine, climate change, biodynamic wine, fair trade wine and so forth.  In general their analysis was thorough, pointed and objective.  They have “soft hearts” and “hard heads,” as Princeton Economist Alan Blinder would say.  They care about social issues, but think about them critically.  Blinder says (and I agree) that’s better than the other possible combinations: soft head/hard heart, soft heart/soft head or hard head and heart.

  • Comparative analysis of changes in Treasury auctions versus global wine auctions
  • An ethnographic study of wine consumer trends
  • Hispanic workers in California’s wine industry
  • Climate Change: what it means for Spanish vineyards.
  • Climate change and the wine industry
  • TetraPaks and cans: the alternative packaging of wine
  • Movement from niche markets to mainstream: prospects and challenges for ethical consumption in the wine market
  • The terroir of equality: fair trade wine
  • Organic wine: the beginning of redefining fine wine
  • Oak in Wine: an exploration into differences.
  • Green wine: ideas and details of sustainable wine
  • Wine’s historical and modern role in religion
  • Of vines and witchcraft: biodynamic wine
  • India’s wine prospects
  • Old world crash: wine’s changing face in the globalized market
  • What makes that bottle so expensive?
  • How corks are being screwed over
  • Aging wines: from barrels to bottles
  • Drowning in the wine lake
  • Wine brands: friend or foe?
  • Wine tourism and economic development
  • Bordeaux versus Burgundy: why the rivalry matters
  • Transitioning wine industries: assessing development strategies in the wine industry

Hong Kong Wine Taxes: The Papillon Effect

How Tax Cuts in Hong Kong May Create a Tornado in Bordeaux

everwise-poster.jpgWine prices are dropping in Hong Kong (click on the image to see one merchant’s sale announcement). The reason is that Hong Kong has abolished taxes on beer and wine. The tariff on wine was an incredible 80% until a few years ago, when it fell to a still hefty 40%. So the drop to a zero rate and the price reductions that should follow will be welcome news indeed for wine-drinkers in this prosperous Asian hub.

What prompted the HK government to take such an action, which cost the city over $70 million in lost tax revenue? One factor was a budget surplus, which made tax cuts possible. But why cut wine taxes? Imported wine in Asia is often an expensive luxury sold to well-heeled buyers who may not be very sensitive to price — just the kind of product that makes a logical target for tax policy. If the government can afford to cut taxes, why not target a tax that would provide more general benefit?

The answer, according to published accounts, is that Hong Kong’s policy isn’t about wine, it’s about money. By cutting wine taxes, the Hong Kong authorities hope to bring in more money, not less.

The world auction market for wine is large and growing. London (with annual wine auction sales of $1.2 billion) and New York are at the center of this market, but as much as 40 percent of the expensive auction wine is sold to Hong Kong residents. The high taxes on wine discourage HK buyers from bringing auction purchases home to drink or to re-sell, so the wine is held in foreign warehouses (or sometimes in bonded warehouses in HK).

Much of the world’s supply of great wine and demand for it too resides in Hong Kong, but the wine itself lives elsewhere. By abolishing the wine tax, the Hong Kong government hopes to exploit this fact and turn Hong Kong into Asia’s wine market center. Look for the big auction houses to organize HK wine practices to take advantage of the new market environment. And look for HK government revenues on the resulting auction enterprises to rise, perhaps enough to compensate for the initial tax cut.

The Papillon Effect

The impact of Hong Kong’s auctions are likely to be felt well beyond Asia and well outside the gilded halls of the auction houses. Have you heard of the Butterfly Effect? It is the idea that small changes in complex interconnected systems can sometimes produce large effects. The name, coined by Edward Lorenz in 1961, comes from the idea that a butterfly beating its wings in Brazil, by disturbing air flows in ways that compound and multiply, can theoretically cause a hurricane in Texas. It is a famous concept in the field of non-linear dynamics.

Natural systems are obviously complex and interdependent and sensitive to initial conditions. Tipping points, butterfly effects and the like are both theoretically possible and empirically observable. Economic systems can have these same properties. (I wrote a book a few years ago that examined the turbulent flows and non-linear dynamics of foreign exchange markets, for example.) This is perhaps especially true for complex global markets, like the market for wine.

The shift in the wine market to Hong Kong should have fairly significant effects on wine flows and prices — especially for trophy French and especially Bordeaux wines, the object of much London and soon Hong Kong auction activity. So I’m calling the effect of the HK wine tax cut the Papillon Effect (papillion is French for butterfly — if the HK buyers were focused on Italian wines it would be the Farfalle Effect). I will be interested to see just how much market turbulence the HK tax change creates.

Will the HK butterfly’s wings cause a tornado in Bordeaux? Yes, I think it will, although it might be difficult to tell how large the effect is because of the boom already in progress, both in the auction and en primeur markets, for these wines. Prices are already staggeringly high for the most famous and highly-rated products.

But the really interesting question concerns the side effects in other markets. How will surging Bordeaux prices affect the rest of the wine world? Will the object of speculation remain fairly narrowly focused or will the boom’s domain expand to include investment-grade wines from around the world? How far will the Papillon Effect extend?

And then there is the question of stability. The clear message of the Butterfly Effect is that the compoud effects of small changes may not be sustainable — they can be disruptive and even explosive, like a tornado.

Will the HK tax changes merely shift the wine market centers and expand demand and supply, or will it blow up a bubble, as often happens in financial markets? This is a question that Hong Kong financiers should consider as they raise their bidding paddles at the great wine auctions that seem sure to be coming their way soon!

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