Vineyard Economics: Boom and Bust in the Global Wine Market

Anyone who studies the economics of the wine business eventually comes to realize that wine is fundamentally an agricultural product with the boom and bust market cycles that ag markets are prone to experience because supply cannot quickly adjust to changes in price and demand.

Here’s what I mean: When demand for Pinot Noir (PN) rises growers must decide whether to pull up Chardonnay and plant more PN. They may delay doing this, creating a short term shortage of PN (and rising prices), because they are unsure whether the Pinot Noir boom is real. If they do switch, it takes maybe five years before the new vines are ready to make wine. By that time the PN craze may be ended and so the market will collapse under the weight of the extra wine. Even if demand stays firm all the extra PN coming to the market at once may result a surplus of wine and falling prices. Then growers have to decide whether to stay in PN or switch to something else (Pinot Grigio?) and so the cycle begins again. Rising price, rising production, surplus, falling price and so on.

The winemakers in Oregon are currently worrying about this cycle. Oregon Pinot Noir has been hot in recent years, which has been good for their businesses. But what’s going to happen when the new vineyards they’ve planted begin to produce in a couple of years. Will Pinot Boom be followed by Pinot Bust?

(Economics students will recognize the vineyard boom-bust cycle as a market cobweb, one of my favorite examples of economic dynamics. Cobwebs can be stable and converge slowly, or they turn unstable and explode.)

Pinot Noir aside, most of the talk in wine markets these days is about surplus, not shortage. Australia is still stuck with large surpluses of bulk wine. California is in surplus, too. And the European Union has been forced to introduce a new wine regime in an attempt to drain its wine lake and reverse the structural forces that created it.

It is very interesting, therefore, to read about the coming wine shortage. This is the message of recent studies by the people at Turrentine Brokerage, a Novato, California firm that does wine market research and also brokerage services (go to their Marketplace section to get a real feel for supply in the bulk wine market!). I’m very impressed with their analysis of wine market dynamics.

Turrentine Brokerage has created the Wine Wheel to describe the boom-bust cycle of the wine markets. According to their analysis, we are currently in the stage called Emerging Shortage for many wines where supply is stagnant or falling (no one’s really planting much Cabernet Sauvignon in California right now) but demand is slowly growing. There isn’t a shortage yet, but there could be or will be in the future and the market isn’t taking action now to deal with the problem when it comes.

Moving around the wheel, Emerging Shortage is followed by Acute Shortage, with rising prices, which stimulate new plantings and new vineyards and wineries. This large scale expansion leads inevitably to and Emerging Surplus and then Acute Surplus. And then we start again. If you think of wine as a tiny craft industry or as a giant industrial business, these cycles don’t make much sense. But when you realize that fundamentally agricultural nature of wine, it all falls into place.

So don’t be surprised if wine prices start to rise back up as the surpluses disappear. But don’t expect prices to go through the roof, either (except for those high end collector wines that you read about in the magazines – their prices are already stratospheric). The world wine market is very small these days and this may keep prices from getting out of hand. Boom and bust cycles happen everywhere, but I’m not sure that they are entirely synchronized, so shortages in one part of the world may still be partially offset by surpluses elsewhere. This cushions the cycle somewhat as far as consumers are concerned – for now at least.

But what about the future? I wonder if the cycles will become more or less severe in the future? That’s a question for a future essay!

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