Australia’s wine bubble seems about to burst (as I reported in my last post) and a number of observers have jokingly compared it to the global economic crisis. You have too much wine? Ha! We have too much bad debt! Shall we swap problems?
Since I’ve just written a book about about the financial crisis (Globaloney 2.0 — it will be out in December 2009), I started to wonder if I could learn anything by seriously comparing the two crises. Here’s a first draft of my report.
This Time is Different
One of the arguments I make in Globaloney 2.0 is that financial investors and speculators convinced themselves that their risky, highly leveraged holdings were really “safe as houses” (irony intended). Although they saw the bubble building and realized that bubbles often burst, they convinced themselves that “this time is different.” (They always do this, as a new book by Carmen Reinhart and Ken Rogoff makes clear.) It’s what I call Financial Globaloney.
Their false assessment of risk (which created moral hazard, which encouraged even riskier behavior) combined with leverage and liquidity to produce the boom and bust we are living through just now. Booms and busts are a persistent feature of financial markets and we shouldn’t be surprised when they come ’round again. This time is not necessarily different. Is the same true for wine?
The Twenty Year Wine Boom
Everyone knows about Australia’s recent wine boom and its imminent bust, but it is important to put these events into a broader context, to understand that the present crisis is nothing new. University of Adelaide Professor Kym Anderson’s 2004 book World Wine Markets: Globalization at Work tells the story.
The current Aussie wine boom began in the mid 1980s. Wine production had closely tracked slowly growing domestic demand for the forty years after World War II (Australia was a net importer during this period), but began to rise dramatically after 1987.
Changes in retail sales laws in the UK transformed the wine market there (I wrote about this in an earlier post). Supermarket chains became mass market wine sellers that searched the world for good value product to fill their shelves and own-brand bottles. Australia stood ready to answer this call. Wine was identified as a key potential export industry. Private and public resources were organized to support and expand it. Vineyards and cellars started to grow to meet rising export demand.
A number of factors contributed to the boom, including liberal trade laws, increased international investment flows and of course the French Paradox findings that made red wine popular for reasons of health. Here in the US the partnership between the Casella family of Australian winemakers and the Deutsch marketing/distribution family firm produced the Yellow Tail phenomenon, which helped create what we now call Brand Australia. The high ratings that Robert Parker and others gave to Australian fine wine didn’t hurt demand, either.
Vineyard area doubled then doubled again over the 20 boom years (see brief data appendix below). Since domestic demand did not increase nearly this fast exports had to rise, and they did. It must have seemed that the global markets could and would absorb any amount of wine, an attitude that encouraged further investment. This belief in infinite world wine markets gave investors confidence to make what might otherwise (or with hindsight) be seen as quite risky investments. Thus a classic bubble was born. Parallels between the wine bubble and the mortgage credit bubble are easy to see here.
The level of output was unsustainably high given modest Australian consumption, rising production costs, realistic limits to global market growth and increasing international competition. Recent problems such as drought and recession-induced collapse in demand for high priced wine may have triggered current crisis talk, Australian wine was already at the tipping point,
Not So Different: Australia’s Wine Bubble History
This is not the first time that Australia has experienced wine boom and bust. In fact, according to Professor Anderson, this is the fifth time Australian wine has experienced a wine boom.
The first boom (1854-1871) was driven increased domestic demand and ended when over-production caused prices to collapse. A gold rush brought lots of thirsty prospectors and business people to Australia (as happened in California a few years before), inflating a wine bubble. Protectionism abroad and high shipping costs limited export potential so when domestic demand stopped growing the over-sold market tumbled.
The second boom (1881-1896) like the current one was more export driven. Wine exports increased by 23 percent per year due to a combination of factors including liberal trade regimes abroad and preferential access to the key British market.
The third boom (1915-1925) was, like the first, internally driven but with an emphasis on supply over demand. Government policies and incentives combined with irrigation-generated high yields contributed to over supply. Wine production rose 12.7 percent year year during this decade — hard to support that kind of compound growth.
The fourth boom (1968-75) was mild by comparison and followed 20 years of much slower postwar growth. A number of factors contributed to the rising market including income growth, changing consumer preferences and improved wine marketing programs. As in all the other cases, the market soared until the momentum ran out and then slumped as prices fall back to earth.
So wine booms are nothing new for the Australian wine industry. Each boom was different in the details, of course — so “this time is different” is not entirely a lie — but similar in the overall pattern and final result. No wonder, writing in 2004, Professor Anderson asked “… the obvious question of whether Australia’s current wine boom is to be followed by yet another crash. at least in wine grape prices if not in wine production and export volumes.”
Past as Prologue
Re-reading Kym Anderson’s essay today, five years after its publication, I am impressed by his foresight. Anderson found several hopeful factors in the current boom — reasons why this time might be different — but everything about the essay is really a warning not to ignore the lessons of history.
Anderson’s concludes with a rather serious analysis what Australia needed to do to make its growth sustainable. The analysis was wise in 2004 and still looks very much on the mark today, although the problem is obviously deeper now. It is recommended reading for wine people in Australia and everywhere else, I think.
Wine and finance are very different economic sectors, but there are some parallels — cycles of boom and bust, for example, and a tendency to assume “this time is different.” I hope both industries take advantage of the opportunity the current crises present to rethink, relearn and restructure. If they don’t — if they simply reload — then I think the next crisis won’t be far away.
Here’s a bit of data to flesh out the story, taken from The Global Wine Statistical Compendium 1969-2005. Data are for Australia in 1995 and 2005.
- Total vineyard area increased from 73,000 hectares to 153,000 hectares. Vineyard area roughly doubled between 1985 and 1995 as well.
- Grape yield rose from 10.5 tonnes per hectare to 13.2 t/h.
- Wine grape production rose from 577,000 tonnes to 1.8 million tonnes due to the combination of greater vineyard area and higher yields.
- Per capita production rose from 27 liters per capita to 71 l/c.
- Per capita consumption rose from 18 liters per capita to 22.5 l/c. That leaves nearly 50 l/c for export markets.
- Total value of exports increased from USD 301 million to USD 2.129 billion. All that increased production had to go somewhere.
- Average unit value of bottled wine exports rose from USD 3.04 per liter to USD 3.65. New Zealand was getting more than USD 6.50, however.
- Average unit value of bulk wine exports fell from USD 1.12 per liter to USD 1.04.